Interview with 20 Minutos

Interview with Luis de Guindos, Vice-President of the ECB, conducted by Emilio Ordiz and Jorge Millán

21 December 2023

Wage cost data in Spain point to an increase of 4.7%. ECB President Christine Lagarde stated that domestic inflation is resisting and is largely predicated by wages. Do you think wage moderation is required to beat inflation?

A year ago inflation was above 10% and now it is below 3%. Indicators of underlying inflation are also favourable, i.e. there is a clear downturn in inflation, basically because the supply and energy components that were having a negative impact have started to fade, and because monetary policy is taking effect. However, average wage growth in the euro area is over 5%, whereas productivity is barely improving. This means that unit labour costs are rising, which adds to inflationary pressures. In 2022 profit margins increased considerably, but this year the increase has been more moderate. This is partly due to firms absorbing some of the increase in labour costs, which in turn is contributing to moderate inflation growth.

What will the ECB do in this situation?

We will analyse developments in wage costs and profit margins, as both factors could delay the return of inflation to our 2% target. We are keeping a very close eye on this.

The EU is emerging from this crisis better than it did in 2008. What do you think has changed?

We have the experience of what happened in 2008 and the two crises are completely different. The 2008 crisis broke out on the back of extremely high private sector debt levels, which had a significant impact on the banking sector. The response was also very different. For the crisis that began during the coronavirus pandemic, there have been no limits to fiscal policy, and this has been accompanied by monetary policy that has also been very expansive. In addition to this, the European Union came up with an action plan for all countries throughout the bloc, providing them with funding through the Next Generation EU programme.

However, the situation has now changed. Almost all income indicators have returned to their pre-pandemic levels and the focus is now on fighting inflation. To this end, the ECB takes action through its monetary policy but we also need to see fiscal policy return to normal.

With euro area inflation at 2.4% in November and euro area GDP stagnating for the past twelve months, how do you explain to people why interest rates are being kept so high?

Interest rates are doing what they are supposed to do, which is bring inflation down. Monetary policy operates by tightening financing conditions: higher interest rates affect levels of economic activity. And when economic activity is dampened, inflation slows. Once we see inflation is clearly converging in a stable manner to our target of 2%, monetary policy might then start to ease. But it’s still too early for that to happen.

When can we expect to see the first interest rate cuts?

If sustained for a sufficiently long period of time, current interest rates will help bring inflation down to 2%. We are data dependent. The data have been favourable but still not enough for us to change our monetary policy. It’s therefore too early to talk about a cut in interest rates.

What do you think about opinions from certain quarters that the ECB is sort of following in the slipstream of the US Federal Reserve?

The US economy’s fundamentals and cycles differ from Europe’s. US fiscal policy has been much more expansive, growth is higher and the rate of unemployment, below 4%, is even lower than in the euro area. With an unemployment rate of 6.5%, our labour market is in good shape, but on the whole the economies are in different situations. As the central bank of the world’s largest economy, what the Federal Reserve does is relevant, but it does not determine the ECB’s monetary decisions.

Do you think that now is the time for completing banking union? This debate always seems to be ongoing but never seems to reach a conclusion.

Completing the banking union is essential if we want full economic and monetary union in Europe. There is one pillar missing: a European deposit insurance scheme. European elections will be held in June 2024, offering another opportunity for this. Completing banking union should be on the future European Commission’s agenda, as should making progress on a fiscal union through the introduction of a common fiscal stabilisation function.

Do you think there is the risk of a recession if, for example, the war in Ukraine drags on?

The ECB does not expect a technical recession, defined as two consecutive quarters of negative growth. But beyond whether or not a recession will occur, the main issue is that Europe’s economy has a structural growth problem. Both our projections and those of the European Commission see very moderate growth of around 1% up until 2026. These potential growth levels are low because productivity is barely improving. Europe needs to import more energy than other global economies. As a result, the energy crisis further exacerbates its competitiveness issues. Structural reforms are therefore necessary. The aim of monetary policy is to reduce inflation, but to achieve growth, other factors must be brought into play.

What would these reforms have to be?

One would be completing banking union, as I mentioned. Clear progress also needs to be made towards the capital markets union, and also in the single market of the European Union. Not much is said about the latter, but we are in a situation where there are hardly any limits on state aid, which creates imbalances between countries, depending on their fiscal position. The focus basically needs to be on Europe's low growth potential, how to increase productivity and the reforms needed to boost growth in the medium term.

Do you think it would be feasible to standardise the formula for the European Union’s Next Generation funds?

The Next Generation funds were a response to the pandemic and had two very positive aspects: the issuance of joint debt and the fact that part of the aid consisted of grants rather than loans. Beyond the clearly positive effects of the programme, it ultimately highlights that we need to complete our economic and monetary union. And to do so it is vital to have a permanent centralised fiscal policy instrument, and to implement structural reforms.

Staying with the European Union, there was an agreement on fiscal rules yesterday. How does the ECB see it?

Markets are calm and interest rates on sovereign debt have even fallen. But this can change relatively quickly in the context of low growth, tight monetary policy and geopolitical risks. That is why it is very important to have a clear framework of common fiscal rules. We welcome that there's an agreement because that reduces uncertainty in the markets.

And what is the ECB calling for?

Our recommendation is that the framework should be simple, transparent, easy to understand and countercyclical. In other words, it should allow fiscal policy to be expansionary in bad times and contractionary in good times. Fiscal action plans need to ensure a prudent and sustained reduction of the public debt-to-GDP ratio and a decrease in structural deficits. They should also create fiscal space for public investment in digitalisation, climate change or defence, and should provide incentives for structural reforms.

In the end, would you say that the EU has completely ditched austerity?

Sometimes it is not clear what is meant by “austerity”. Fiscal sustainability is essential, and, at the same time, fiscal rules have to allow for countercyclical action. And to be able to increase the public deficit during an economic downturn, countries need to rebuild their fiscal positions and reduce their public deficit when the going is good. Beyond fiscal policy, one basic difference between the pandemic and the 2008 financial crisis was the very different monetary policy response, providing liquidity to banks and launching a pandemic asset purchase programme that has ultimately provided immense support to the European economy.

Do you think southern European countries have learned the lessons of the 2008 crisis?

Banking systems are much healthier than they were in the period from 2008 to 2011. And that is a key change. Moreover, these countries have made efforts to become more competitive and have a balance of payments surplus. For example, Greece and Portugal have made very significant budgetary adjustments that have been reflected in the risk premia and the ratings agencies. Many southern European countries have made considerable efforts to improve the sustainability of their public finances in the medium term. That is why it makes no sense to now try to create some kind of north-south divide between EU countries.

One of the most important projects the ECB is currently working on is a digital euro. How is it going and what are its key components?

At the moment, we all have euro banknotes in our wallets. A digital euro would be exactly the same, just on our mobiles. It would basically be the banknotes we have now, but in digital form and also backed by the central bank. We want it to be an additional, alternative means of payment. It is not meant to replace banknotes but to complement them. There would also be a limit on the amount of digital euro you can hold. In other words, it would be a means of payment but not a means of saving. We want a digital euro to be more comparable to banknotes than current accounts.

Do you share the Government’s optimism about the Spanish economy?

The Spanish economy has a healthy banking system, which is completely different to how the situation was in 2010, 2011 and 2012. Moreover, the economy is competitive, with a surplus in the balance of payments. It is important that both are maintained in the future. The external sector, including international tourism, has helped a lot in restoring income to pre-pandemic levels.

Are there any challenges?

Education still needs some work. This affects medium- and long-term growth because there are mismatches between labour supply and demand. The 12% unemployment rate means there is room for improvement in the labour market. Like some other euro area countries, Spain has a high public debt-to-GDP ratio of 110%. It is therefore important that these countries implement a prudent adjustment programme to reduce the ratio of public debt to GDP.

All countries are going to face major challenges: economic slowdown, geopolitical risks, a new framework of fiscal rules or higher interest rates. That is why economic policy must be predictable.

The last two questions have a Spanish context. What do you think about Nadia Calviño’s appointment as the next president of the European Investment Bank?

Naturally, as a Spaniard, I think it is positive that Spaniards hold key positions in the European Union. I wish her and the institution all the very best.

And in the same vein, particularly seeing as you have held the post that Calviño now leaves, who would you like to see occupy the position left vacant by her?

It is not my place to comment on domestic affairs. I am sure whoever is appointed will be competent and I wish them every success.