The former member of the Executive Board of the European Central Bank, responsible for the Innovation pole of the Bank for International Settlements since January, returns for “Les Echos” on the action of central banks during the coronavirus crisis. The calls to cancel the public debt held by the ECB and those aimed at easing the regulatory constraints weighing on the banks seemed to him particularly dangerous.
Have central banks been up to the shock caused by the Covid?
Yes, they were up to the task. It should be emphasized that this is an entirely new kind of crisis: it is not an ordinary recession but a complete halt in the economy, for reasons which are not economic but health. Confronted with this, very strong and rapid action was required to ensure business continuity and maintain confidence. This is what central banks have done all over the world. And as the BIS annual economic report explains, they have been able to adapt the nature of their instruments to the problems that arose in the economy and in the markets.
States seem ready to no longer leave them alone in the face of the crisis. This has not been the case so far.
Indeed, things are going in the right direction. Faced with this crisis, the budgetary response is significant. It is enough to look at all the facilities put in place by the States to support businesses, for example. In Europe, a common budgetary response is currently being discussed. It is progress compared to the last crisis. Monetary policy should not bear the burden of responding to the crisis alone.
Doesn’t this coordination between monetary and fiscal policy pose a problem for the independence of central banks?
There is a strong complementarity today between monetary support and budgetary support. This complementarity is beneficial given the nature of the crisis, which involves both a supply shock – against which central banks can do nothing – and a demand shock. But this complementarity can lead to some confusion. This is evidenced, for example, by the debate in France on the cancellation of the public debt held by the European Central Bank.
Do you think these calls for a cancellation of the debt held by the ECB are dangerous?
Central banks are not political authorities. They are already carrying out massive and unconventional monetary policies which have redistributive effects, but they are not equipped to design programs of a budgetary nature such as “helicopter money” for example, which involves making a check at each household according to criteria that fall under political choices. However, if we cancel the central banks’ claims on the states once, it is inevitable that we will do it again. This trend is unhealthy; it amounts to making central banks the arm of fiscal policy. This will lead in the long run to more inflation and a loss of confidence in the currency, as the central bank will have put its mandate of price stability in the background. A central bank embarking on this adventure would see its credibility and independence called into question. His ability to act quickly and loudly in a crisis would be damaged.
Finally, let us not forget that the states, and through them the citizens, own the central bank. They are therefore the ones who would end up suffering the loss. If the Banque de France were a public administration within the meaning of national accounts, the State’s debt to it would be excluded from the public debt. There is therefore a form of accounting illusion.
You talked about induced effects of monetary policy … which ones?
Asset purchases by central banks reduce income inequality by supporting employment. But they increase wealth inequality by supporting the price of assets. This is acceptable as long as the action of the central bank falls within the framework of a price stability mandate which is subject to democratic control. A central bank assuming budgetary responsibilities would become a political institution. Today, we have a very strong and credible ECB and a European economic and budgetary pole still under construction. Plunging the central bank into politics would weaken it.
But with over-indebted states, isn’t the ECB de facto obliged to maintain an accommodative policy?
Today, I don’t think so. In the long term, it is true, there is a risk of monetary policy being captured by fiscal policy, which can make it more difficult for the central bank to return to normal.
There is also another risk, often less well understood: that of capture by the financial sector. In other words, the risk that the central bank will not dare to do what it has to do for fear of weakening the banks and the markets. In the United States, the Federal Reserve is less constrained because the American economy always rebounds very quickly. In Europe, the ECB has acted effectively within the framework of its mandate, but these two risks exist and it is up to governments to avoid them.
In what way?
The answers are known: beyond the current budgetary expansion, which is entirely justified, governments will have to acquire a credible budgetary framework, ensuring a sustainable public finance trajectory. In this regard, there is an urgent need to reform the European budgetary rules, whose credibility had eroded before the crisis. Many proposals are on the table around the idea that we must monitor the trajectory of spending rather than the deficit or the debt.
With regard to the risk of capture by banks and the markets, maintaining a rigorous prudential framework is important for banking players to assume their responsibilities. To consider the relaxation of banking rules as a stimulus seems dangerous to me. These rules are there to prevent risk-taking, which will ultimately rest on depositors or taxpayers. Banks have been made stronger since the last crisis and now is not the time to weaken them. The BIS report also stresses the importance of replenishing capital buffers as soon as conditions allow.
With the crisis, central banks are diversifying the assets they buy. Can they buy everything?
Central banks must do everything they can within the framework of their mandate, expanding their operating methods if necessary. The Fed has targeted corporate bonds, local government debts … the ECB has started buying short-term corporate debt. They also intervene to bring money closer to households and businesses, this is the purpose of targeted ECB loans. The latter also accepts more diverse assets as collateral for its loans, in particular claims on SMEs. Finally, the major central banks are showing with this crisis that they assume their global responsibility, with the dollar swap lines of the Fed or the opening by the ECB of a euro liquidity window for non-European central banks. , in exchange for a guarantee.
Can a central bank buy shares?
Why not, if necessary. But it must not be involved in industrial policy. It also seems to me that today, any reflection on the modes of intervention of central banks must integrate the climate dimension, which in Europe is part of the general objectives of the Union which are binding on all its institutions.
Should we exclude the bonds of groups whose activity is based on fossil fuels for example?
A balance has to be found between support for activity and employment, which contributes to price stability, and the objective of sustainable development.
“I am delighted to see that Beijing has joined the G20 and Paris Club initiative which consists in granting moratoria to the poorest countries”
In emerging countries, monetary institutions have had to resort to policies inspired by the Fed, the Bank of Japan or the ECB. Is it encouraging or worrisome?
As our annual economic report highlights, this is the first time that quantitative easing [programme d’achats d’actifs financiers, NDLR] is used extensively in emerging economies. It is a sign of the seriousness of the impact of Covid on these countries, and also a sign that their central banks are also able to adapt and temporarily use new instruments to respond to a situation. unpublished. These countries are suffering from a serious health crisis, coupled with a direct as well as an imported economic crisis. They are faced with the fall in their exports to advanced economies and an even more brutal halt in capital inflows than in 2009.
Aren’t these new policies risky?
Of course there are risks. Monetary policy, in emerging countries as elsewhere, cannot be the only response to the crisis. The IMF is responding to the need for international solidarity. And in many cases, we will have to manage debt sustainability problems, which will require discussions on their restructuring. This also means that there is more than ever a need for a robust international framework on this issue. We know that for twenty years, the traditional framework which is the Paris Club collides , on the one hand, to the fact that bond financing is taking precedence over bank or public financing and, on the other hand, to the rise to power of an essential player in the financing of developing countries: China, whose motivations are commercial as much as financial. I am delighted to see that Beijing has joined the G20 and Paris Club initiative to grant moratoriums to the poorest countries.
However, China is not fully playing the game of transparency as a creditor.
As a former co-president of the Paris Club, I think that this process must be seen from a long-term perspective. A strong international financial system is in the interest of the Chinese. I am convinced that little by little, China will move closer to the Paris Club and will make its claims more transparent.
What new framework do you think would be relevant to these debt issues?
The composition of the Paris Club must continue to evolve to bring more emerging countries into the picture. And the Covid episode relaunches thinking on how to make the financing of emerging economies more robust in the event of a shock. I am thinking, for example, of the mechanisms for suspending interest and paying the debt in the event of an external shock. Climate change requires us to speed up this reflection.
“In a world where the use of banknotes is likely to decline sharply, citizens must continue to have access to the safest means of payment, central bank money.”
Why are we seeing a proliferation of initiatives dealing with central bank digital currencies?
Central banks have traditionally played a central role in the payments world, both as a provider of basic infrastructure, such as large amount payment systems, and as a supervisor of market infrastructure and payment systems. They also encouraged private actors to coordinate to encourage innovation and avoid fragmentation.
Today, we are faced with a very rapid technological development and the arrival of new players. Both fintechs, which provide payment solutions that can improve customer service, and “big tech” who want to take control of the entire payment architecture by creating closed-loop systems, such as Libra . Other similar projects could emerge on the same model.
What do you expect from central banks in this area?
Central banks must continue to do what they have always done, which is to provide basic infrastructure and encourage actors to coordinate. Central bank digital money fits into this logic. In a world where the use of banknotes is likely to decline sharply, citizens must continue to have access to the safest means of payment, central bank money. On the other hand, the digital central bank currency can create an incentive for innovation and the coordination of the various actors. But for that, it is necessary that the central banks are themselves coordinated, to avoid a fragmentation of the system.
What can be the role of the BIS?
The BIS can promote this coordination and its innovation pole, which I lead, can help not to create a digital currency – this is not in our mandate – but to clarify certain technical questions such as that of interoperability between digital currencies. Tomorrow, central bank money will be at the center of the digital payments ecosystem in the same way as today, the central bank is at the heart of payment systems and market infrastructures.
What inspires you about the Wirecard scandal, this German fintech specialized in payment?
I do not comment.