Interview by Bank of Greece Deputy Governor John (Iannis) Mourmouras published in the 100th edition of “The Bulletin” (OMFIF): Ensuring a stable euro
31/01/2019 - Articles & Interviews
Ensuring a stable euro
(Iannis) Mourmouras, Deputy Governor of the Bank of Greece, and Danae
Kyriakopoulou, OMFIF’s chief economist and head of research, discuss the
future of the euro as it caps off a turbulent decade, and Greece’s
What will the euro’s third decade be like and what role will Greece
play? Are fears of a breakup of monetary union still justified and what
needs to be done to strengthen the currency union’s architecture?
John (Iannis) Mourmouras:
The euro is the official currency of 19 countries and 340 million
citizens, and the second most important global reserve currency. Its
introduction was a milestone in post-war Europe, comparable to the
reunification of Germany and the breakup of the Soviet Union.
decade of a prolonged cycle of economic expansion and prosperity was
followed by the 2010-12 sovereign debt crisis, resulting in high levels
of unemployment and poor growth performance. Despite the continuing
divergence between the North and the South with regard to real wages and
productivity, overall the single currency has been a success.
Nevertheless, it would be naïve to attribute the debt crisis solely to
the failings of some European Union member states without recognising
the shortcomings of monetary union’s architecture.
To address the
next global downturn and ensure a stable euro, economic and monetary
union must be deepened. The agreement, at last December’s euro summit,
on developing a budget instrument for the euro area and setting the
terms of reference for the common backstop to the single resolution
fund, was a welcome step. But progress is needed on the banking union’s
third pillar, the European deposit insurance scheme, and the capital
markets union. Proposals such as a European safe bond and a European
monetary fund will help mitigate the divergence between core and
periphery countries and break the vicious cycle between banks and
How do you see the European Central Bank’s role evolving in the post
quantitative easing era and what would its role be in the next downturn?
ECB will continue reinvesting the principal payments from maturing
securities purchased for an extended period of time, contributing to
accommodative monetary policy and favourable liquidity conditions.
medium-term challenge for the ECB is the question of how long it will
take to reduce the size of its balance sheet. There is no need to rush;
itis important to take into account the uncertainty created among market
participants and avoid any potential market disruptions. There are
other – conventional– tools to use if tightening is deemed necessary,
including raising interest rates, increasing reserve requirements and
using reverse repurchase operations to drain excess liquidity. No matter
what the optimal size is, the central bank must communicate to markets
what the new ‘normal’ balance sheet size will be.
The Greek bail-out programme ended in August2018. How confident are you
in the economy’s long-term prospects and what should be the reform
priorities to ensure a successful return to market financing?
There should be no complacency or slackening of effort on behalf of the
national authorities, especially in 2019, an election year in Greece.
The government must commit to the implementation of growth-enhancing
reforms, particularly in the public sector (including administrative
reform and speeding up of judicial procedures). This will enhance the
country’s credibility in the eyes of international capital markets and
credit rating agencies.
period of prolonged fiscal consolidation and private investment, the
country needs an investment shock. In 2014, I suggested reducing primary
surplus targets, along with slashing corporate tax rates drastically
and gradually, in line with the fiercely competitive corporate tax rates
applied by Greece’s neighbours. Some EU member states, such as Belgium,
Denmark, Finland, Ireland, Sweden and Italy, have continuously recorded
primary surpluses above 3.5% (on average) of their respective GDP.
Their growth rate was more than 1.8%. However, economic activity is
affected mainly by changes in fiscal policy. The composition of already
achieved primary surpluses determines growth impact, more so than their
What lessons do you draw on the relationship between central banks and
national governments at times of crisis management, and did these put
central bank independence to the test in the case of Greece?
Central bank independence and its sister concept, accountability, were
challenged during the 2008 financial crisis and the euro sovereign debt
crisis. These challenges fall into two categories: first, the
independence of central banks has been put into question by external
parties. Second, even if independence is not formally challenged, it may
be compromised as a result of altered conditions.
challenges to central bank independence stem mainly from political
pressure. For instance, in the euro area, QE has been challenged both
for being too expansive and too limited. On the other hand, the
independence of central banks may be scrutinised due to concerns
relating to whether a central bank with an extended mandate can operate
transparently and have an appropriate degree of accountability in a
democratic political and economic system.
All in all, an
accountable, independent central bank needs broader support from the
public. Clearly, with persistent negative rates, support for central
banks is likely to drop. If a significant problem remains unsolved (for
instance, a high stock of non-performing exposures), the public is bound
to question the role of the supervisor. Fiscal and monetary authorities
should have distinct roles in the economy and respect each other’s
increased role today for forward guidance in monetary policy and the
management of expectations, the head of a central bank must be selected
with the utmost care. It goes without saying the right candidate should
have a spotless reputation and possess formidable technical expertise
and communication skills.