Interview with Philip R. Lane, Member of the Executive Board of the ECB, conducted by Elena Laskari on 26 January 2021 |
There’s no doubt that in the near term it’s a difficult situation. Many parts of the European economy are under some kind of lockdown measure right now, but we think this is maybe more delaying the recovery rather than posing a major long-term problem. So, we still think that by the middle of next year, so maybe towards the end of the summer of 2022, we will have returned to 2019 levels of GDP. I think it’s important to say that this year will be a year where initially, right now, there are lots of restrictions. But over the course of the year, as the vaccination programmes are rolled out, we think the economy can grow quite quickly. So there will be a lot of recovery later this year and next year. I should emphasise that even if the overall economy does recover, not every sector will recover in the same way. So there will be scars in some sectors of the economy.
Until 2022, right?
Right, so another year, year-and-a-half.
Do these projections include Greece as well?
What I’m focusing on there is the overall European aggregate picture, but at this point the pandemic is fairly common, fairly general across countries. Now, of course, for economies like Greece for example, the recovery will be heavily dependent on the recovery of tourism. But again, this depends on the speed of the vaccination campaign.
Will the recovery be an easy process? Is there a risk of a new financial crisis following the pandemic?
It’s very important to emphasise that we think there will be a lot of momentum, so we will see a strong growth rate later this year and next year because essentially the pandemic is an artificial type of recession. We know that much of the recession is because we have to suspend normal economic activity. When that suspension is over there can be a strong recovery. But as I mentioned to you, if you have been losing income in this period because your restaurant, your hotel or your service industry has been compromised, that income is a loss to you. But in terms of the recovery, in terms of the recovery of demand, we do think it will be a significant recovery later this year and into next year.
But at the same time we’re witnessing a rally in the stock markets while the real economy is suffering and banks risk facing an “explosion” of non-performing loans. Do you think that stock markets are “irrationally exuberant”?
First of all, let me say that I am not an investment adviser, so I don’t take a stance on whether markets are correctly pricing the value of stocks. But again, this returns to my basic point here. We have another year, year-and-a-half of this pandemic. But from the point of view of the stock markets, they look forward, not just to this year and next year, but many years into the future. So the stock markets are confident that there will be a recovery later this year and next year. On the point you mentioned about non-performing loans: of course, we do think there will be an increase. But to respond to your general question about the issue of the financial crisis: so much has been done. So much has been done by governments in terms of all sorts of subsidy programmes. We are maintaining favourable financing conditions at the ECB. A lot has been done, measures have been taken to counteract that risk, so I would not be disproportionately concerned about the financial damage of this pandemic.
Regarding Greece, the end of the pandemic will find the country with a debt-to-GDP ratio of more than 200 per cent and possibly still without an investment grade. Do you think that, after almost ten years of economic crisis and adjustment programmes here in Greece, we will need a new programme? And how would this relate to the ECB’s pandemic emergency purchase programme (PEPP)?
I think the overriding point is that the increase in public debt is everywhere. There’s a large increase in public debt across the world. First of all, the most important point to mention is that this has been necessary. It has been inescapable that in a pandemic the government has to do a lot. In that context, I think there’s a very natural reason why public debt has increased. And what we see is a low interest rate environment. So the ability to finance this debt, the ability to service this debt – we think even at high debt levels – is much easier than before. That does not remove the longer-term issue that high debt levels will need careful monitoring. But they will be more easily managed over the long term because the more quickly the economy grows, the more reforms are introduced over time to support a fast-growing economy. This is why the Next Generation EU plan is so important. There’s now a common European initiative with common funding to support an acceleration of digitalisation and the green economy, and many initiatives that will support a faster-growing European economy.
Last March, Mario Draghi wrote in the “Financial Times” that we are facing a war, and that wars are financed by increases in public debt. That is what we are seeing; that’s what’s happening. Do you think that the return to normality could or should include the cancellation of debts – private, as Mr Draghi has suggested, and/or public, as some others are saying?
Let me emphasise that a little bit. So much has happened since then in terms of the amount of support offered by governments in order to make sure that firms and households are supported as far as possible during this pandemic. So, if you like, the prospect of a lot of unsustainable debt in the private sector has been curtailed by the amount of fiscal support. Then, let me go back to what I said already. The most important issue is that in a world of very low interest rates the capacity to manage this debt is much greater than was maybe envisaged last March. Of course, again, to reiterate the bottom line: the cancellation of public debt is not part of the Treaty for the ECB. More generally, I think the focus should be on re-emphasising the importance of the roles of the governments at this point, the importance of the EU common funding which we have in place, the importance of accelerating growth rates after the pandemic, and to put all of that in the context of this, as you say, really large event, like a war. It’s temporary. We know it’s only going to last another year, year-and-a-half in terms of its main economic impact and therefore these extraordinary measures can be sustained, because it’s only for a relatively brief period of time compared with the normal business cycle or financial cycle.