Villeroy: At the time, we tried to counter the unique downturn and the looming financial crisis with a very significant program, and it worked. The situation has improved since then, so we decided at our recent meeting to keep a firm hand. But a firm hand does not mean tied hands. If it is necessary to take greater action due to the incoming data, we would have the capacity and the will to act.
THE MIRROR: Your German colleague Jens Weidmann recently said that a possible resurgence of the pandemic was already built into the existing program. If this is true, it should not be necessary to take any further action.
THE MIRROR: Some council members want to end the program next summer. What is the probability?
Villeroy: We have said that the program will continue until the end of the crisis phase, and at least until next June. Given the uncertain situation today, it would be a mistake to decide on an end date now.
THE MIRROR: At the end of August, the US Federal Reserve announced a new “symmetrical inflation target”, which means: when the inflation rate is below target for a while, the Fed would tolerate an overrun later. Could this serve as a model for the ECB?
THE MIRROR: Concretely, does this mean that if the inflation rate is less than 2% over one period, it must be greater than 2% over the next?
Villeroy: We are not yet at the mathematical “average targeting”, as the Fed announced, while reserving the right to remain flexible. But we do not want to rule out that in the future the inflation rate may exceed 2%, as has happened in the past.
Villeroy: They are. Central banks have the capacity to act, as the recent past shows. The COVID-19 crisis clearly increased the downward pressure on prices in a situation where inflation was already low. Our active set of monetary measures since March have avoided deflation and are effective if you incorporate the usual monetary policy transmission delays. We expect inflation to turn positive again in a few months, and at 1% next year and 1.3% in 2022. We are on the right track, but still too low.
THE MIRROR: This route has the ultimate goal of higher prices.
Villeroy: Our aim is to anchor medium-term inflation expectations to around 2%. Almost all economists around the world agree that such a goal is a solid foundation for sustainable growth.
THE MIRROR: Some economists doubt that the ECB can achieve this, in part because of the recent ruling by the German Constitutional Court. This decision slows down the ECB’s bond purchase program, which channels liquidity to the markets.
François Villeroy de Galhau
THE MIRROR: Is the creation of the European recovery fund a step in the right direction?
Villeroy: Clearly yes. Our Governing Council has long been unanimous in saying that monetary policy should not be the only game in town. The fund is expected to focus on innovation and the transformation of the European economy. In my opinion, in the aftermath of the crisis, we should be more Schumpeterian in Europe.
THE MIRROR: You are referring to Joseph Schumpeter, the Austrian economist who stressed the importance of entrepreneurship for economic growth.
Villeroy: If you look at the recent forecast from the International Monetary Fund (IMF), we Europeans face a challenge. The health crisis has indeed been better managed in Europe than in the United States, But the recession will be more severe in Europe – even in Germany, although less – than in the United States
THE MIRROR: Why is that?
Villeroy: During the lockdown, there was an urgent and necessary need for the program to focus on leave programs and a general safety net. But now we need a program for growth. In Europe, we cannot simply reproduce the past and forget about digital or ecological transformation. It would be a mistake.
Villeroy: I do not agree. If we had not ruled in favor of our monetary package, we would probably be facing deflation right now. It would have been disastrous, including for startups and forward-looking businesses. Monetary policy has a general effect on the economy. Governments, with their fiscal and structural policies, on the other hand, can be selective, providing public support to businesses that really deserve it.
THE MIRROR: Some economists are concerned about the increase in sovereign debt that goes hand in hand with recovery programs in some euro area countries. Do you share these concerns?
Villeroy: Debt has increased in all countries, including Germany – and rightly so. It was the appropriate countercyclical response to the COVID-19 crisis. The problem in several countries is the level of debt that existed before the crisis. And in this regard, Germany clearly had better fiscal policy.
THE MIRROR: what will be the consequences?
Villeroy: In my opinion, there is no need for the moment to change the rules of the Stability and Growth Pact. Instead, we should start reducing the public debt of euro area countries once the crisis is over and the economic recovery is over. Not too soon, probably after 2022. Moreover, to ensure debt sustainability, we need structural reforms in several countries to foster growth and jobs – and in some countries like mine, we need to increase debt. efficiency of public spending.
THE MIRROR: Does this mean that you are opposed to the pooling of the national debt?
Villeroy: In recent months, the old and fruitless debate over pooling existing debt – over so-called Eurobonds – has finally been settled. The national debt will remain the responsibility of each issuing state, and I think this is fully justified. As the European Council decided in July, we will now focus on reconstruction and future investments. And to do that, we have to issue a common debt.
THE MIRROR: Since World War II, there has been a policy shift between the rules-based, market-oriented approach in Germany and greater state coordination in France.
Villeroy: It looks a bit like a cliché …
THE MIRROR: Has this gap now been closed by the initiative of the fund of German Chancellor Angela Merkel and French President Emmanuel Macron?
Villeroy: France has changed over the past 30 years. Today, there are as many large companies in France as in Germany. They are completely independent private companies listed on the stock exchange. At the same time, the number of state-owned enterprises has significantly decreased. Our central bank is independent, believe me. Of course, in this crisis we need greater involvement of public authorities on both sides of the Rhine, but I hope and am convinced that we will remain a market economy. As a European and a close friend of Germany, I have a deep love for the expression Soziale Marktwirtschaft (social market economy). After COVID-19, we just need to add the word “nachhaltig”, which means sustainable.