Benoît Cœuré discusses his position on the Executive Board of the European Central Bank, the effectiveness of the bank’s Asset Purchase Program, and the impact on international capital flows.
The C. Peter McColough Series on International Economics brings the world's foremost economic policymakers and scholars to address members on current topics in international economics and U.S. monetary policy. This meeting series is presented by the Maurice R. Greenberg Center for Geoeconomic Studies.
LIESMAN: Good morning, ladies and gentlemen. Thank you for joining us at the C. Peter McColough Series on International Economics. And we have the honor or having Benoît Cœuré here. I’m Steve Liesman, senior economic reporter at CNBC. I’ll be presiding over todays discussion. Just an idea of how it’s going to go here, Benoît has some remarks, 10 minutes. Then we’re going to have a chance to talk for about 20, and then you’ll have an opportunity to ask questions for a half an hour after that. The meeting is on the record. Wait for the microphone and speak directly into it. Please then state your name and your affiliation and limit your remarks to one question, please.
I think I have to recognize a few people in the audience. Can I do that? First of all, Secretary Jack Lew is here with us this morning. We’re very honored. And then of equal importance for the journalism that he’s doing right now is my former boss, Paul Steiger here from ProPublica, who is, in my opinion, just absolutely tearing it up. And then my good friend Jim Grant is also there. I’d like to say hello to him. So just some great, great—and there’s Peter Bakstansi (ph) from the New York Fed. What a great group. It’s going to be a wonderful conversation. Please welcome Benoît Cœuré from the European Central Bank. (Applause.)
CŒURÉ: So good morning, everyone. And thank you very much to Steve for his nice introduction. I’m very honored to be here today. I will be very short, that’s the rule of the game. And I guess we have a lot to discuss. I would like to say a few words not really about monetary policy in the eurozone, which I’m happy to discuss later on if you’re interesting, but I would like to say a few words about the importance of international cooperation at the current juncture, and also about the role Europe can play. And that will be very short. And as you will see—I mean, that these remarks will be posted on the ECB website. And the title on the ECB website is “The Perils of Isolation.” So that could be the short version, just about it. The perils of isolation, but let me elaborate a little bit more.
I guess the starting point, that we are seeing widespread concerns in many parts of the world. So what I’m going to say is not specific to any particular part of the world. It could be about the U.S., but that could be also about Europe, where we’re seeing concerns regarding free trade, regarding globalized finance. And these concerns stem mainly from perceptions of inequality of opportunities and lack of inclusiveness in sharing the benefits of globalization and international openness. And often, these are not only perceptions. In this country, for example, in the U.S., net income inequality has been on an upward trend since the late 1970s, I guess. So that’s not a recent trend.
So we know what economists would say about it. They would say that globalization might have amplified income inequality, but they will also point out that empirical analysis tends to suggest that technology, technological progress, and also the rise in demand for skilled labor which comes with it over low-skilled labor is likely to explain most of the rise in income inequality. So that’s what professional economists would say, at least in advanced economies. And that’s since the early ’80s. And the IMF has done nice research about it. But yet, we see that fear of globalization dominates public discussion and is likely to have been a key factor in fomenting political opposition to the free movement of goods, free movement of capital, free movement of people.
So much has been said about the perils of rising protectionism. And speaking for the ECB, I’m not going to elaborate on the trade dimension of that, which is not our turf. I would like to focus on a related but distinct risk, which is talks of a weakening the international financial regulatory agreements that were reinforced in the wake of the—of the financial crisis. Such a pushback would be all the more difficult to understand as there is compelling evidence that excessive risk taking by the financial sector has contributed to rising inequality. So that would be really shooting at the wrong target. Dismantling regulatory standards would not only make financial markets less safe, it would also be unfair to those who feel left behind.
And indeed, in recent years through the actions of the Financial Stability Board, the FSB, and standard-setting committees, like as the Basel Committee and others, the international community has made important progress in rewriting the international financial rule book with a view to curb—to curbing financial exuberance, protecting taxpayers from costly bailouts, and improving cross-border cooperation. And these reforms have undoubtedly made global financial markets more resilient. They’ve also supported the recovery of loan growth to households and firms, despite claims that regulation may hurt economic growth and dent bank profitability. Researchers at the Bank for International Settlements have found that well-capitalized banks lend more.
And that’s also our experience in Europe. We’ve—thanks to the phasing-in of the new regulatory standards, also thanks to action by the ECB as banking supervisor, the core equity tier one ratio of European banks has risen from 9 percent in ’12 on average—in 2012—to nearly 14 percent today, 13.7 percent in the third quarter of 2016. And in parallel, at the same time, also supported by monetary policy, bank loans to the real economy in the eurozone have recovered from historical troughs, and they’ve been increasing at the fastest pace since the crisis towards the end of last year, namely 2.3 percent for loans to households and also around 2 percent for loans to non-financial corporations.
So—(audio break)—is essential to a country’s growth agenda, and also that in an integrated world economy, global economy, financial regulation has to rely on internationally agreed standards. And to the extent that countries around the world are signing up to these standards, conditions for growth in a financially stable environment are being reinforced globally.
But, of course, this does not mean that we shouldn’t look back critically at what has been done. As you may know, the FSB, together with other regulatory bodies, will undertake an evaluation—a broad evaluation of what has been achieved since 2009. That will be an evaluation of the individual and combined effects of past reforms. The FSB will assess whether the initial objectives have been achieved, if there are any unintended consequences that call for changes to the regulatory framework.
It will assess whether reforms aimed at different industries or different market segments have created conflicting incentives. And we know that these—the way we do regulation is very much silo-based, and there can be conflicting incentives given to the industry. And we have to look into it. And also, the FSB will take stock of progress achieved in curbing risk outside of the banking sector and in market-based finance, and also in strengthening the resilience of financial market infrastructures.
But that exercise should not be mistaken for tolerance of hidden forms of financial protectionism or a relaxation of regulation. Turning back the clock on international financial regulation would revive distrust, create financial fragmentation, and would risk regulatory arbitrage and a race to the bottom. And he stakes are too high to allow such short-termism to thrive. While unilateral financial deregulation may yield quick benefits, its potentially harmful implications for financial stability and, ultimately, for economic growth are not likely to be felt until later. And then, those implications would be felt worldwide. And ultimately, this would leave the most vulnerable members of society exposed.
More than ever, we Europeans—we are convinced that belonging to the European Union helps us maximize the benefits of international cooperation. It minimizes the risks of short-sighted unilateralism. It offers a framework that disciplines member states to work towards the common objectives and values enshrined in our treaties. It leverages the experience gained as one of the world’s largest markets, which has existed for 60 years now under a single rule of law.
And it reminds us that there is no fair exchange—so I’m quoting from the U.S. Constitution, actually—there is no fair exchange without an agreed and enforceable set of rules, domestically and internationally. So what we’ve been—the projects we’ve been—the project we’ve been in Europe for the last 60 years, it can be compared in a different environment, different circumstances, different century, can be compared to the project the U.S. has been in under your Constitution—building a common set of rules to ensure fair exchange.
Despite daunting challenges, the EU and the eurozone in particular have a track record of overcoming common challenges through cooperation. And there are plenty of challenges that we’ve overcome over the last five, six, 10 years, which we can discuss later on, when it comes to the eurozone. And we’ve done that through cooperation.
Let me give two examples: We’ve created of a single banking supervisor for the eurozone, along with a single framework for bank recovery and resolution—bail-in rules and also a single resolution authority with a single resolution fund. And that’s a case in point. That has created a level playing field for banks operating across the eurozone that strengthens financial stability, eliminates double standards and also can protect European taxpayers, if the rules are fully enforced.
Another example is the European Commission’s recent steps to curb illegal tax benefits for multinationals and to promote a common corporate tax base. And let me explain why it’s so important. Globalization has made it more difficult to effectively tax multinational companies. And globalization will be sustainable only if its benefits are spread across society. And that’s not something that market forces alone can achieve. It’s possible only if governments keep control of their tax and benefit systems. Effective tax cooperation can tilt the balance towards rebuilding trust in globalization. And that’s why the steps taken by the Commission are also meaningful.
So strengthening all the efforts is advisable. Globalization has helped already to raise our living standards considerably. Over the past 25 years, world trade has increased by about twice as much as GDP, financial openness has quadrupled, and millions of people, particularly in emerging and developing markets, have been lifted out of poverty. Regional and multilateral trade and financial agreements, alongside the creation of international financial and regulatory institutions and bodies, have significantly contributed to this process.
And many of us have taken these developments for granted. In Europe, for example, younger generations have grown up in the belief that the free movement of people, goods, services, and capital is an unqualified right. But the current zeitgeist, to use a European word—the current zeitgeist forces us to put aside our complacency. As the benefits and legitimacy of international cooperation are being called into question, it’s essential to defend the values that underlie global economic governance—openness, collaboration and tolerance. And those who cherish the benefits of international cooperation should make their voices heard. They should highlight past achievements, explain why continued and strengthened cooperation is essential. And this appeal must be seen as an opportunity and responsibility, not as a chore. I stop here.
LIESMAN: Thank you for those remarks, Benoît. So I have had the opportunity to cover extraordinary monetary policy for what is going to be a decade—almost a decade. And this was the temporary measures that were put in place—like zero interest rates and large balances that were going to go away. Would you describe where Europe is right now in the story of the use of extraordinary measures? And to borrow a phrase, is it the beginning of the end, or the end of the beginning, or is it still just the beginning?
CŒURÉ: Well, first, let me say it’s nice and important to quote from Winston Churchill, who was a great European. (Laughter.)
LIESMAN: Even though he lived in—
CŒURÉ: And convinced of the virtues of European integration. So that sets the stage very well. (Laughter.) No, it’s true that we’ve been there for almost 10 years. I mean, in August—first week of August, will be 10 years from August 2007. And it’s true that sometimes there is nothing more permanent than temporary measures. (Laughter.) And we don’t want them to be too permanent, because we see value in normalization. But we also want normalization to be cautious and relevant—a relevant fit to the economic conditions. So where we are today in the eurozone is very simple. We see the recovery broadening, firming up, strengthening. Also broadening in terms of the country base of the recovery, broadening in terms of sectors. Just for example, it’s much more reliant on domestic demand than it was only one year ago or two years ago. So it makes it more robust.
So the recovery had been quite robust. We, the ECB staff, has revised up the growth forecast for the eurozone, 1.8 percent in 2017, which is still not enough, obviously, but it’s better. It’s much better. We’re not in deflation. There is no risk—we don’t see risks of deflation anymore. So lots of Taylor risks has been put off the table. But we still have to be convinced that the return of inflation towards 2 percent is sustainable, because that’s how we’ve phrased our—we’ve framed the discussion. We want that increase in inflation to be sustainable. And in particular, we have to be convinced that it does not rely too much or mainly on the full-time components of inflation—like food inflation and energy. And we also have to be convinced that it could be sustainable without our extraordinary monetary policy support.
So a lot of what we’re seeing today in the eurozone remains reliant on monetary support. So taking away—taking monetary policy support away now would, of course, change the picture. So we see—we see the prospects for normalization. We are very, very—we are very serious about the forward guidance we’ve given to financial markets, including the fact that we are—will be buying financial assets until December, or later if necessary, that rates will remain low, that we don’t see reasons today to change that sequence, that rates will believe that only well-past the horizon of our asset purchases. But, obviously, we have to monitor the situation closely.
We start from monitoring the balance of risks. So I think it’s fair to say that the balance of economic risk to Europe now is by and large balanced, by and large flat. We don’t see—I personally don’t see risk to the downside anymore. But we—there is a—I just want to instill a sense of caution here. This will be based on facts, based on data. And we attach a lot of value to the—to the forward guidance as it is today.
LIESMAN: Just speaking about integration and global integration, tell me what it’s like to be a European Central Banker right now, to see the Federal Reserve interest rates, and having quite an open and public discussion about reducing its balance sheet as something that may happen at the end of December. Does it make you feel like your hand is being forced at all?
CŒURÉ: No, I don’t think so. I mean, I don’t want to comment on the Fed, obviously.
LIESMAN: Feel free. (Laughter.)
CŒURÉ: I don’t have my—(inaudible)—with me, so. (Laughter.)
No, what we’ve been—I think what’s important to note here that what—I mean, we follow the Fed experience very closely. It teaches us lots of lessons, because they are clearly ahead of us in the business cycle. So we learn a lot about what from what the Fed is doing and from the discussion they’re having, even though the environments are different. But what we have been able to achieve recently with our policies, with rates being low, with the short-term end of the curve being negative, with the forward guidance, is a fair amount of decoupling of monetary policies.
And it’s an important—it’s an important objective of what we’re doing to protect the eurozone from any outside shocks—from shocks coming from emerging market economies, shocks coming from the U.S., and to make sure that financial conditions in the eurozone will remain fit to our domestic circumstances in the eurozone. So we don’t have to be coupled. That’s the way the international system works. We want our monetary policy to be—to be fit to our own—to our own circumstances.
LIESMAN: And you don’t see a limit to the extent to which the Fed can be raising rates, reducing its balance sheet, while in fact—I mean, if things go as planned, you may still be adding to your balance sheet?
CŒURÉ: Well, I don’t think there is much discussion today about adding to the balance sheet. I mean, that’s not the course we are headed for. We’re just like in the U.S. And of course, there is correlation in the sense that if the U.S. are having that discussion, if the FOMC is having that discussion, that’s a sign of resilience and strength of the U.S. economy, which is good for us, and also bodes well for our own future growth. So the extent that our economies are tied, correlated, then of course there will be some correlation also of monetary policy cycles. But we don’t have to—we don’t have to follow the Fed. We’ll do whatever is fit for our economy.
LIESMAN: Around the world institutions are being challenged politically and from a popular level. The European Union through Brexit, in the United States with the election of President Trump. If nothing else, was a challenge to many institutions. Is the European Central Bank feeling that challenge politically right now?
CŒURÉ: And that’s a very good question, which goes deeply to the heart of the European issues. I mean, we are not a political institution, obviously. We are a central bank. We’re independent from politics. We have a technical mandate and technical instruments. But we live—we operate in a political environment. And we need good politics. We need a political system to work smoothly, also in order to do our job, to be efficient in doing our job, because that’s the environment we’re in.
And we see a lot of tensions. We see political tensions. We see the temptation of a divide—of many divides, actually. The divide between north and south, a divide between east and west, all kinds of divides. Our priority is not to let ourselves being contaminated by these kinds of political discussions. And I think I can—I can say with confidence that the ECB, from within, is not contaminated with these kinds of political discussions. I don’t see any political—any country bias or political bias in what people say inside the ECB at staff level or Governing Council level. So we have to protect ourselves from this.
But obviously for us to be efficient, we want to see a political environment that works. And sometimes these discussions have been—have been difficult. I mean, why is it taking so long to find a solution for Greece? It’s not that a solution is easy. It’s very difficult. And it’s first and foremost in the hands of the Greek government themselves. But still, Europe has a duty to support. And it’s proving very difficult. So the better the politics, in a way, the easier for us. But of course, that’s not something we can—we can impress on. That’s not something we can act on. That’s not our role.
LIESMAN: Do you worry about the future of the eurozone, given some of the political developments?
CŒURÉ: No, I’m not that worried. I’m not that worried about the future of the eurozone because the eurozone—the euro whole as a—as a project is a political project. It’s the core of the European project. It has brought incredible benefits to our economies. We’re still halfway, in the middle of the river, however you want to call it. We certainly have to make the system work better. There are lots of ways we can improve the way the euro is being organized, structured, institutions, instruments, et cetera. And that’s a discussion, certainly, that has to be taken forward. But I don’t see any risks that the euro as a project would go, because it’s so important to us. And I think when you—when you ask European people, I mean, all surveys are clear that the European people want to keep the euro. They believe it’s not working very well, and they’re right, but they want to keep it, certainly.
LIESMAN: So the moment right now is pregnant, in that the audience out there—especially the journalists right now—are saying: Is Liesman going to ask about the French election? (Laughter.) And you’re saying, when is he going to ask me about the French election? And I know you don’t want to answer this question, but I have to ask it. (Laughter.) So—
CŒURÉ: (Laughs.) So what’s the next question?
LIESMAN: What’s the next question? (Laughter.) How much is at risk if a major country were to elect a leader who did not support the eurozone?
CŒURÉ: Well, we are—I mean, we are six days away from—five days away from the French election. So it’s very not possible for me to make any comment on that. It’s all the less possible that, as a French citizen, I really have a duty to steer away from the discussion. And I guess—I guess it ties back to the previous question. There is overwhelming support for the euro in Europe, at the European level and in each and every individual country, including France, by the way. So the European people, the French people want to keep the euro. So that’s what comes from the people.
LIESMAN: I’ll consider that asked and answered. (Laughter.) And if the audience would like to come back, they’ll certainly have an opportunity. Maybe they’ve got a better way—(laughter)—to get an answer out of Benoît on that.
Let me talk about the European economy right now in relation to the U.S. economy. It seems to me—and this gets at what we were just discussing—that the risk has shifted, that there’s—U.S. Fed officials now are talking about upside risks to growth. One of the biggest problems we’ve had had been weak overseas growth that’s hurt U.S. growth. Now it seems like—are we at a point where we can say we’re sort of firing on all cylinders here in the major economies?
CŒURÉ: Well, as you know very well, I mean, forecasting is not what economists do best. (Laughter.) So—
LIESMAN: In talking about the past they don’t do so good either.
CŒURÉ: Exactly, exactly.
LIESMAN: How’s the present? Do they do—
CŒURÉ: Especially when it comes to the future. (Laughter.) And I think central bankers are no exception to that. So there is always a tendency to overestimate growth in a downturn and to underestimate growth in an upturn, meaning that it’s all non-linear, in a sense. And that’s what we’re seeing today. And by the way, ECB staff has been revising the path—the growth path. In terms of risks, as I said, I mean, I would see the balance of risk being balanced, not skewed to the downside. But there are different kinds of risks. And we clearly see the main risks coming from outside the eurozone, which is new. So that’s also a big difference compared to one year ago, two years ago, or even five years ago, that we see the recovery being quite robust inside the eurozone.
But there is political risk all around, obviously. But that’s very difficult to quantify. But from an economic standpoint, which is the growth profile being very robust. And we see the main risk coming from the outside of the eurozone. And that relates to growth patterns in emerging market economies. And that relates to uncertainty created by the change of policies in the U.S. So I’m not—I’m not passing a judgment here. I just don’t know yet. But what I see is uncertainty about the course of action and the impact on the U.S. economy and on the global economy. So, in a sense, the sooner this uncertainty is resolved, the better for us. And again, I’m not passing a judgment either way.
LIESMAN: I want to come back to that, but I want to spin a narrative here of what happened in the U.S. recently, and ask if you think there are lessons for Europe. A president is elected promising large fiscal stimulus in the form of tax cuts as well as infrastructure spending. The market rallies. Yields rise. The Fed suddenly has the ability to hike rates not once, not—but twice, and pretty much have the market bake in additional rate hikes. And also, begin a discussion about reducing its balance sheet that does not cause the market to freak out. Is the lessons in that that it is possible indeed to transfer from monetary to fiscal policy? And that if that were to happen it would give the central bank in whatever region it was in the ability to normalize rates if the fiscal side did its part?
CŒURÉ: Well, yeah, that’s clearly the conclusion. And that’s a conclusion we would like to bb—to be in a position to draw in Europe as well, that we would—we would like to see more fiscal policy. If it’s—if it’s good fiscal policy, meaning if it’s good—if it’s a good composition—if it’s a growth-friendly composition of fiscal policy, that’s possible everywhere. And if it’s more fiscal policy in countries that can afford it, and not in countries which cannot afford it. And there are not that many countries which can afford it. So the discussion in Europe is more nuanced, in the sense that we have 19 countries with different positions.
LIESMAN: You can’t coordinate a federal—
CŒURÉ: Different fiscal space. And most eurozone countries don’t have fiscal space. And so clearly we would not advise them to invent fiscal space they don’t have, because debt is high and they have to—they have to address that challenge. But more fiscal policy when it’s possible and better fiscal policy everywhere in terms of the composition of the—in terms of supporting investment, in terms of supporting the supply side instead of having overblown public expenditures, which is the case in many countries. That’s something which would relieve us, and which would help us normalize faster. We’re not seeing it. So we take—you know, we take the fiscal policy as it is. We don’t have authority on fiscal policy, and we don’t want to—we don’t want to have that, by the way.
LIESMAN: I want to preempt a question from my friend Jim Grant, but—I’m sure he’ll still get one—but does that not be the same thing as saying that you have wandered into areas that central banks should not be in, which is to replace fiscal policy?
CŒURÉ: No, that’s something I want to—I want to challenge very strongly. Everything we’ve done is within a monetary policy mandate. So we would have—we might have done it differently if we would have seen different fiscal policies, different structural policies, different financial policies. So, just to give you an example, if the situation of European banks had been addressed earlier on after the crisis, we would be in a better place when it comes to non-performing loans, when it comes to bank capital. And that would put less pressure on monetary policy.
So our environment has an influence on us. But whatever we’ve done is—has remained within our monetary policy mandate. And by the way, the ECB president is often quoted for saying that we would do whatever it takes, which he said. But he also said we’ll do whatever it takes, within our mandate. That’s what he said in London. And we’ve been very careful to do so. And we had to be very careful in Europe, in an environment where the rule of law is even more important than anywhere else. It’s important everywhere, but in Europe where we have one single central bank with 19 different governments, we don’t have the kind of intimate relation that the secretary of the Treasury can have with the—with the Fed chair, in terms of, you know, sharing views and discussing outlooks and understanding each other. We don’t have that. We don’t have those counterparts.
So we are—we are backed, we are bound by the rule of law more than anywhere else. We have to be very, very careful that whatever we do is compliant with European treaties. And by the way, whenever this has been brought to the European Court of Justice, the European Court of Justice has backed us and has confirmed that what we’ve done has been within our mandate.
LIESMAN: I have additional questions, but I want to open it up to the audience and give them a chance—give you guys a chance out there. Right here, Bob Diamond (sp).
Q: Thank you, Steve.
Benoît, thanks to you we’ve been able to acquire a bank in Greece, which—for which thank you for the approval.
CŒURÉ: It’s not thanks to me. It’s not thanks for us. (Laughs.)
Q: So two questions. Probably both of these I should have asked before we closed, but, no. One is really on—you know, one of your responsibilities within the ECB is to focus on Greece. It’s a very general question, but what’s the business plan for Greece? You know, in France, you have aerospace and luxury. In Italy, Fiat, Pirelli, luxury. What is the plan in Greece? And then the second thing I would say is the lesson learned for us is we were able to buy a small bank. It was a subsidiary or a consumer finance unit of Credit Agricole. So it had no NPLs. You know, very, very little on the balance sheet. And the beauty of having that is that we can grow the business. We can immediately begin to invest, because we’re not battling with the non-performing loans. What’s the solution to get these non-performing loans off so many of the other bank balance sheets so we can get back to a growth agenda in the banks?
CŒURÉ: Well, certainly non-performing loans in Greece is an issue we’ve been discussing in a lot of detail with the Greek government and with the central bank of Greece. It’s an important aspect—an important part of the adjustment program in Greece. And as ECB—as you know, the ECB is part of the institutions which are monitoring adjustment in Greece. And our focus is very much on the financial sector. And within the financial sector, it’s very much on NPLs.
So we have a set of news laws being agreed—or some have been passed, some remains to be passed in Greece—to create a—to kick off the market for NPLs, to allow for auctions, including for electronic auctions when it’s possible or when physical auctions are not possible, to allow—to make servicing NPLs easier. And also to change—one of our priority has been to help the Greek financial sector move away from what I would call politically connected lending to market standards in terms of business practices and in terms of risk management and in terms of accounting, et cetera. And that’s an important part of this program.
So I’m very—and I see the Greek government being committed to it. It’s an important part of the—of the redo of the Greek program. And we’ll insist very much that it happens. And in a sense, what you’ve been doing, Bob, is a sign of—is an act of trust in the Greek economy. So it’s positive. So coming back to your first question, we are not here—I mean, it’s not up to the ECB to prescribe a particular growth model or business model on Greece. This has to be found by the Greek government and by the Greek economy, by the Greek industry. What we want to see is a business environment that makes it possible. And that’s what the program is about. And certainly, the IMF also will be insisting very much on that aspect.
And then it’s for the Greek people, the Greek government to reinvent their business model in a way that makes them thrive inside the eurozone. It is very challenging. I think it’s fair to say that most time has been spent up to now—until now in dealing with legacy issues, including NPLs. And we are close to the point where the review of the third program can be concluded. I very much hope that this will allow the IMF to come back on board and have a program also for Greece. And we know that there is one last condition to be met for the IMF, which is to be—to be absolutely sure about debt stability in Greece.
And we certainly agree with the IMF. We support the IMF in wanting to see more than razor-edge stability in Greece, which was a use that was used initially. We want to be sure that Greek debt is sustainable. We want concerns about Greek—sustainability of Greek debt to be relieved by Euro Group—to be believed by Euro Group. And we very much stand together with the IMF on this. But once this is done, once we’ve gone through all this sequence, a lot of roadblocks will be cleared, and it will be time to focus on the future, and to focus on reinventing the business model.
LIESMAN: Next question? Paul. Wait for the microphone.
Q: Hi. I’m Paul Steiger with ProPublica.
Could you talk a little bit about the effect that—the extent to which Russia is playing a greater role, both above board and behind the scenes, in European politics and economics, and how does that change your calculations?
CŒURÉ: It’s a—that’s a little bit embarrassing for me, because that’s not really an issue the ECB can focus on. I mean, we—economic relationships with Russia are important. Also, we play a role in enforcing the embargo against Russia. We have done it very seriously. When it comes to the—when it comes to the political aspects of it, I can’t really comment. I’m sorry for that. What I can say, that as I said we see a lot of uncertainty coming from the environment. It’s not only the global environment, it’s also the close environment of Europe, which is geopolitical uncertainty in the Middle East and in Northern Africa, and it’s in sub-Saharan Africa as well, and Russia. So as much as this political uncertainty can be lifted, the better for the European economy. But that’s not for us to comment on it.
LIESMAN: One of the questions that I didn’t get to ask earlier, Benoît, was about the financial regulation. And you spoke about it in your remarks earlier. The U.S., from the story that I can tell, led the world in a post-crisis—the post-crisis period towards stricter financial regulations. What do you see when you look at the U.S. right now, and executive—a president who says they’re going to—I forget what the word is—was it whack or do drastic cuts to Dodd-Frank. What does that mean for global agreement on financial regulation?
CŒURÉ: Look, each and every country has their priorities. And it’s not for me to comment on the—on the priorities of the new U.S. administration. What we want to see is a well-functioning framework at a global level to have the discussion. And that framework is well-known. It is the FSB, it is the Basel Committee and the other committees, it is the IMF. And we want—we want it to be the place where these kinds of discussions take place. And so far, I see no sign coming from the new U.S. administration that they would disengage or walk away from these kinds of discussions. We had the G-20 meeting in Baden-Baden one month ago. G-20 ministers and governors. And there was a good discussion on FSB priorities, where Secretary Mnuchin was engaged.
So I—and then each and every administration has priorities. That’s OK. I don’t have anything to say about it. But we want the framework to be—to be committed to and to be working. And as I said in my initial remarks, we see economic value in having strong financial regulation. There are different ways to do it. There is no question that there are some aspects where regulation could be lighter or maybe with less paperwork. There are some—maybe there are kind of administrative burden coming with regulation can be reviewed, something that each and every jurisdiction can do. But strong financial regulation is good for growth and is good for lending and is good for financial stability.
LIESMAN: Do the European banks still have a long way to catch up when it comes to raising capital levels to those that make the system safer?
CŒURÉ: So I will be cautious here, because I’m not sitting on the supervisory side of the ECB. I’m not a member of the supervisory board of the ECB. But from the numbers, I can, I think, safely say that the capital is not the main issue that European banks are facing. As I said, the average core liquidity is 13.8 percent for significant banks in Europe, which is a lot. The challenges that European banks are facing are different. These are challenges, in some places, about NPLs.
And Greece is a case in point with that example. And that’s certainly a priority. And generally, concerns about profitability and business models, an adapting business models to an environment with low rates, low interest margins, and fast technical change also in the banking sector. And a cost base, which is higher than the U.S. So these are the facts. So it’s more about long-term profitability than about point in time capital, which is strong.
LIESMAN: Are there other questions? Oh, lots of them. Right here.
Q: Thank you very much. (Inaudible)—Associates.
I was—there’s been a lot of chatter in the market about—and you touched on it a little bit—about potentially changing the sequencing around exit from some of the measures you’re taking right now. I was wondering if you could talk a little bit about how you’re thinking about that in the context of credibility for the long term for the ECB and communication with the markets, and the credibility of that communication.
CŒURÉ: Well, I think that discussion has been clarified, to a large extent, a couple of weeks ago by Mario Draghi and by a few—and by a few others. We have a framework for communication which is our forward guidance, right? And there are different aspects, like doing QE until December ’17, or later if warranted. That’s about rates being low for an extended period of time. And that’s also about not lifting policy rates before well-past the horizon of our asset purchases. And that’s—it’s important for our credibility that we—that we stick to this guidance. And now, it’s also important for our credibility that the guidance is credible itself, that is that it fits with economic reality, economic facts. So the guidance has to be reviewed based on facts.
We had that discussion. And I guess the whole of the Governing Council agreed that it’s too early to do it. It’s too early to do it, given the state of the recovery, which is still—which still has to firm and to broaden, and given the nature of the inflationary pressures that we’re seeing, which are mostly driven by energy and food prices. So it’s too early to do it. But we have to keep an eye on the facts, on the figures. And whenever we have to do it, we will do it, because it’s important that the guidance remains in line with reality.
LIESMAN: Here. I’ll get to the other side in just a minute.
Q: Jim Grant of Grant’s Interest Rate Observer.
Mr. Cœuré, a wise Frenchman, Frédéric Bastiat said that public policy has two effects, that which is seen and that which is unseen. The visible effects of extraordinary monetary policy, some of them seem positive. Could you enumerate some of the possible unseen adverse consequences of extraordinary monetary policy?
CŒURÉ: “Ce qu’on voit et ce qu’on ne voit pas,” what’s seen and what’s unseen. Well, there’s a lot of unseen positive consequences of monetary policy—(chuckles)—which doesn’t answer your question. But, I mean, most politicians in Europe would take for granted that growth coming back is thanks to them, while a lot has to do with monetary policy and a lot would disappear if we would withdraw today our monetary policy support. So that’s the heart of the discussion we’re having as a Governing Council: Would we see growth and inflation being as strong as they are today if we withdraw our monetary policy support? And the answer—as of today, the answer is clearly no. So what we see in terms of investment, consumption credits in the eurozone relies a lot on monetary policy support. Less and less, and that’s good news, but still quite a lot.
Now, there are also unseen—possible unseen negative consequences. For instance, just to give you an example, we’ve been monitoring very closely the consequences of having negative interest rates at the short end of the yield curve. We’ve seen the initial impact of our negative-rate policy being clearly positive, uncontroversially positive in terms of supporting the forward guidance, anchoring the short end of the yield curve at a very low level, stabilizing financial conditions in Europe, inciting banks to lend to the economy instead of keeping excess liquidity on their deposits with us. But we also see negatives, and the negatives have to do with the low interest margin, which is denting profitability, and possibly at some point harming this bank lending transmission channel of monetary policy. And that’s not always visible because—it’s very difficult to—it’s quite tricky to monitor because it happens in different ways in different places of Europe.
So that’s a key difference between us and the Fed, that the way monetary policy is being transmitted is so different in different places. So the impact of negative rates, for instance, depends a lot on whether banks are borrowing from markets or collecting deposits, first thing; and second, on the asset side, whether they are lending fixed rate or variable rate. And depending on countries, depending on institutions, you have different configurations.
So that’s something we are looking into very closely. So far we haven’t changed our conclusion that the net overall impact is positive, but we see the negative impact being accumulated over time in terms of—in terms of reducing the interest margin of banks. So at some point we might change our conclusion and conclude that negative rates have become a net negative for monetary policy transmission. We’re not there, but that’s something we have to monitor.
LIESMAN: I think a follow-up to that, though, is about asset prices. Do you worry about the impact on asset prices creating potential bubbles?
CŒURÉ: Not really. Not to the point where this would become an issue for monetary policy. With our local tensions, there are local instruments to deal with them—macroprudential instruments, as they are called. It starts at the local level.
You know, the way macroprudential policy is organized in Europe, it very much starts from the local level. So it’s for different countries to have that discussion at the local level. Monitoring housing prices, for instance. And they have instruments. And only if this would become an issue—either an issue for monetary policy or a financial stability issue at—(inaudible)—level, then the ECB would have to step in. But that’s not what we’re seeing.
LIESMAN: Over on this side there was a question. In the back there, yeah.
Q: Nise Agwha (ph) of Pace University.
Would you expand, and compare and contrast the mechanics of quantitative easing in the United States versus Europe? In the United States, as you know, the bond markets are deep and it’s very easy for the Fed to expand its balance sheet. In Europe, there are a whole bunch of constraints: the bond markets are not deep, there are excess pressures on the bund, and so forth. Thank you.
CŒURÉ: Well, that’s something we’ve been doing since the start, and even before we started, actually, looking at the—watching closely what the Fed has been doing and considering what could be done in Europe on it. And I would—I would agree that the main difference has to do with different structures of financial markets. Financial markets in Europe are less deep in terms of—at least the fixed-income segment is less deep. We don’t have a mortgage market as—which would be comparable to the U.S. market in any sense, so that’s not really a place where we can buy or we can expand the balance sheet.
We’ve done it to a limited extent. As you—as you know, we have a covered bond purchase program. We have an ABS purchase program. But they are relatively small in comparison to what we wanted to achieve in terms of expanding our balance sheet. So we had to focus on the government bond market, which raised a whole lot of different issues, which are due to the political structure of Europe or due to our constitutional constraints, which are very different from the Fed. We buy government bonds in 19 different markets. This raises technical issues, like market depth, in each and every individual government bond market; possible bond scarcity, and that’s an issue we’ve been following closely recently; but also legal, political, and constitutional issues.
For instance, one difficult discussion we had in the Governing Council was on risk sharing, whether—meaning whether the risk coming from government bond holdings should be borne individually by participating national central banks or should be pooled on the ECB balance sheet. And that was a long and difficult discussion of the Governing Council, and there were different views. And my personal view here was that we had to be mindful of the political environment and the—and the constitutional constraints, that the ECB as central bank doesn’t have a mandate to do fiscal union. We are not a fiscal authority. So we don’t have a mandate to pool fiscal risk on a single balance sheet, and doing in effect what governments and parliaments have decided not to do, which is a fiscal union. So what’s why I was in favor—and that was a prevailing view in the Council—of not sharing risk, and keeping risk on the balance sheet of national central banks.
LIESMAN: But when you—
CŒURÉ: So that’s not a market consideration, but it’s more a legal and constitutional consideration.
LIESMAN: When you studied economics, though, they didn’t tell you that if you grow up to be a central banker, you’re going to one day own bonds of a yogurt company. (Laughter.) Right? That was not something you were expected to—are you comfortable with that?
CŒURÉ: Yeah, I’m very comfortable with that as long as we—as long as we—as we have a principle of market neutrality, which we have. So the way we buy corporate bonds if that we have a—we have amounts, of course. That’s driven by monetary policy. And then we want to achieve market neutrality. So the benchmark which is given to national central banks when they buy corporate bonds, it’s to be as close as possible to market structure. So we don’t take any decision that would distort market structure. So if there are more bonds issued by yogurt company than by car companies, that’s a market outcome and we’re not changing it.
LIESMAN: We’re going to run out of time here. How about all the way in the back there? Yeah.
Q: Good morning. Hashi Inamoto (ph), Japan Sankei.
You said tail risk is off the table in the context of explaining the state of the eurozone’s recovery. How do you assess the risk of the 23rd election?
CŒURÉ: Sorry, can you—
Q: How do you assess the risk of the French election? And what kind of new leaders you would like to have?
CŒURÉ: Well, I think I answered it already, no? Steve, what do you think?
LIESMAN: I think he answered it. I appreciate the question. But as a Frenchman and member of the European Central Bank, he’s expressed his reluctance to have that discussion, and I will bail him out as a moderator. It’s called a lifeline. We have that in gameshows.
How about right there?
CŒURÉ: Comes with the (custom with you ?).
Q: My name is Andrew Gundlach from First Eagle Investment Management.
Is maybe one of the seen or unseen consequences of the 10 years that the global correspondent banks today are a smaller oligopoly and all American, with the sole exception of, say, Hong Kong/Shanghai? And is—first of all, do you agree with that?
The second thing is, does Europe need—forget a global champion; today everyone’s just fighting to be a local champion. And how are you going to achieve it if you agree that it’s necessary?
CŒURÉ: Do you mean a global champion in terms of having—
Q: In terms of having a European correspondent bank that can—that can serve multinationals and all our payments issues everywhere in the world. There are so few banks today that you can actually go to to do global business, global payments, global everything. And they’re all American, with the sole exception of Shanghai. And European—Europe has, over the last 10 years, pulled back only to its local markets, where they’re still fighting to tackle all the issues that you brought up.
CŒURÉ: No, that’s a—that’s certainly a major concern for the—for the global financial system, and there is a risk that a—that a large number of jurisdictions would be smaller—smaller economies, smaller countries would just be cut off the global banking network. That’s an issue on which the FSB has spent a lot of time, and the G-20. And there is no easy solution. There are a number of technical solutions that can be—that can be invented, designed to make it easier for banks to comply with AML/CFT standards in particular, comply with their legal duties.
I’m chairing the Payment and Market Infrastructures Committee in Basel, and we’ve come up with some possible solutions to help banks comply with requirements, like making KYC platforms easier to use, changing the messaging systems, et cetera, et cetera. Well, that’s of course technical, so that’s—there is not much that we can achieve on that side. It’s useful.
And there is another discussion going on with the Financial Action Task Force, the FATF, to clarify the regulatory expectations when it comes to KYC or possibly to KYC-square, know the client of your client, or the perception of it. And that’s, I think, a useful discussion with the FATF. And the—and also the U.S. Treasury has shown a lot of leadership in trying to make it easier.
But now, that said, everything being said, there are regulatory expectations. There are compliance requirements. And in a world where we see geopolitical risk, in a world where we see terrorism around, this should not come at the expense of a—at the cost of weakening compliance standards.
LIESMAN: Right here?
Q: Joe Naggar with Goldentree Asset Management. Thank you for spending time with us today.
I have two very easy questions. The first one is—
LIESMAN: If you could keep it to just one, because we are running out of time.
Q: They’ll be quick.
Q: The first one is just TARGET2 imbalances. Just any perspective on that? Is that something we should care about?
And the second one is, given that the GDP in the eurozone is, you know, north of 1 ½—let’s call it 1.6, 1.7 (percent)—what do you think the right, you know, kind of long-term real rate should be, 10-year real rate should be?
CŒURÉ: Well, I’ve hedged myself saying that economists, we are not good at doing forecasts. I think that gives me an excuse not to answer your second question on where the real rate should be. And we—contrary to the Fed, we don’t have, you know, dots and we don’t disclose our expectations of neutral rates and the like. So I’m not going to change that.
On your—TARGET2 balances or imbalances are by and large a byproduct of financial—I mean, they are a symptom. They are a byproduct of financial flows inside the eurozone, and they’ve been heavily influenced recently by the way we do QE—the fact that when we buy Italian bonds or Spanish bonds, we buy them from banks which are very often in core European countries, not in Spain or Italy. So that creates a very particular pattern of financial flows, which is reflected in TARGET2 balances. So it’s largely a byproduct of the way we are doing QE, not a matter of concern itself.
LIESMAN: There’s a great story in a Peter Bernstein book where he—the high command in talking about bad long-term weather forecasts says the high command is aware that the long-term forecasts are useless, however we still require them for planning purposes. (Laughter.)
Mr. Secretary, apologies that I didn’t see you earlier.
Q: Benoît, maybe a philosophical question as you come near the end. One of the big advantages of the international conversations is not just accomplishing positive things, but avoiding bad things—avoiding a race to the bottom. In a number of the areas you discussed, whether it’s tax policy, regulatory policy, or exchange rate policy, one of the things that we’ve seen over the last, you know, 10, 20 years is diminishing the risk of a race to the bottom. In an environment where there’s so much domestic pressure of a nationalist nature, how durable do you see that in the current environment?
CŒURÉ: I think it’s a daily—it’s a daily fight. It’s a daily fight to—it’s a daily battle that we fight to avoid a race to the bottom. And it’s not—it’s not—by the way, I mean, just to clarify, what I—my initial remarks and the tone of my remarks was not particularly aimed at the U.S. or any particular—any particular jurisdiction. That’s something we see in Europe. There are lots of people who would like to see regulatory race to the bottom inside Europe in terms of banking regulation, in terms of market regulation, et cetera, et cetera. So that’s something—that’s a battle we’ve got to fight everywhere.
I think the—what really—I think the best argument—I mean, first, if we can show that it works, that having—I mean, upholding these global standards, having an effective FSB has been very useful in terms of making the financial system sounder. And I think we have good—we have got good facts, numbers to show on what we’ve achieved since 2009 in terms of bank capital, in terms of resilience. So there are facts here. And also we have global banks. We have global financial institutions. And it’s only through cooperation that we can—that we can deal with possible issues facing global banks.
So without the—without the FSB, without supervisory colleges or, I mean, whatever they’re called, crisis management groups, there is no way we can address issues faced by a globally—by a globally active bank. So we need that cooperation framework if we want—if we want crisis resolution to be effective.
And if crisis resolution is not effective, then the cost will be borne by the taxpayer. I think that’s the best argument, that if we don’t have an effective and cooperative international framework, that will increase the cost for the taxpayer. That’s certainly not something the taxpayers want to see, and as it happens taxpayers are also voters.
LIESMAN: And, with that, please join me in thanking Benoît. (Applause.) That was great. Thank you very much.