The Eurotower is only a short walk from Frankfurt's main rail station and as I worked my way through what appeared to be the city’s red light district at 8.30am on a Thursday, the 36-story building did not look particularly modern or impressive.After making my way through the not-particularly-tight security on the ground floor, I was taken up to the 35th floor to wait for Ms. Tumpel-Gugerell, a member of the Executive Board of the ECB.
I waited in a small meeting room with a table that could seat about 8 people, the office also afforded great views of the large river that winds its way through the city. At 9am precisely, Ms. Tumpel-Gugerell entered the office without fanfare and said that she'd prefer to do the interview here rather than in her own office next door.Dressed in a simple beige suit, the bank's director was soft-spoken but also quick to smile.
The interview went well, though I thought she was very careful with her words - preferring not to comment on the currency and her press secretary took notes and recorded everything that was said.At the end of the interview, Ms. Tumpel-Gugerell also kindly agreed to accompany me outside to take a photo of her in front of the big Euro sign in the small park in front of the building.
EO: From your experience of working at high levels of European banking for more than 20 years, how do you see monetary policy that existed in Europe in the lead up to the crisis and did those policies have any effect on causing the crisis?
TG: If you look back at the years before the Euro was established and also since the Euro was established, we can say that the object of European monetary union (EMU) has first of all helped to introduce a convergence of fiscal policy across Europe which helped many countries to stabilize their positions and has contributed to much lower interest rates after the introduction of the euro then they had ever experienced in the past.
We should not underestimate this effect; this was the first impact that the introduction of the Euro had.
And since the introduction of the euro, we conducted monetary policy according to our mandate to maintain price stability.
We could also achieve what we promised – price stability – and we achieved this– the price increases were not beyond what we defined as our objective –namely an increase of not more than 2%.
Therefore, I think, we HAVE conducted stability‐oriented policies.
What contributed to the crisis in the financial sector was, I would say, global imbalances. Secondly, financial innovations which were not accompanied by regulatory changes and changes in risk management and certainly also corporate governance issues – in the sense of the role of risk management within institutions and incentives which served short term results in rather than long‐term financial stability.
EO: So you mentioned the convergence of fiscal policy, and the low interest and low inflation rates which helped countries like Spain and Portugal when the euro was first introduced, but some would say, it was just such policies that led these economies down the path …
TG: I would say that policies were successful in the years before the establishment of the Euro and for a few years after the establishment of the euro. After that, clearly, the fiscal surveillance was not as good as it should have been.
Some countries did not take care of their competitiveness as well as they should have
done, which means that prices rose too much and they also let their current account deficits rise too much.
And of course in the crisis of 2008‐09 there was an additional challenge because their deficits and also debt levels increased quite considerably because countries decided to implement stimulus programs.
Those countries whom were not in a good position before the start of the crisis of course, were under even more pressure.
But I think the governments have started to address these issues, not only the Greek government but also other governments, have announced fiscal programs that will bring their fiscal positions back to more sustainable levels.
I think a lot has happened in the past months in this regard.
EO: Where are we now – how important are the stress tests? Are they a crucial turning point?
TG: I would say stress tests are in the tool box of the supervisors as a regular way of assessing the resilience of the financial sector, so supervisors in the individual countries are conducting these tests regularly.
This time it’s a joint exercise and it was planned already for some months, the Committee of European Banking Supervisors (CEBS) has prepared this in close cooperation with the ECB. What was introduced as an additional assumption in the current stress tests was a possible sovereign debt risk. I’m confident that these tests results will clarify that the European banking system is in a sound condition.
The purpose is to assess whether a worsening of the macroeconomic scenario, would require additional capital.
Therefore it’s important that the tests take place. It is also important that if the stress test reveal that banks would need more capital in a scenario that is worse
than the current one, then they should aim at increasing their resilience.
I’m confident that these test results will also help assure the public and the media about the situation in the banking sector, not least to avoid any incorrect reporting on these matters.
EO: If any weakness is found, many countries have set up funds, but there is also this recently-announced Euro fund, will that function as backstop for the national funds?
TG: I think the first step is to use the facilities that exist at a national level and in many countries these facilities were not fully utilized.
EO: We’ve talked to people in Southern Europe who have claimed that the inter‐bank market is not working properly – can you tell us why and is it going to be able to start functioning again soon?
TG: I think it was necessary to get clarity on the fiscal strategies of the individual countries, and now with the stress tests, we get clarity on the positions of the banks. What we have seen over the past few weeks is that banks turned out to be in a position to absorb without any problems the maturing of our EUR 440 billion 12-month operation and to replace it only by around half this amount in shorter term liquidity from the ECB. Hence the market reacted very smoothly to an overall liquidity drain
of about EUR 250 bn.
This is good news. Also, the dollar funding facility which was offered was not used. This is additional reassurance.
EO: You mentioned earlier this “incorrect reporting” or problems with central banks in certain countries in getting messages across about how they see the banking system in their jurisdiction. Why is this happening?
TG: I think it’s a rather recent phenomenon, let me give you an example: one of the major magazines had a cover story recently pointing to the Euro area banks as having 1.3 trillion losses. However, 1.3 trillion is the total of losses of the global financial system during the crisis. European banks had to write down approximately 200 billion, which is not comparable to what was mentioned. This is, of course, very dangerous misreporting.
EO: Some people have said the ECB is now functioning as a kind of broker for banks that no longer trusted each other – do you see that role?
TG: Less. It was in certain phases of the tensions but I see it less now.
EO: It was an emergency measure?
TG: Yes.‐
EO: How has the crisis altered the role of the central bank?
TG: I think the last three years were a very special situation, where we had to take very unconventional steps to stabilize the situation; we have used interest rates, but also a number of other measures to contribute to financial stability and also to react to the weakening of economic activity.
In this context one should also see our recent steps regarding bond purchases.
From our perspective, these programs have worked well. Banks are coming back to normal, demand for loans is returning – we have positive figures for loan growth again, especially for household loans ‐ and this is important as it’s a precondition for the economic recovery that there is access to finance.
EO: So you think the moves have been effective, and you see this as being what’s required of the central bank?
TG: Exactly.
EO: How do you respond to comments that by purchasing bonds the bank has been politicized?
TG: It has nothing to do with politisation, it is part of our toolbox, we had very high tensions in the sovereign debt market and our intervention contributed to stabilizing the situation and restoring the monetary transmission mechanism.
And we took this decision of course, fully independent.
EO: In terms of the 7 years that you’ve been on the ECB board– in hindsight, is there anything that the ECB could or should have done differently?
TG: I think we have raised our voice in this regard – especially in relation to competitiveness of these countries.
And we’re very active in also urging reforms in the way fiscal surveillance takes place.
This means a strengthened role for the Euro group (Finance ministers of the euro area) with, more discussion taking place before the governments or national parliaments decide on the budget. Besides that, very independent monitoring of fiscal
data and enforcement of corrective action should take place.
So, strengthening the fiscal surveillance is the first priority in this regard.
EO: What do you think is the most urgent measure that needs to be taken on a European and a global level in regards to financial regulation?
TG: We see the reform of the capital and liquidity requirements as well as special provisions for systemically relevant institutions as the core of the reform. It’s
also important to come to a conclusion on these reforms soon.
The second issue is the institutional reforms in Europe. Although I think a lot has been achieved already, the final steps are yet to be taken, namely to set up the new European supervisory authorities and also to establish the European Systemic Risk Board, a board which brings together supervisors and central bankers. I hope the final steps can be taken very soon, because it’s very important that the cooperation of supervisors at the European level is strengthened so that systemic risks are systematically addressed.
EO: Did the crisis bring to the fore an institutional gap that existed in Europe, that regulation on a European level was lacking in some sense?
TG: I would argue that it’s not specific to Europe. You see this also in other jurisdictions where reforms are being undertaken – like in the U.S., where they have made similar moves to establish a systemic risk committee.
What is clearly needed is not only more cooperation at an international level, but also making sure that not only banks but also “non-banks” are subject of to the new rules, including rating agencies. In this regard, it is also very important to introduce central clearing for derivatives that are usually traded over the counter.
Additionally, the convergence of the accounting rules (IFRS and USGAAP) is also very important.
Discussions are going on now about how provisioning should take place in the banking system - these are important steps.
EO: In terms of the banking system and monetary policy in Europe – what do you think needs to change? Do you think there has to be a shift in monetary policy in Europe?
TG: No, I don’t see this. I think our monetary policy is appropriate and has
been successful. But ‐ sound monetary policy has to be complemented, first of all, by fiscal policies that are sustainable and by a regulatory framework which enables the financial sector to play its crucial role of providing loans for the economy.
Being innovative, but at the same time, also avoiding the risks that have affected the system in a very profound manner over the last three years ‐ not only the real economy, but also the budgets of the governments.
It has had a huge impact and therefore we should draw the lessons and make sure that we get regulation in place for the future which stabilizes the system.
EO: Some people have said that as a result of the crisis a transfer of authority from member states to the union will be required; do you agree with that analysis?
TG:What we’ve experienced is that countries can not only take the benefits of the euro, but have also to stick to their commitments – that is the main lesson.
We have sovereign national governments, parliaments, but it’s clear that we need more Europe rather than less. National sovereignty is important but it‘s also clear that fiscal surveillance has not worked sufficiently and that that part should be strengthened.
EO: can you give other examples of where you need “more Europe”?
TG: We have now the Europe 2020 strategy, which addresses areas of
structural reform, innovation, research, education.
At the same time, we should not underestimate what has been achieved over the last 10 years. For example, labor market participation has clearly increased. We have more older people at work now, we have clear improvements in the labor market.
Therefore, it’s important for the future to also have a common view on issues like research, which is very important for Europe as research programs allow us to bring researchers together.
It’s important also to have a shared view on changes taking place in the education system, for example – the so‐called Bologna program which makes it much easier for students to study at different universities all over Europe.
It’s important to also invest more in this field and we already see countries giving a lot of priority to research and development and education reform.
Infrastructure investment and investments for clean energy to address climate change are also very important.
EO: Do you agree with the basic analysis, that if these structural reforms are not made, than growth rates will not return to pre-crisis levels?
TG: We don’t know yet what the impact of the crisis on the growth potential will be. But one thing is certain. Structural reforms are necessary. Past experience has shown that countries that have already been active in these matters are much better off now.
So, it’s important to learn from each other.
EO: In order for Europe to return to pre-crisis growth levels, governments need to push ahead with often unpopular reforms, how do you see the prospects for member states being able to push through these reforms?
TG: It’s not easy of course for government to implement these policies. But what makes me confident is a recent poll carried out which says that people support long
term fiscal sustainability. They want to have government finances under control. For
even though they might benefit in the shorter‐term from a more expansionary fiscal policy, in the long term they know there is an issue of sustainability.
EO: What are the biggest concerns facing the central banks of Europe?
TG: I think that it’s very important that the recovery remains on track.
We have received good news in the last few weeks; the second quarter might be stronger than what we have seen in the first quarter of 2010.
We don’t see risk to price stability for the time being, though of course it’s important to constantly monitor all risks to price stability very carefully.
It’s also important that confidence strengthens to boost domestic demand and that the labor market improves.
EO: What are the necessary conditions before the central bank will consider lifting the key interest rates which has been held at 1% since May 2009?
TG: The outlook for price stability.
EO: You just mentioned the potential effect of commodity prices and energy prices – what is the outlook for commodity prices?
TG: It’s difficult to predict, but we don’t see it as a special concern for the moment, according to the information that we get about future prices.
EO: In the likelihood that there is a spike in energy or commodity prices, what would that mean for monetary policy in the Eurozone?
TG: We always monitor all relevant risks to price stability. We will address the problem in case it should arise.
EO: Demand from emerging economies has played an important role in the rise in energy prices, so in terms of a longer term outlook …
TG: It’s very important to invest in alternative energy and I think a lot is already happening in this regard.
EO: It seems to me that Europe is now at a critical juncture and everybody is looking at what will happen with the stress tests and reforms – and everyone is waiting …
TG: I would like to clearly tell you, that challenges are being addressed and I’m convinced that Europe will emerge stronger from the crisis.
I think we have seen very clear decisions being taken over the past few months and confidence is gradually coming back.
EO: What was it like within the central bank in May when the debt crisis peaked in May? How stressful was it?
TG:You’ll remember that in May, when the debt crisis peaked, the ECB was able to take decisions quickly on a number of unconventional measures.
Cooperation between the member governments of the euro area has also worked well. It took some discussions to address the Greek issue and it took some time to come up with additional measures for the euro area but solutions were put on the table in a relatively short time frame.
EO:Looking ahead, I also wanted to ask about the role of Asia – we saw that SAFE purchased a significant share of a recent Spanish bond issue – what role do you see Asia playing in European banking and financial markets?
TG: I think Asia is a very important trading partner for the European corporates and also the links between the financial systems have become better and closer. And of course, Asia is also a very important partner in the context of the G20 and I think we share common values, for example – long term orientation.
Zhang Feifei contributed to the preparation of questions for this interview and Tony Liu translated the interview into Chinese.
The Chinese-language translation of the transcript can be found here.
The above transcript is of an interview with Gertrude Tumpel-Gugerell, a member of the executive board of the European Central Bank which was conducted at 9am on Thursday July 14, 2010 at the Frankfurt headquarters of the ECB. The interview was just one of a series of interviews that Paul and Zhang Feifei conducted with various officials, scholars and journalists throughout Europe on the topic of the future of the European economy in the wake of the sovereign-debt crisis. You can find a collection of the interviews in English here and in Chinese here.
