Transcript of Governor Gabriel Makhlouf's interview with Johanna Treeck, Politico

Interview with Governor Makhlouf conducted 29 July 2021

Johanna Treeck: Do you expect September staff forecasts to show another upgrade in growth and inflation forecasts?

Gabriel Makhlouf: The short answer is I don't know.  If you had asked me a few weeks ago there would have been a bit more confidence, but the Delta variant has obviously just increased uncertainty.

We've been living through a lot of uncertainty now for over a year. I think that applies to what will happen in September. So I think it's a bit premature to speculate.

We're seeing a rebound, we are seeing a recovery. But is September going to be different to June, I don't know, and I wouldn't like to speculate.

Johanna Treeck: If there is no upgrade to the economic outlook, do we need more stimulus or merely more patience?

Gabriel Makhlouf: I am a great believer in patience as a general rule. Right now our current monetary policy is providing a sufficiently accommodative stance to achieve our goals.

If you think about our interest rates, if you think about the pandemic emergency purchase program, the ongoing APP purchases, our targeted long-term refinancing operations – the combination of all those working together is right and appropriate for where we are right now. It is providing strong support for the recovery. That's before I talk about the sort of fiscal response, which is working in tandem. So I think we're in the right position right now. But obviously, in September we'll take stock of the outlook again.

Johanna Treeck: How does the high degree of uncertainty the ECB constantly points to chime with the extra-long forward guidance? 

Gabriel Makhlouf: If I can just make a couple of observations: One key word is the word guidance. It isn't a promise, its guidance. It's signaling our intentions, based on what we know today. I think that's an important thing for people to bear in mind that at the end of the day, we're talking about guidance, not a promise. And it's guidance that's provided under extreme conditions of uncertainty, more uncertain conditions than ever before.

I don't want to downplay the importance of the guidance, but I think the people who want to understand it need to understand the context in which it is provided. It's clearly our intention right now, but if the facts as we understand them suddenly change significantly, we're going to have to change our guidance.

 I don't think there's an inconsistency between the uncertainty we are seeing in the near term and what we have put in the forward guidance.

Johanna Treeck: There seems to have been more of a discussion, more disagreement at the last Governing Council meeting than usually. Do you think this is because you are not all on the same page on what the new strategy means in practice?

Gabriel Makhlouf: No, I think we are on the same page as to what the new strategy means. We've invested a lot of time and effort on the new strategy. Everybody on the Governing Council endorsed it.

I think it’s actually worth just taking a step back just for a minute, because I do read in the media in this sort of notion that there's disagreement and therefore, it means that we don't understand what we're doing, which I think is unfair.

You've got a governing council with 25 people on it and all people who will have views of how the economy works, what the outlook is telling them. It would be staggering if we all thought exactly the same way. In fact, it would be bad for the ECB and bad for Europe, if we promoted groupthink over diversity of thought.

I think it reflects the strategy is agreed and understood what we're now looking at how to apply this. Applying it involves taking the view of what the outlook is telling us. Certainly, we had a discussion, and some colleagues have come out and they've explained why they took a different view. Most of us were happy to support the forward guidance as is.

I understand completely why some colleagues took a different view.  In fact I'm very sympathetic to those perspectives.

Johanna Treeck: The questions about the shared interpretation of the new strategy was raised because you had a more extensive discussion now than you tend to have.

Gabriel Makhlouf: I understand what you say but to be fair, this was the first time that we had a discussion on the forward guidance since having agreed the strategy. It would have been pretty surprising if we were doing something a bit different and everybody just agreed without a good discussion.

It doesn't surprise me that we had a good discussion. The more uncertainty we have, the more likely it is that people will have different perspectives, see things in different ways.

Johanna Treeck: In light of the difficulties that you had agreeing on the forward guidance do you expect a similarly active discussion on the phasing out of PEPP purchases?

Gabriel Makhlouf: We haven't had a discussion about exiting, but I expect a good discussion about it. What we've said is that the Governing Council will make a judgment as to when that emergency is over. I think it's going to be a really interesting discussion.

When are we ready to say we think the emergency is or will be over? If you'd asked me a few weeks ago before the Delta variant became so prominent, I would have given you a probably a slightly different view than now. 

I would have been more confident a few months ago that we can end the program in March 2022, because I thought the pandemic emergency would be over. But today compared to two months ago that is less clear.

When we get around to it, I and I think most of my colleagues want to avoid a cliff edge.

Johanna Treeck: Does the Delta variant and new uncertainty mean that you will not even discuss and end to PEPP in September?

Gabriel Makhlouf: I'm expecting us to have a discussion about it, because we'll be six months away from the end of March. So I would expect us to be talking about it.  Talking about it is a completely different question to whether we're going to make some decisions.

Johanna Treeck: How smooth does a transition to a world after PEPP have to be? Do you expect increased asset purchases under other programs to make up most of the shortfall at least initially?

Gabriel Makhlouf: Firstly, I believe in retaining flexibility across all our instruments, from interest rates to asset purchase programs and everything in between. Flexibility is quite important to me. I don't right now see the emergency purchase program somehow needing to continue, if we conclude the emergency is over.

I think it becomes a different question when we think favourable financing conditions exist and become normalised and don't need the emergency purchase program.

Will that mean that we have to somehow do something else on other purchase programs, perhaps, will it mean that we have to do something else on our targeted long term refinancing operations, perhaps. Will it mean that we have to do something different on interest rates, perhaps, but it becomes a different question. I don't think that if you end PEPP, you need to find some equivalent increase somewhere else, because PEPP has a specific purpose.

Johanna Treeck: How concerned are you over a global minimum tax and its impact on the Irish economy?

Gabriel Makhlouf: I've got a background in tax and the one thing I know is that everything about tax is in the detail. It really depends on exactly what is finally agreed.

After the G7 meeting, the reporting was that they agreed on a minimum rate. About 48 hours later we then heard that there were going to be exemptions for particular sectors in particular countries. Let's see what is agreed on.

Clearly, it's going to have potentially an effect in Ireland, but I don't think Ireland's corporation tax rate actually is the only reason why there's economic activity in Ireland. Ireland has got a history of having multinationals based here, especially in pharmaceuticals and in technology.

Those businesses come here for a number of reasons, because of particular skills. The quality of the labour force, the certainty of the legal system etc etc.

So, the change in corporation tax rate will have some impact. But is it something that I, sitting here as the governor of a central bank, worry about in a significant way? That would be an exaggeration.

But ultimately, it depends on the detail. It depends on exactly what is agreed.

And if we're talking about a minimum tax rate of 15 percent, it a very different thing to the minimum tax rate of 21 percent, which was originally discussed a few months ago.

There are jurisdictions around the world where the tax rate is effectively used as a pass through and there's no real economic activity. But in Ireland you only need to just travel around the country to see the real economic activity that exists here. There is real activity here, this isn’t an artificial thing.

Johanna Treeck: So could it then just be like a real positive for the Irish economy and you've got all this additional tax income that you can then use to invest?

Gabriel Makhlouf: It mainly depends on the judgments of the managers of the businesses that will have to pay the corporation tax. They may decide it's just one part of the costs of running the business, it's not a problem to carry on. Some of them may have different judgments.

My sense is from many of the businesspeople that I meet, is that they are not making big financial decisions, big investments or running a business based purely on what the corporation tax rate is. These are long-term decisions that they are making and taxes can be changed fairly regularly. Some of the large companies have been here for decades. So, judgements are made based on the confidence … in the quality of the labor force, the quality of the government.

Johanna Treeck: Last time we spoke you said “monetary policy needs friends” Could you please elaborate, what do you expect governments to do?

Gabriel Makhlouf: Monetary policy is an important component of a macroeconomic framework. So, monetary policy doesn't work in a vacuum.

It is ultimately a key component of a successful economy. Successful economies need a number of things, they need a stable framework, they need price stability and debt sustainability, and so on. Monetary policy needs friends. When I talk about friends, I’m talking about all those components, of which fiscal is not the only but the most important.

That can help and ultimately when I say what is the help that we need. We need help so that monetary policy can operate beyond the lower bound.

That is the help that we need so that we're back to a world where we have a natural buffer. So that we have the flexibility to use rates more effectively in the way that we're used to.

In Europe, our macroeconomic framework is fragmented compared to either the United States or even the UK. We have a single monetary policy, but we've got 19 fiscal policies.

We've started the banking union, but we haven't completed it. We've got a capital market that isn't unified. A completed Banking Union and Capital Markets Union in themselves would be important to support monetary policy.

So when I talk about friends I'm talking about the sort of component parts of a macroeconomic framework, which I'd like and which in Europe we don't have.

Johanna Treeck: Do you think a joint budget or fiscal coordination or a combination of the two be the right approach in Europe?

Gabriel Makhlouf: Right now realism tells me that the idea of having a single joint budget for the whole of the EU is some time away, if at all, so we are still going to have 19 fiscal policies. It is important that they are coordinated. On the other hand, I also think that having a joint budget or a single fiscal mechanism that operates at the EU level would help complement. I think would be a good thing.

It is important that we learn the lessons of the last two crises. The one we're in right now and the one that we had in the last decade.  

One is if fiscal and monetary policy work in a coordinated fashion, it ultimately benefits the community as a whole. I would be in favour of having a combination of both.

Johanna Treeck: Is fiscal coordination really that realistic? In Germany the discussion about the black zero dominated the last crisis and it is already coming back.  Might it not be more realistic to have something that is actually decided on the European level?

Gabriel Makhlouf: Now I think it's pretty clear that it will be difficult. I don't think it's impossible.

I think the challenge for us, and I mean not just the politicians, but central bank governors, economists and people interested in good public policy, is to invest a bit of our efforts into understanding why some countries, you mentioned Germany, may be reluctant to go down that road. We need to make sure we understand that and make sure we think as creatively as possible, as to how to construct a narrative that will support the direction in which I'm talking about.

Let's talk about the Stability and Growth Pact. We should take the opportunity over the next year to look at how it can be improved. The Stability and Growth Pact was essentially a creature that was designed 30 years ago.

The question we all need to be asking ourselves is whether this is the right plan for the next 30 years. And I think as currently designed it isn't.

I think the economy of the world 30 years ago, it looked very different. The challenges were also different. We were not discussing 30 years ago about the need to achieve net-zero. We were not making these long-term commitments back then. Now we are.

I am a very big believer in the importance of debt sustainability. But we don't spend enough time, as policymakers, thinking long term macro side. There is the need to be thinking more long term and I think this also applies to the Stability and Growth Pact.

We should be asking ourselves, for example, what's the composition of investment and expenditure. The composition of investment is as important as the absolute level as a proportion of GDP, especially when so much of economic activity is going to have to be done a different way over the next 30 years to achieve net-zero. The rules of the Stability and Growth Pact needs to be simpler, more flexible and definitely more long term in outlook.

The objective of economic policy is not to reduce debt. The objective of economic policy is to improve people's living standards or our economic capital. Now, debt needs to be sustainable, but it's part of the pathway to get to where you want to go.

Hence me saying that I think the composition of investment is, in some respects, more important than the total amount of borrowing.  We just have to think of this challenge in a different way.

Johanna Treeck: Do you think what you envisage would be possible without a Treaty change?

Gabriel Makhlouf: What I would ideally like I think it would be a Treaty change, but I certainly think that there is a scope to improve it without Treaty change. The Treaty is more interested in the structural budget balance and the single big ratios. I'm thinking of something that potentially a bit more qualitative assessment.

This is an area where a big group of people need to get together and talk about and develop ideas, and ultimately develop consensus. And I think those of us who aren't politicians need to help the political system.

Those of us who are not part of that system need to help the politicians develop the narrative that they can then use for the wider community. So I do think that people like me have a role to play, and academics have a role to play.

Experts in the European Commission have a role to play there are many people who’ve got a role to play, as well as obviously politicians. But I think in some respects, we perhaps have a responsibility to enable the politicians to develop that narrative.

Let's make sure that we've learned from the experiences of the past, as we develop the sort of policies and practices and frameworks of the future.