A Look Inside European Central Bank's Decision-Making
Philip Lane, Chief Economist for European Central Bank, provides insight into ECB’s decision-making and what a deal or no-deal Brexit will mean for the Eurozone.
Alan. This is almost a time of new beginnings in Europe in many, many ways, especially as of the first of November. But it's new beginnings. The U as well. It's being six months since you joined the E C B as it's chief economists and a big role change as going from the governor off the central Bank of Ireland to now looking at the eurozone as a whole. But here's a curiosity question. The E C B had a retreat just a few days ago, Um, and it was in a very grand palace, probably grander than this, to build fences, get to know each other. What's the new leadership off the European Central Bank looking like with fresh blood like yours and Ms Lagarde? So I think the way to think about it is the Governing Council meets all the time. The people in the Governing Council actually meet each other even more frequency through the I'm at eco fin backed international settlement. What is true is the Governing Council has the six of us in fact, first and then the 19 governors at when we spent time together in meetings. We're busy. We have a decision to take. What is true is that these years been quite busy on that in the four years I've been on the Governing Council not being the opportunity to have that kind of retreat. So I'm sure every organization here among your senior leadership you you have every so often, especially when they're the new leadership. Let me emphasize is at this year, it's not just the facts. We have a new president that I've arrived off 25 members of Governing Council. I think by the end of the year a majority will be new. I'm not. The executive board will be two new appointments. We think starting in Gianaris, that would be a panettone. Israel's novel. So it is a time for a new team. Andi, it's important, especially when we have no money at medium term challenges as whether the short term day today, meeting by meeting decisions, there a lot of medium term challenges over the next eight years for all of us. So it's good to have that kind of trees on that time, too, and you have some informant discuss. I know a lot of people are curious about how maybe the structure and the operational side of decision making at the European Central Bank could potentially change. I know there are a lot of waste is especially amongst the fresh blood that is coming in off, wanting to look a little bit more like the Fed or like the Bank of England. Do you see that kind of openness coming into play when decision making is made going forward on? Do you see that playing a rule in the way Europe looks at the European Central Bank? I mean a lot more craftsman. I mean, let me differentiate between the formalities of decision making with tradition. I think it's very strong. Tradition is where we can't make decisions by consensus. I'm actually most of time at much policy, if not that divisive most of time. I think we can achieve that. But what is true when you have Ah, different voices? New voices? Um, how do you have a debate at life as opposed to noise? Because it's not. It's not a good idea to have in any system at signals which are hard to interpret part. It's report for mantra policy that the clear narrative is the care of the founding off that water up to. So I do think collectively, I guess it's fine, too elaborate where you have a different point of view. We also have to know emphasize that we also make decision we've we've got a decision on. I think it's important to say the most fourth elements application, while the chief like consensus where the most important element of the decision in September Woz. We need to add extra accommodation in our March policy. That sensation is too low and we need Thio demonstrate our commitment thio having station Luke back towards its target sooner rather than later. After that, the details which instruments were used I mean, of course, with 25 members on many choices, there are gonna be range of views. But all of that is secondary to the fact that the walls content that a monetary easing off some type of needed Well, let's talk a little bit about where there is no consensus and there is no clarity which would be Brexit, and that would be quite an interesting conversation to have. We've been talking about Brexit the impact on the studying, what is the position when it comes to the European central bank as we get edge closer and closer to the UK elections, with not that much clarity still in place, whether we do a no deal, whether we'd get some sort of a deal, that Mr Johnson's kind of agreed to. What are the red flag for Ireland and for the eurozone at this point and what needs to happen for those red flags to become yellow? Agrees. So let me emphasize from the ear area perspective that in terms of am planning for all with time, all scenarios Well, you know, as of now, because there is a a draft deal at the worst case scenario of a disorderly Brexit is less likely They even if it did come back on the table, thes e C B and the Bank of England have worked very closely together in the last two years. It's not like this is a surprise. No breakfast bean, you know, announce exactly. So it would be unforgivable for the central bank's not be ready as far as we can be ready so that that kind of risk of you know, this continuity at something not working overnight because that is handles, but from the economic part of you that big issues they're going to be. What does this mean for the future? Future trade for the UK? Most importantly, remember, this is a disruption primarily for the K. Of course, As a close neighbor, three year area is important to your area. Percentagewise left UK is, you know, 13% some number like that off your GDP. So something that's a big deal to you. Kay is a big deal for the rest of you. Area was proportionately left. They worried about Ireland. It'll in this back and forth which goes seems to have of course, we are three. Irish economy is going to be the most effective. But this is in the context of an Irish economy is growing quite quickly oven arse economy which now have trade on the investment links with the world, as you know, most famously with the U. S. Economy on one. The big news from the tri field. While the fact that there is now a sustainable approach, I think to handling at Northern Ireland in terms of the economics of reconcile ing no border on the island of all of our items were maintaining the integrity of the single market. I wanted to get open this up to everyone in the audience because it's red to get an opportunity to speak to him directly. So Philip is here. If you have a question, please raise your hand will get the mic to you. Um do let me know otherwise, I have plenty of questions to go on with. Right? We will come back at some point to check in and see the folks here do want to ask you a question. It brings back a question of the number of risk. I know that there are risks within Europe of banks and banking profitability. There are trade wars. Brexit is one of those risks. When you look at the eurozone overall which if this was a pyramid, what are you gonna put at the top off your worry list for 2020 and the next decade that is to come. So I think maybe the way I would think about it. There's a lot of AA meeting term challenges, So there's a medium term at challenge for the world economy, which is, you know, very important parts of the world economy. Most importantly, China is undergoing its own chances, undergoing a transition towards being a focus on the domestic economy. Focus on boosting consumption and service is then that transition has a mirror image at because, of course, you're benefited so much for many years of being able to be the supply of capital goods supplier so much to the Chinese economy, so that kind of ab as obvious structural transformation. Another one is the climate change. Remember how, if the world's going to move along in terms of the carbon transition and on Donna also, and connected to this point is in terms of the mix of activity in the European economy, wanting me to be have beena highlighting is that essentially at this point after a very difficult period of rebuilding public climb Mt. That in terms of support that could be provided by fiscal policy toward more bottom European economy. That requires a big conversation among fiscal policy makers and, by extension among the electorate about the role of fiscal policy in the European economy? Because it has been set quite a bit by a number of central bank governors on with the CB, there's a limitation to what monetary policy can accomplish when you have slowing growth. Um, what would you say all all those limitations? Because at some point, Q E. And is there a plan for that? Because that's not going to go on indefinitely, is it? So let me rephrase that, which is underneath everything. So whether it's about no interest rate, about Lone place and underneath everything is how quickly is the European economy going to grow and indeed, how quickly the world economy going to grow and for us. You know, many people here have studied economics to some degree, and we know that Monty Monty policy does not have longer in effect on a nest. The long run challenges about raising the groceries, better policies by innovation, education making sure did enough physical support for the love of aggregate demands at you know that be multiple ity take care of the cycle to extent, but that that cycle is around. The trend under trance depends on these wider policy for us. What we say is if fiscal policy structural policies delivered a faster growth rate of the economy, then at the multi policy times, a lot left. But I think also were would be emphatic that are much policies will accommodate for as long as necessary. But we think the recovery will be quicker if these other policies kicked in more strongly. If they don't kick in strongly, what tools are left in the chest, let me emphasize that we know what tools to pick out of the toolbox. Well, depends on the particular circumstances we face. Well, we do emphasize is that our assassin is not the case, that we are at some kind of limits, in fact, the concept of monastery policy hitting an absolute limits. And I think there's a lot of that nuance to that. Let me emphasize, we don't think we're at the limit as a yes, and we do think the bigger focus should be rotting to focus on that. What the difference off the central banking world to the limit. But the role of auto parts of Canada unconscious use to make this limits question left rather less interesting because the economy will be growing more quickly. You touched on something that I think resonates with everyone in this room, which is climate change, and that is becoming part of the banking stress test here in Europe. When do you see climate issues being part off monetary policy for the European Central Bank because the agreement is quite narrow at this point, What will it take? When do you see the time frame off becoming part of that? So let me ask a different levels, Krystle. It's already hard mantra policy when I'm trying to forecast a year for the economy for next two years. The future of the car industry is a central issue. And, of course, the seat of the car industry is deeply interconnected to, uh, where we're going to be in terms of, um, recognition policy, carbon taxation, the preferences of consumers. Many factors which essentially driven by the carbon transition, already are essential to Monte policy. I think that's only going in one direction, and it's very difficult to overstate. In the last two years, the speed at which the world gentrifying, bloated monster policymakers on those regulators have invested indeed ing with the carbon transition. So you know, the implications for mantra policy are quite straightforward. If this causes your novels have many opportunities. So in fact, you know, and I was embarrassed meeting last few weeks where the dominant driver of investments for many firms right now is adopting their firm to be with the climate challenge. So one novel, the driver of investments, I know that nothing ever uncertainty about, how quickly will carbon prices go up? What exactly will be the nature of regulating the restrictions to encourage the transition? That uncertainty is that not helpful, said the mortar. A clear, comprehensive and vigorous ex climate change policies. I think the batter for the transition. Does anyone have a question for Philip? We do have one. The front piece for the mike to come to you. Just your name on the company representing a very quick question. It's not working yet. Oh, they will figure it out. If you can stand up, that will help. Uh, working, Mike. Very good. Here we go. And I in fact, I wanted to ask a similar question to question already been asked about interest rates. You will be aware, of course, that with um, the lowering of interest rates even to negative interest rates, it's a real squeeze on interest rate margins for banks, to the point that many Europe, banks and on your banks are charging customers to be able to hold their deposits in euros. Banks are being charged to hold liquidity at the BB. Now, I result, trained as an economist in my lifetime. That was a very unusual experience to have to pay someone to hold money with him. I don't know if there's a nice way of asking, but I'd be really interested to know where you see the trend going over the next 12 18 months. I actually think it's unsustainable at its current trend. I think it's fascinating question, which is very important that we put into contact. So when we set monetary policy, it's for the whole economy, not back are tense, a part of the transformation channel. So we do care about her, are adjusting to this. But let's start at the most basic issues. Underneath our in state policy to taste in is again, Many people here would be familiar with consequent to read into trays the placement of the race, which is turned by the inter faction of savings and invest. And why do you think a global perspective or European perspective? The driver of why strictly solo is a mix of no, uh, investing activity on the high preference for saving because of demographic and also, by the way, at risk aversion to those high preference of a finding. So the challenge for rough is many Estimates of this religious race are zero or negative, either globally or for the European economy. So, um, essentially, what that means is, if we raise rates above the level consistent with that really raised, that would be contractually for the European economy. So we have two paradox of from traffic offenses. But also the case on the inflation numbers tell you it's not particularly a super loose policy. It was super loose. Inflation will be higher. This is a big craft for the financial sector. I was the 1st 1 I would make is our four cops. Do you say you will be recovery? We do say, even though inflation around one now we assessed by 2021 of the one and 1/2 which we close towards the target at the kind of money market do into space still be some reversal in the interest rate path. So I think that's a good baseline under the hand. I do think everything here involved the financial sector on more generally at those involved in government policy for pension insurance. Half have to recognize how can we live in a world where sometimes it's gonna be the case? The Polish straight We said We'll go Nakata So I think there is an adaptation of expectations. We are seeing a very interesting in the banking world right now. By the quarter of that, European deposits to corporate are being Tarsem negative race I want the interesting we see is those corporate were charged negative rates. I got it. You suffer that doing more compact So are our trump mission is supportive So you know it's a new are you? And as you know, we brought in that hearing to compensate Bank for taking on a lot of excessive secrecy. Been turned. The transmission that we all think up to now back benefited from a better macro picture, which means volume up, even though margins down and also at credit risk. Is there that of being that left provisioning as being less concerned about credit? That isn't to say those forces will be forever, so we absolutely accept. This is something we look at all the time. But, you know, it's an ongoing process. I cannot think of a better question to end that interview on a better answer, to give us a snapshot off what's happening in Europe. Thank you very much for that.