Europe 2014: An Outlook from the European Central Bank

Thursday, November 21, 2013
Jörg Asmussen

Member, Executive Board of the European Central Bank

Steve Liesman

Senior Economics Reporter, CNBC

Jörg Asmussen reflects on the European Central Bank's role in overcoming the eurozone crisis and the economic challenges for Europe ahead in 2014.

This meeting is part of the C. Peter McColough Series on International Economics, presented by the Corporate Program and the Maurice R. Greenberg Center for Geoeconomic Studies.

LIESMAN: Good afternoon. Welcome to today's Council on Foreign Relations meeting with Jorg Asmussen. I'm Steve Liesman, a senior economics reporter for CNBC. I cover the Federal Reserve and the Treasury and the ECB, when it gets into trouble.


I don't much care about it until then. Luckily, I think we're out of one of those times here. This meeting is part of the C. Peter McColough series on International Economics. And I want to introduce our speaker today.

Jorg Asmussen has been a member of the executive board of the European Central Bank since January 2012, responsible for the directorate general international and European relations and the directorate general legal services. Before joining the ECB, Mr. Asmussen served in various positions at the General Federal Ministry of France—of Finance—France, wow. He was the state secretary from 2008-2011, which is when I first covered him.

Let's have a warm welcome for Mr. Asmussen.


ASMUSSEN: Yes, thank you very much for the welcome, Steven. Thanks for you that you come. Thanks for the Council on Foreign Relations for having us here. It's always, I think, worthwhile to travel across the Atlantic to explain what we are doing in Europe. I'm also pleased to see old colleagues and friends here today. Stan, great honor that you are here today.

So I would try to give you a short introduction, roughly 10 minutes, how we see the outlook from the ECB perspective. And I think it's clear that the latest economic data suggests that the euro area is gradually advancing on the road to recovery, but there are doubts—I know this—where that road is leading. And some commentators think that the road will be so long and so difficult that Europe will face a lost decade like Japan experienced in the 1990s.

But I want to be very clear: Yet this is not my view. And I will use my remarks today to argue that the changes which are taking place in the euro area today will allow us to take a different path than Japan, although we need to persevere to ensure that a lost decade is definitively avoided.

And at the same time, observers should understand that the process of restructuring and reform, that this entails certain economic consequences, namely a period of current account surpluses. I see this as part of a healthy adjustment that will help the euro area to play a constructive role in the global demand in the future.

Let me first start by illustrating how the euro area is learning the lessons from Japan, because the term "lost decade" came to be applied to Japan not just because the economic outcomes were poor, but also because little was done to address the structural challenges. In other words, what was "lost" was not only current growth, but the opportunity to fix its underlying problems and lay the foundations for future growth.

And this is not at all the picture that I see in the euro area today, and it's precisely because we have the Japanese experience to guide us. Certainly, our growth and employment outcomes are currently weak. But below the surface, fundamental reform and restructuring is taking place and we are determined not to let our crisis go to waste.

And a key lesson we have learned from the Japanese experience is, first, the importance of banking sector reform and, second, the need for structural reform. And, indeed, a recent paper on the Japanese experience identified delays in these two areas, banking sector reform and structural reform, as the main factors retarding Japanese recovery from the crisis. And on both fronts, the euro area is now making progress.

First, we have substantial bank balance sheet repair that has taken place since 2008. By October this year, banks have raised around 225 billion euros of fresh capital, and a further 275 billion euros has been injected by governments, and this is equivalent in total to 5 percent of euro area GDP. And as a result, today, the median Tier 1 capital ratio of euro area banks stands above 12 percent.

But nevertheless, we, of course, see that investors are not yet convinced that the banking sector has fully healed, and this evidenced, for example, by euro area banks' price-to-book ratios being less than one. And this is why the ECB—the future bank supervisor in Europe—is now undertaking a rigorous and comprehensive assessment of banks' balance sheets. We want to make sure that investors have all the facts they need.

Such transparency should dispel investors' doubts where they are not warranted. It should encourage proper risk pricing where it is misaligned. And it should encourage corrective actions where they are needed. As such, we trust that we will have a similar effect to the Federal Reserve's stress test in 2009 that helped to lift the fog over the U.S. banking sector.

And looking further ahead, next year, we will have a new European supervisor, ESA at (ph) the ECB, and the year later, we will have a new resolution framework and potentially a single resolution mechanism. And this will allow for tougher supervision of weak banks and ensure that nonviable banks can be wound down orderly, cross-border, in the common markets safely and effectively.

So this is why I expect most bank sector repair to be completed by then, but the future banking union gives us the powers to ensure that banks contribute to the recovery, rather than to hold it back.

We have also seen a good deal of progresses of structural reform in the euro area, in particular in countries under stress. Thanks to early labor market reforms, according to the relevant OECD index, labor market institutions in Portugal, Spain and Greece are now more flexible than those in the Netherlands, in France or in Germany.

Reforms to increase competition and improve the business environments have been slower, but in several countries we are now seeing movements in the right direction. Governments have improved the regulatory frameworks, reformed their legal system, removed protections from regulated professions, and raised the quality of public administration.

For comparisons, Japan's attempts at structural reform did not start in earnest until around 2001. And even then, when I go back to the research paper I just referred to, it finds that out of the 35 initiatives of the Japan government, only 8 were directly growth-enhancing. So in terms of structural reforms, the euro area is therefore clearly on a different trajectory.

What is the role for monetary policy? Monetary policy is clearly not the solution to structural problems. Maintaining price stability through a period of adjustment is essential. Otherwise, real debt burdens rise and, in the euro area, rebalancing between countries becomes more difficult.

Japan was unable to avoid deflationary pressures, but this is not—I repeat, not—a scenario that we foresee for the euro area. Inflation expectations are firmly anchored around our goal of close, but below 2 percent, and we see no risks of deflation in the medium term.

We have recently cut our main interest rate to ensure that we maintain inflation at below but close to 2 percent over the medium term. And this objective was the anchor of all our policy actions before the crisis, it has remained the anchor during the crisis, and it will remain the anchor as the euro area economy proceeds towards recovery.

Such a comprehensive process of restructuring and reform as we are seeing now in the euro area has economic consequences. And let me turn to the consequences in the second part of my remarks.

As the public sector is consolidating and the private sector is deleveraging and rebalancing towards exports, the external sector has to go into surplus for a period of time. And the euro area current account surplus is expected to rise above 2 percent this year.

And there have been some claims recently that this constitutes a "beggar-my-neighbor" policy and that this approach is hampering global demand. And I find this quite contradictory, because observers cannot call on one hand for Europe to avoid the mistakes of Japan and then on the other hand criticize Europe for the inevitable consequences of doing so.

It's also a short-term view. Europe's contribution to global demand in the years before the crisis came largely through governments, firms and households taking on too much debt. And this had to change. The ongoing process of reform and restructuring will allow us to support global demand in the future, but in a sustainable and stable way.

And I would add that ensuring balanced growth between major economies would be greatly helped by efforts to accelerate regional free trade arrangements, in particular the Transatlantic Trade and Investment Partnership, TTIP, between Europe and the U.S.

It has been estimated that a comprehensive and ambitious TTIP agreement would create 400,000 new jobs in the E.U. and raise E.U. GDP by roughly 119 billion euros. The economic gains for the U.S. economy would be 95 billion euros a year. And benefits would also accrue to the rest of the world, increasing their additional demand by roughly 100 billion euros a year. And I also think that such efforts on a regional level would in turn create momentum to revive the stalled multilateral agreements.

Looking within the euro area, the main focus has been recently on Germany and its current account surplus. There are various negative claims made about this, for instance that German competitiveness hinders intra-euro area adjustment and the return of stressed countries to growth.

I think we need a bit more nuanced view, because, first, at the macroeconomic level, Germany is already contributing to euro area rebalancing. Its surplus with the euro area has been more than halved since 2007—falling from 4 percent of GDP to 2 percent of GDP—and with the stressed countries, it virtually disappeared, falling from 2 percent of GDP in 2007 to 0.5 percent this year. This is being driven in a large part by higher domestic demand, which is structural, not cyclical by nature.

And, second, at a microeconomic level, Germany's export performance supports both upstream and downstream producers in the rest of Europe, because Germany is at the center of the European value chain and it's a gateway to global value chain. You can see this especially in the automobile industry, in countries that highly benefit from this development are Poland, Slovakia, Slovenia, but also Portugal. So it's simplistic to assume that Germany becoming less competitive would automatically help others; it may, indeed, harm them.

The solution to rebalancing is for other countries to become more competitive, not for Germany to become less so. We need to maximize competitive pressures within Europe to achieve higher efficiency, innovation and productivity.

And thanks to the structural reform that we are seeing, we can actually show that this is happening. Since 2011, Portugal's export market share has been increased by 11 percentage points and Spain by 8 percentage points.

At the same time, I see a vital need for new investment in Germany. Public and private investment has been weak in the last decade. Investment is still around 1 percentage point of GDP lower than it was in 2007, and already in that year, Germany had the lowest investment ratio in the euro area. To raise investment in Germany, we need structural reforms, as well—for instance, to liberalize the services sector—and we need to create a virtuous circle of higher potential growth and better investment opportunities in Germany. And by definition, if more German savings were invested at home, the current account surplus would also fall.

To conclude, I do not see the current decade in the euro area as lost; I think it's being used well. And the decade of adjustment we are facing now is to correct the mistakes of the previous decade. By the process, I trust we are fixing our problems at the root.

And looking to next year, the key challenge, in my view, is to stay on this path to create the fastest possible rebound in growth and especially job creation. And this entails building a genuine banking union with a strong supervisory mechanism. It entails finding new ways to support structural reform implementation, for instance, through reform contracts. And it entails deepening our political union to ensure full legitimacy in the eyes of the citizens.

All this requires effort and determination to achieve these goals, but I think it's well within our reach. Thank you very much for your patience.


LIESMAN: Jorg, thanks for those interesting remarks. And I can cross right off my list your response to the Treasury's criticism of the German current account surplus, so that's—we've done that already.

Let me begin with your comments on the banking stress tests and the banking system. What is your opinion on how capital shortfalls should be handled? Is there a role for the European Union as a whole? Or is it individual countries?

ASMUSSEN: Let me first say, it's absolutely necessary before we start the comprehensive exercise that we can answer this question, because if you have no idea how to deal with possible capital shortfalls, financial markets will not trust the exercise, because they will have the impression you simply fudged the outcome in a way that you can deal with it. So we need to answer the question, how to close possible capital gaps before. And we have not done this right when we did two stress tests in Europe in the past, yeah? And then that's procyclical.

So I think we have three different layers to deal with possible capital shortfalls. The first one—and that's the normal layer in market economies, our private markets and the owners of the bank—to raise capital in markets, to retain dividends, whatever.

The second layer of defense, if a bank is not able to raise capital, are the national budget or national bank rescue funds. And only if this second layer is not sufficient, then we have a European backstop, the European stability mechanism, the ESM. With the instruments currently in place, this means then a state would need to request a banking sector program as it was successfully used in the Spanish case with the banking sector conditionality attached.

So these are the three layers in place, and the euro area finance ministers as they're meeting at their meeting last week decided about the three-layer approach, and especially the willingness to use it, if needed.

LIESMAN: Is it enough that those three layers to convince markets that the stress tests will be real?

ASMUSSEN: I would say yes. I mean, there are—I know, of course, all the guesses which are out about the capital shortfalls that will be revealed. It goes from zero, people say, "My banking sector has nothing to fear," up to tremendous three-digit amounts. I'm always a bit surprised. We have not even started the exercise, and some people say, oh, the outcome is very positive, and others says the outcome is horrible.

They have a kind of knowledge about the future that I don't have. So let's be prepared. And if you look at the three layers, capital markets, banks can go there. I know the management doesn't like it; it dilutes their shares, yes. But that's the normal answer in our economic system. Then you have national budgets, and if not, there is the ESM, and there is money in the ESM. So I think these three layers combined are enough.

LIESMAN: Let's talk about something that was in the news yesterday. There was talk that there was talk about usage of negative deposit rates at the European Central Bank. What do you think about that idea of using that tool? And how serious is the discussion at the ECB? You love this question.


ASMUSSEN: You know, central bank is not so much about love. It's more what you—what your duties are, so...


To frame this a bit, we have said—and I think this is fully correct—I have said this, I can repeat this today—our monetary policy remains accommodative as long as needed. We still have a whole range of instruments at our disposal, standard instruments like the interest rate, and a range of nonstandard instruments. So we still have things we could do, if needed. And as I said, we just have acted at our last monetary policy meeting.

Negative deposit rates are an available instrument for us. We are technically ready to use that instrument. And I personally would be very, very cautious to use that one, but I will not categorically exclude it.

What I think is not really helpful, if one—we just have acted two weeks ago. If one every single day discusses the possible use of a new instrument, because it could be seen as a signal that we have greater concern about the state of our economy than expected. And I think this is not the case. We see a very gradual recovery being in place. Yes, it's weak, it's fragile, it's uneven, it comes from very low levels, but it is a gradual recovery. But I think this is where we stand.

LIESMAN: What other instruments or tools would you say are available to you right now? You haven't used quantitative easing in the way the United States has used it by any shape or form. What's your opinion of that? And is that a tool that you think is available? And when you say that you don't see a risk of deflation, is it because you believe the ECB will employ the tools that are necessary to fight deflation? Or is it because that's not part of your forecast?

ASMUSSEN: We will come out in December with a new inflation forecast for the next two years to come. We had data for October where consumer price inflation was 0.7 percent in the euro area. That was lower than expected. And we have acted. Because we have this target, as I alluded to, of close to 2 percent, below 2 percent. And the target is a symmetric one; we always have said this. Not all people have listened to this, but we always have said and we mean it. It's a symmetric target.

And I know how the debate, for example, would be in the country that I know very well if we were to have an inflation figure of 3.3 percent. And for us, 0.7 percent is the same. It's a symmetric target. So everyone can have a look at this, and we will use all instruments available, standard and nonstandard. You just spoke about one of the nonstandard instruments. We will use, if necessary, all instruments to ensure price stability as defined consumer price inflation close but below 2 percent in the euro area as a whole. This is important. We are the central bank of all 17 countries of the euro area, not of any specific country, region or sub-region. We have a European mandate, and we have delivered price stability since we have been operated as—operating as European Central Bank.

LIESMAN: I'm going to ask one more question and then open it up to the floor, but I just want to press this point. You're not far from the zero bound with ECB policy. Do you have a priority of tools that you think, if you do get close, and if you had another decline of a similar magnitude in the inflation numbers, you would be at that point of needing to respond? What would be the priority of responses, in your opinion?

ASMUSSEN: I first want to see the data. And, yes, we are close to the zero lower bound, but we are still away from it. And as I said, we have a whole range of standard and nonstandard instruments. We have been very, let's say, orthodox in keeping our mandate, which is a single mandate, it's different from many other central banks, other major central banks. But we have been unorthodox in using new instruments.

So this is possible, but as always, with the aim to achieve our very orthodox, but good mandate. And as I said, there are a number of instruments we could deploy, and we always have to see, what is the best instrument that one could use? One has to be careful. We have a different mandate than the Fed. The financial market structure is very different in Europe. Here intermediate go three-quarters through capital markets. In Europe, it's vice versa. It's three-quarters through the banking sector. That's why liquidity provision to the banking sector through LTROs have played a key role in the past.

So look at the differences of the structure. Look at the differences of the mandate. But as I said, we have more instruments and one clear goal.

LIESMAN: As a central banker, does the quantitative easing program of the Federal Reserve make sense to you?

ASMUSSEN: It makes sense for the U.S., because they have a different mandate, they have a different legal framework, they have a different market structure, so this is all I'm going to say to commend their policies. They have, as we have, a domestic mandate. We have a regional one, but it's domestic. And each one uses its domestic instrument to reach their goals.

LIESMAN: Let open it up the floor to questions. I guess, members, just raise your hand and we'll pick on you. Stan Fischer?

QUESTION: Thanks. There've been some differences about what's desirable and the speed of implementing the banking union. How do you see the process actually playing out, time-wise and so forth?

ASMUSSEN: I think it's absolutely vital that we implement the banking union with all the key elements, and the timeframe until now is a bit different. I will try to elaborate.

The first key element of the banking union—and the banking union itself is the largest integration project since the introduction of the common currency—the first element is the European banking supervision at the ECB. We will supervise as of November next year the 130 largest banking groups of the euro area. It covers roughly 85 percent of banking assets.

And here we have finished the lawmaking procedure, so we are now in the operational phase to prepare for this. We are well underway. We are in the process of hiring 1,000 people, of which 800 will be supervisors. And then we have developed a supervisory manual. We have hired or we have rented the building and things like that, so it's of the operational phase, and it should start November next year.

The second key element of the banking union is resolution. This has three subcomponents, a legal framework, the resolution regime. This is who pays in which kind of pecking order when a bank goes bust. The second sub-element is the resolution authority, and the third one is the resolution fund, financed by a bank levy of the industry.

These three sub-elements, again, we are in different phases. For the legal framework, we have a directive adopted by the Council of Ministers, and we are now in the phase of a trialogue, so it's called, with the European Parliament. Since the parliament is generally in favor of this European legal framework, I would assume that this can be done relatively soon, and then we have a solid legal base for who pays what burden if a bank is insolvent. And this is good for investors around the globe that they have a picture, what are the rules of the game in Europe?

The main features of this directive, the pecking order, the Council of Ministers have decided to have this in place or be operative in 2018. I would favor we at the ECB would favor, if it could advance this date to 2015, that we more legal certainty for global investors about the rules of the game in Europe.

The second two elements, the resolution authority and the resolution fund, we have a lawmaking procedure on the table by the European Commission. What we still need to find is a compromise at the Council of Ministers, I would say, until the end of the year, because afterwards we, again, have to deal with the European Parliament, and the parliament will disappear in mid-April, because we face elections of the European Parliament in May next year.

The overall aim to have the whole resolution mechanism, with all three sub-components, in place roughly at the same time when the single supervisory mechanism starts. It has not been exactly on the same date. But if supervision starts in November next year, let's say, if resolution is available 1st of January '15, that's OK.

But these are the two elements, and they are interdependent, because as a supervisor, you might be a bit shy to act to deal with a nonviable bank if you don't know how it is resolved in the common market, cross-border in an orderly way. So these are the two elements with different sub-components and the timeframe attached. It's a big complicated; I'm sorry.

LIESMAN: Right here.

QUESTION: (inaudible) Investments. Thanks very much, Mr. Asmussen. As you say, the ECB is a central bank for the entire EMU, but there are very large differences in the economic sort of well-being of your member countries. In Germany, as you know, the unemployment rate is, you know, right around 6 percent. In a country like Spain, around 25 percent, Italy, 12 percent, and the youth unemployment numbers in those countries are very, very large.

Could you maybe just share some thoughts about how the ECB thinks about the tradeoffs and trying to formulate an effective monetary policy for the whole euro area, given those big divergences between the member countries?

ASMUSSEN: I mean, this is not a unique task. I mean, you also have huge economic divergences in the U.S., for example. We have this—this is the thing we can deal with. We have, of course, fragmented markets. The fragmentation has decreased in the last 15 months, but it's still a matter of concern. But if you look as an indicator for fragmentation the famous TARGET2 balances, they have decreased since June last year until now by roughly one-third. So fragmentation is receding, but it's still there.

This is what we have to work with, and this is why we have deployed quite a number of nonstandard measures, because they are dealing with the fragmentation, because the standard measures had lost somehow the potency, especially to steer money market rates.

So I think we are able to do a monetary policy for the whole currency area. We have done this. And we will do this. Everybody can rely on us for the future. There are criticisms from various parts, undisputed. If you travel through Germany, they will always ask you, why are you doing so much? Why are you violating your mandate? We are not doing this, but there is a huge criticism.

If you travel, let's say, Italy, they ask you, why do you leave us alone in this crisis? Why don't you act as our central bank? And the answer is always the same: We do what is necessary to ensure price stability in the whole euro area. And this is what we have delivered since the ECB has existed.

LIESMAN: Let's do one all the way in the back, left there, my left.

QUESTION: Thank you. Dirk Wilever (ph), Citigroup. I was wondering, in your description of your reaction function, if you like, it sounded like you want to see the data first and then you react. But I think one could maybe argue that one lesson from Japan is that, you know, the deflationary danger can be so high and it can be so hard to reverse once it's there that there is a case of acting proactively if one is sufficiently afraid of deflation coming or moving to the direction.

So I was just wondering, you know, how—whether this is true as a potential lesson, that one has to be maybe a bit more proactive when there is a deflation danger.

ASMUSSEN: As I said, we have a different analysis. We don't see risks of deflation in the euro area. That's a key difference. I mean, the governor of the Banque de France has written today a very good article for the Wall Street Journal, where he explains the difference between deflation and low inflation. We need low inflation, especially in the euro area countries under stress, because this is part of the necessary relative price adjustment process that we need to see. If you follow the strategy of internal devaluation, you need to see low prices in countries that have to regain competitiveness. And this is what we are seeing, for example, in Greece or in Spain.

But as I said, different to Japan in the '90s, we today see no deflationary risk for the euro area.

LIESMAN: Let me use a little moderator's prerogative here and see if I can flesh out the forecast a little bit, if you don't mind. What—so the forces you're saying of—that have brought down the inflation rate are those of what you call internal devaluation, and you see those abating over what period of time? And if you could also give us your growth forecasts for next year.

ASMUSSEN: As I said, we as ECB will come out with the new forecasts in December, two weeks from now, and I haven't seem them yet. The growth forecasts, the latest one that is out from the European Commission has real GDP growth for the euro area next year of 1.1 percent. So...

LIESMAN: But what about the forces of—that are causing the inflation rate to decline? Those are seen abating next year?

ASMUSSEN: This is what I don't know yet. The October data were driven by a number of factors. It was lower energy prices. It was the main contributing factor, lower prices for services, while at the same time, in some subparts, we see rising food prices a bit. So this is why people have the sense that the—what we call felt inflation is higher than the actual one.

So we have to see how the factors evolve. We see the risks to inflation being broadly balanced. And we have to look at, as I said, at the forecast two weeks from now.

LIESMAN: Right here.

QUESTION: (OFF-MIKE) is that working? There we go. Emil Henry, Henry Tiger. So I want to come back to Steve's question about quantitative easing. The—so Steve mentioned, solicited your view on our quantitative easing policy. And you responded that the U.S. has a different mandate, implying that that policy is somehow a function of not having a single mandate.

So I just wanted to tease that out without putting you in an uncomfortable spot. How much of—how much of our quantitative easing policy right now actually, in your judgment, relates to the fact that we have this dual mandate now at the Fed?

ASMUSSEN: I have not the intention to comment what the Fed is doing, yeah? They do their job for their country; we do our job for the euro area. So the mandate is different. The market structure is different. They have a single risk-free instrument here. We have quite a number of them in the euro area, so there are some differences. But we have, as they have, the whole range of instruments available, if needed.

But, again, it's really not useful every single day to discuss the deployment of a new instrument. They are all technically available. The question is, are they needed? Are they useful? And this we will have to see.

LIESMAN: I want to follow up on this. Are you surprised, given the increase in the size of the U.S. balance sheet, at what's happened to U.S. inflation? And more broadly, given what's happened to central bank balance sheets around the world, are you—where are you now in thinking about the relationship of balance sheet size to inflation?

ASMUSSEN: I can talk about our balance sheet. It has increased less than other central banks. It has been decreasing a bit over the last months, mainly because banks have early repaid their LTRO takeoffs. I think this is normal procedure that central banks do in crisis. They expand their balance sheet.

This is, in a number of countries in Europe, seen as dangerous. It will create inflation. And I think one has to be very precise here. What we are doing by expanding our balance sheet is expanding the monetary base, M-0. But what we don't see at the same time that, for example, larger monetary aggregates, like M-3, are expanding at the same time. M-3 expansion is quite subdued for a number of months now, and this is exactly because the monetary transmission mechanism is impaired, so there is not the old money multiplier that goes from the balance sheet to the larger monetary aggregates.

And this is the reason that we can explain this, especially in Germany, that we do not see inflationary pressures. That's why I said the inflation risk are broadly balanced to both sides.

LIESMAN: More questions. How about in the middle? Moving around geographically.

QUESTION: Ginesh Cloulely (ph), Houlihan Lokey. My question is primarily about the nonperforming loans in the European banks' balance sheets. It seems like there's a significant amount of it, and it seems to be growing, especially in Spain. Any resolution strategies or disposal strategy as part of your plan? Thank you.

ASMUSSEN: The strategies on how to deal with NPLs, they are still at the national level, at the level of member states. We are not yet the supervisor. We only will become this a year from now. Spain, you're right, they just have been out, have been showing rising NPL numbers, but the strategy on how to deal with this is still a national one. Spain has chosen the way to put most of them in a kind of bad bank, called Sareb. So it depends on the national answer.

Ireland has had a quite different strategy. So there is yet not a European strategy to deal with the NPLs, because we have still the institutional framework that this is up to the member states to deal with it.

LIESMAN: Let's do a question over here.

QUESTION: Hi, Dan Altman from New York University, Stern School of Business. Negative interest rates, deposit rates are difficult because we still have cash around. And as long as physical cash is an option, there's a very narrow band in which you can actually use negative interest rates. So given how constrained that is as a policy instrument, is it even worth discussing it, until we all have electronic money?

ASMUSSEN: At least there seems to be a huge interest to discuss it. So...


The instruments has advantages and disadvantages. It can have unintended consequences. We all have studied the case of Denmark. The ECB is not Denmark. Yeah, they are a price-taker; we are a price-maker. So we studied the instrument. It is, in theory, available. And then let's see. But as I said, I would be very, very cautious.

LIESMAN: In the back there, please.

QUESTION: Amitabh Arora from Citigroup. You mentioned inflation expectations are stable at your target, which in the very long run they are. It's 2 percent. But if you look at, say, five-year breakevens, they're below 100 basis points. The market expects you to miss your target by 1 percent for the next five years. Is that an acceptable deviation from your perspective?

ASMUSSEN: I mean, I would not share the description. I mean, all our instruments we use shows that the inflation expectations are firmly anchored across the euro area around our target, and this is what we will keep in mind. As I said, the target is—or the objective, to be more precise, was unchanged. It is unchanged. So we're not going to change this. But this is the measure on which we have to deliver.

LIESMAN: Additional questions? Right there.

QUESTION: Arnie Graphie (ph), AIG Investments. At banking union at the beginning, the question of how to fund potential shortfalls, you mentioned shareholders, national budgets, and the ESM. You did not mention credit-holders, the junior credit-holders. Could you say that you don't see them as part of that—in that group or—can you just elaborate? If you see junior credit-holders as a potential to cover shortfalls, thank you.

ASMUSSEN: I didn't mention it, because I was forward-looking. We already, when it comes to junior creditors, we have a regime in place under the state aid rules of the European Commission. And these kind of state aid rules have been modified in August this year. There are clearly bail-in rules foreseen, and it's foreseen in the state aid rules which are published, which are adopted that junior bank bondholders will be bailed in, in the future.

This is—but this is already currently there, and this holds not just for banks who are located in countries which will belong to the single supervisory mechanism. This is a rule for the E.U. 28.

LIESMAN: Right here?

QUESTION: Thank you. I'm Vincent Lauerman from Energy Intelligence. The eurozone finally dragged itself out of recession in the second quarter with growth of 0.3 percent. But in the third quarter, growth dropped down to 0.7 percent on a quarterly basis. Could you explain to me what's going to drive eurozone growth the next year to 1.1 percent, which is what you said your organization is forecasting? Thank you.

ASMUSSEN: Not my organization, the European Commission. So—it will be both exports and domestic demand. As I said, we will rely on exports. That's why we will have a surplus of the euro area of around 2 percent this year and next year. But we also see in parts of the currency area strengthened domestic demands, for example, in Germany. So it's a mixture of both.

What I would like to see is stronger investment, public and private. This is lagging. Due to a number of reasons, investors still see uncertainty. That's why they keep a bit of waiting before they create new production facilities. But the growth next year will become from mainly exports, domestic demand, and this is private consumption.

LIESMAN: I want to follow up on a couple things. How serious are the disagreements on the ECB right now concerning the last rate cut?

ASMUSSEN: What kind of disagreements?

LIESMAN: Well, we understand that people voted against it. In fact, the wire stories say you voted against it.

ASMUSSEN: You know, we have the rules—again, different from the Fed—that we are not yet publishing our minutes and not our voting behavior. In my view, this is not up to date. The ECB was at the very forefront of transparency. We are now behind the curve.

And this leads to all kinds of second-guessing, who did what and why, and—so this is why I would be strongly in favor to publish a summary with the main arguments of the debate and then who voted for what. Then this is clear to everyone. And I think one should not be afraid of this kind of transparency.

There is always the fear in the euro area that pressure can be exercised on you in order to vote for, against something. I'm deeply convinced every man, every woman who takes up such a job should be able to live with this kind of pressure. So for the time being, deliberations are confidential, but in my view, that should change.

LIESMAN: We're going to be reaching the end of our time period here, and I just want to compliment you and thank you for coming over. I think this kind of dialogue is enormously helpful for me and I think others who are out in the markets for understanding—I mean, there's a monolithic idea of the German central banker. And I think you tore apart some of that today.

But I want to make sure you have an opportunity before you go, is there a message about the European Central Bank, about its mission, its goals, and its outlook that you want to make sure that this audience understands before you get on a plane and head back over the water?

ASMUSSEN: I can try to summarize. I mean, we see a very gradual recovery. Unemployment is still unacceptably high, totally undisputed, especially youth unemployment. So here governments need to do more.

We are deeply convinced that we need to integrate Europe further. Here we have an incomplete monetary area. It's, in economic terms, an unstable equilibrium. And we need to move this construction to a new, stable equilibrium. And this, in my view, means more integration. And banking union is just the first stop.

We then need to continue with the labors, a true economic union, a fiscal union, a democratically legitimatized political union, so to really—to complete EMU. And if one is not willing or not able to go down this route—it can be both, willing and able—then we will disintegrate. This could lead in economic terms, also, to a stable equilibrium, but in my view, at much lower welfare levels. So I would really say, let's go down the whole way. Banking union is just the first step. We should not stop there.

I, of course, know all the skepticism towards more European integration. I can read polls as you can read polls for the European elections. But in my view, political leadership is not that you look at the polls, say, "Oh, this is very difficult. The people don't want it, so we don't do it."

I think political leadership is exactly the opposite, that one has a goal, explains why this is a good goal, names the pros and the cons, and then simply then goes out and fights for it. And that is what we're going to do in Europe.

LIESMAN: Well, unless you want to make any additional comments about negative deposit rates, please join me in thanking Jorg Asmussen.


And thanks to the Council.

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