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Fireside chat at the Delphi Economic Forum with the Bank of Greece Governor Yannis Stournaras and Peter Spiegel, US Managing Editor of The Financial Times

13/05/2021 - Articles & Interviews


P. SPIEGEL: Tell me a little bit how concerned you are about inflation. The markets are clearly concerned both in Europe and the US. How concerned are you?

Y. STOURNARAS: This is a good question. You know, in economics you can never say “I am 100% sure about that,” so I can tell you what the situation in Europe is. In Europe, we expect inflation to be about 1.5% this year, but mostly on temporary factors, like VAT in Germany and oil price. Next year, we expect this to fall to 1.2%, then, the year after, to go to 1.4% and the models go further away. In 2026, we expect it to be 1.8%.

P. SPIEGEL: So still below 2%.

Y. STOURNARAS: Still below 2%.


Y. STOURNARAS: So, according to available evidence and according to our Neo-Keynesian models, I insist on that, we are not yet close to our target.


Y. STOURNARAS: Perhaps in the United States the situation is different. It is in a different phase of the business cycle, but in Europe the fear of inflation is not yet here.

P. SPIEGEL: Now, obviously in March there was an increase in bond buying in the ECB, because of the signs that the business cycle was declining again, of double-dip recession. Given that the economics in the vaccine roll out and other things are looking better now, do you anticipate a change of policy going ahead? Would you advocate a change of policy in terms of the QE?

Y. STOURNARAS: No. Up until March 2022, we continue with our PEPP program, with TLTRO, so we don’t see any evidence that we should change our policy yet. So, smooth sailing for the moment.

P. SPIEGEL: Okay. Let me take a step back, because we have seen a debate and actually there was an interview in the Financial Times with your colleague, Olli Rehn, where he was advocating an overshoot. Like the FED has discussed. That the 2% was fine in peace time, but we are a little bit at war time now and, like the FED, we have been below 2% for so long. So perhaps we should consider going above 2% for a while, to make sure the economy picks up. What are your thoughts about that shoot?

Y. STOURNARAS: Very close to Olli’s views. In Europe many people are thinking that the 2% is a ceiling and not a target. This is a problem. This has a disinflationary bias in our monetary policy. As you know, now we have a strategy review. We are discussing the issue of inflation, of making 2% a target rather than a ceiling. Of course, we have not decided it yet, but I think we are very close. Perhaps by the autumn we will know what the new target is, if there is any, if there is an agreement. I hope there will be an agreement, because I think it is correct to have a 2% target, average target. I think the Federal Reserve has done well in revising its strategy.

P. SPIEGEL: Let me, if you don’t mind, articulate why you think there needs to be a change in that. Is it the issue that Rehn has raised?

Y. STOURNARAS: Because the definition of price stability is 2%; it is not below 2%. That’s what we know. And on top of this, the market now thinks that in the eurozone the ECB’s target is not 2%, it is 1.6% to 1.8%. This means a disinflationary bias for our policy. That means the monetary policy is not as expansionary -or was not, because now it is- as we thought it was going to be and we never hit our inflation target for many years now.

P. SPIEGEL: Yes. And is that a factor? I mean, the fact that we have so under-performed -for lack of a better word- on inflation, do you think that justifies a little over-performance, an overshooting?

Y. STOURNARAS: Yes. When we say that inflation is 2% on average, it means that undershooting should imply overshooting. Now, by how much, for how long, there are technical issues that we have to settle later.

P. SPIEGEL: Right. Let me go back to my original question, because again, I flew here from New York, the debate very much is on overheating the economy again. The US has been much more aggressive than Europe on fiscal stimulus and again better now in Europe on vaccines, but certainly the US was faster out of the shoot. Are those the two main reasons why the eurozone economy is underperforming than the US? Is it vaccines, is it stimulus, or are there still other structural issues that you see in the eurozone that are causing it to underperform still?

Y. STOURNARAS: Vaccine definitely is one thing. A more expansionary fiscal policy also helps, but, if you take into account both the national fiscal policies plus the NGEU in Europe, I still think that in the United States fiscal policy is more expansionary. You had the Trump package, you have now the Biden package. The Federal Reserve also followed a more expansionary policy before, not now. Now we are keeping up with the Fed.

So, overall it is both a question of policies, but also it is a question of, I would say, a more flexible economy. The United States is a federal state. Some of us were aspiring to make Europe the same, the United States of Europe. We are far away from that of course, but that also plays a role. There is a deeper capital market in the United States. Now we want to create a capital market union in Europe. We want to increase the international role of the euro, so all these things will make Europe more resilient, more flexible, and perhaps closer to the United States.

P. SPIEGEL: You mentioned both the Trump fiscal stimulus and now the Biden fiscal stimulus and then there is another Biden infrastructure bill. Does that mean you advocate more fiscal movement in the eurozone?

Y. STOURNARAS: No, I think now we are okay.


Y. STOURNARAS: We under-performed before, but now we have a relaxation of the Stability and Growth Pact, we have the NGEU of 750 billion. Greece is one of the largest recipients in terms of GDP, but it was also ready to do it. It is one of the well-prepared, I think, member-states, so it deserves...

P. SPIEGEL: For a change.

Y. STOURNARAS: For a change, as you said, yes. So now, I think both fiscal and monetary policies are the right mix and we wish that this kind of flexibility will continue. Of course, we know that we have to go back to more normal policies, but we hope that this will occur at the same time that GDP growth will occur as well. Not before.

P. SPIEGEL: Okay. I want to ask you about return to normality. One last question on inflation: We heard the Fed, Lael Brainard and others, say that they think inflation, if it comes, will be transitory. That they say it is a year-on-year issue. The economy is growing well now and, if you look at what happened in March and April of last year, obviously there was the lockdown. Is that your view when you look at the global economy? And again, obviously you are not worried about it in Europe necessarily, but in terms of your view about the market fears right now. Should they be more calm, because this is a transitory issue? Is that how you view it?

Y. STOURNARAS: There is no question that there was some increase in expectations. But now, there are two conflicting forces regarding inflation. One is the force that will come out of the pandemic, constraints in supply, penned up demand due to savings, so these forces tend to increase inflation.


Y. STOURNARAS: But also, you have all those old forces, what in the United States some economists, starting with Alvin Hansen, then with Summers, called secular stagnation, or other forces that keep inflation down, keep the Phillips curve subdued, which is modern technology, more competition from China, ageing of the population. So these forces are here.

P. SPIEGEL: That’s a very good point.

Y. STOURNARAS: So, which ones will win, we don’t know. In Europe our models, show that we are not yet to worry about inflation, or not to worry as perhaps in the United States. But even in the United States, we don’t know. As you know, the labor market data came out a few days ago, they are weak, so we have to wait, to be patient. I agree with Ms. Brainard that we have to...

P. SPIEGEL: It’s a good point, because we have now been more than ten years with QE and everyone keeps predicting inflation, yet it never comes. So I suspect you are right, that this is another one of these fears that will never materialize.

Y. STOURNARAS: Absolutely.

P. SPIEGEL: Let me change topics, because we don’t have much time. I want to talk about return to normality and one of the things that, obviously when we are in Greece, we talk about is deficits and debt. And right now, during this emergency phase, the sense I get from Brussels is there was a willingness to allow stimulus to happen for obvious reasons. Are you worried at all that the budget cutters in Brussels at some point will come back to Greece and say, “Guys, this government particularly has been cutting taxes, there’s been some fiscal stimulus, some spending plans; we need to go back, we need to relook at your surpluses.” How concerned are you that the Commission and others will look at Greece and bring back down the fiscal hammer?

Y. STOURNARAS: I think there are lessons to be learned both in Greece and in Brussels and the IMF from the Greek crisis and of the present crisis as well.

And the lesson is you shouldn’t follow a procyclical fiscal policy. I mean, you don’t ask a country which has -4% or -5% growth to take austerity measures. I think this lesson has been learned. On the other hand, the Greek political system must also learn the lessons: that you don’t let the fiscal situation get out of hand. We are in a much better situation now and there is a better understanding. I don’t think that in Brussels they will ask us to come back to austerity. Definitely we must come back to more normal primary surpluses, not the situation we have now, which is extraordinary, but we shouldn’t worry, if at the same time GDP growth goes up.

It is important to keep positive the snowball effect, which is the difference between the growth rate and the interest rate in the economic profession jargon. That was what created a disaster in Greece, because if you take austerity measures, you reduce the deficit, but, on the other hand, the snowball effect is such that you lose whatever you have gained from the primary surplus.

P. SPIEGEL: GDP is at the bottom.

Y. STOURNARAS: Absolutely. So, we have to be very careful.


Y. STOURNARAS: We have to create perhaps new rules for the Stability and Growth Pact, more realistic, not a whole book, simple rules that we can follow. And be realistic. I will tell you one example. In Greece now we have a debt to GDP ratio of 200% of GDP. It is extremely easy, just simple arithmetics to show, that 1% better snowball effect, that’s the difference between growth rate and interest rate, is twice as good as a 1% higher primary surplus. So we must keep this in mind.

P. SPIEGEL: Yes. It is interesting. I know we have had these conversations again on and off for ten years. You have been advocating for this for some time.


P. SPIEGEL: Your sense is though, what you say is you feel you have won the philological argument to some extent; that in Washington and Brussels, IMF, you think there is a change in thinking in most of the authorities here?

Y. STOURNARAS: It was painful, but I think it was worth insisting on that.


Y. STOURNARAS: I think now this lesson has been learned.

P. SPIEGEL: Well, I hope you are right on this one. It’s been a long fight.

Let me change topics here, because there is another issue that is faced by a lot of central banks. That’s frankly on a completely different level and led in many ways by the Bank of England, which stress tests a lot of its financial system on the issue of climate change.


P. SPIEGEL: Now, again, a bit of debate. I spoke with Larry Summers not too long ago, who is very much opposed to this. His concern is when it comes to macro prudential issues, there’s so much on the plate right now of central banks, and he pointed this is a leverage no one knew about, there are dangers in the system right now. If we give another role to the central banks, which is climate change, that is putting too much on their plate. What is your view? Do you think that central banks should play a role in assessing this?

Y. STOURNARAS: Let’s start from climate change.


Y. STOURNARAS: Climate change is extremely important. It is the mother of all failures, of the market failure. It is the tragedy of the commons. We cannot coordinate ourselves, countries, and we cannot control the horizon. It is such a long-term problem. Markets don’t care about 50 years from now. There aren’t such instruments.

So it is a serious problem. It is a serious problem and it is much more serious here in the Mediterranean. For more than 14 years in the Bank of Greece we are dealing with climate change. The cost is enormous, I talked about it here yesterday in this forum. The cost of doing nothing in Greece is 700 billion up to 2100, when our GDP is less than 200 billion. So that tells you the scale of the task.

P. SPIEGEL: That’s huge.

Y. STOURNARAS: Now, there are some people who are saying that central banks should be market-neutral, that this is an issue for the governments and not banks and central banks. It’s a mistake.

First of all, because we are not in a neutral situation, so the notion of market neutrality does not apply here. You know, Dante Alighieri had said that the best place in hell is being reserved for those who are neutral when there is a problem. So I leave you with that.

P. SPIEGEL: But I guess the question is, is it an issue for the financial system? Because that would imply that central banks should be enrolled. There is an argument as you say that this is a democratic issue, for lack of a better word. That it’s the elected government that has to tackle climate change. I think there’s no debate necessarily that climate change is a risk, but just what is the relative authority to deal with it. And again, Summers’ argument is that this is not a central bank issue; this is not an issue of financial stability, it’s an issue of politics, it’s an issue of climate and the political world is more appropriate to deal with that.

Y. STOURNARAS: I don’t agree, because our primary target, which is price stability, is being affected by climate change. There’s huge volatility due to the climate change that we are going to see. Second, there are stranded assets, so banks will suffer. I mean, companies will suffer. If you are not careful enough, you are going to have insolvencies. So this is why the central bank should affect the whole process through its monetary policy portfolio. It’s not yet ready for that, but its own portfolios, its supervisory policies and also its models should take into account climatic change in our interest rate behavior.

P. SPIEGEL: Okay. I was going to follow on this one, but I am getting a whisper in my ear that it is time to wrap it up. Always a pleasure to talk to you and thank you very much.

Y. STOURNARAS: Thank you very much.

P. SPIEGEL: My pleasure.

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