Interview of the Bank of Greece Governor Yannis Stournaras with Bloomberg and Francine Lacqua
21/11/2024 - Articles & Interviews
F. LACQUA: I am delighted to be joined by Yannis Stournaras, the Greek Central Bank Governor. Governor, thank you so much for joining us. We also had a great conversation in Athens on Monday.
Y. STOURNARAS: Good morning.
F. LACQUA: You really talked to me about expectation for inflation, growth and the Trump tariffs. I mean, we, at Bloomberg Economics, estimate that actually these Trump tariffs could roughly take around 1% of euro area GDP at already a time of difficult economic performance. Is that your assessment?
Y. STOURNARAS: Yes, yes. This is a reasonable estimate, I’m afraid, yes.
F. LACQUA: So, it could actually, even push the European Union in a recession?
Y. STOURNARAS: Well, if you take into account now that our growth forecast is for about 0.8%, yes. If you take out one percentage point, we might enter into a slight recession.
F. LACQUA: Governor, I mean you were very interesting also giving a speech yesterday, talking about inflation where you expected to hit it for 2%. What is the right way of looking at economics now? Do you have models, without talking about tariffs and Trump, and do those need to change when we have policy or you already need to try to incorporate it in your forecasts?
Y. STOURNARAS: You mean the tariffs?
F. LACQUA: The tariffs, yes.
Y. STOURNARAS: Well, first of all, we have to wait until the new President takes office, sits down with his advisors and we’ll see what they have to say because now we just have what he said during the election campaign.
But we know from experience, we know from economic theory, from practice, from 200 years’ experience that tariffs never, never, is a first best policy. Whatever you can do with tariffs, you can do it in a much more efficient way, and cheaper way, by other means, by domestic taxes, if you want to, you want to support your industry by a set of taxes – subsidies, but not tariffs. Do not interfere with trade. This is the dictum of economic theory and practice, and experience of many many years now.
F. LACQUA: Is there anything that Europe can do to defend itself against tariffs?
Y. STOURNARAS: If somebody imposes tariffs, you must retaliate, I am afraid. So, this has gone to have second-round effects because nobody will stay quiet if somebody imposes tariffs. But of course, we need very careful thought here.
F. LACQUA: Governor, when we spoke on Monday, it seemed that a 50-basis point cut is off the table for December.
Y. STOURNARAS: I cannot say, because we discuss these things very carefully in the Governing Council in a very good spirit, but it is my own assessment that 25 basis points now perhaps is the right response. After all, we still don’t have anything on the table on the other side. We don’t know how markets react, what the Fed will do. So, I think 25 basis points is the right response now. But later we can see.
F. LACQUA: So, Governor, when you look at, you know, given all of these complexities, do you want to hit a swift return to normal and does that mean that we would have a cut almost at every meeting until you get to 2% which is, I think, where you see more or less a neutral rate?
Y. STOURNARAS: As inflation develops now, and as the real economy develops now, I think, yes, we should have a cut in every meeting from now on until we get to what we call the neutral rate.
F. LACQUA: And that is 2% actually in your eyes?
Y. STOURNARAS: As I said on Monday, this is an elusive concept but according to the estimates, it’s about 2%, 1.75 to 2.25 but on average, it’s about 2% in the long run.
F. LACQUA: And, Governor, do you see any need to go into expansionary territory?
Y. STOURNARAS: You mean even below 2%? Well, it’s very early to say. Very early to say. If the worse comes to the worse and you have a hit in European activity, maybe, but it is very premature to say now whether we should go to an expansive territory.
F. LACQUA: So, this would mainly depend on geopolitics and Trump trade tariffs?
Y. STOURNARAS: And the domestic policies as well. It is not only foreign policy. It is also the domestic policies in Europe that count.
F. LACQUA: What do you worry about the most in some of these domestic policies? You worry about the election in Germany and the instability that brings?
Y. STOURNARAS: Well, the ECB issued a financial stability report in the last few days. We describe there only the financial risks. We worry about public debt. We worry about financial stability, if the worse comes to the worse, if there is a trade war, yes, there is going to be perhaps chaos in international trade that will affect financial stability.
F. LACQUA: Governor, when you look at inflation, I mean, if you talk about it, you know, theory precisely has a risk of undershooting the inflation targets, become a bigger risk than overshooting it.
Y. STOURNARAS: There is some risk, although now risks are, I would say, neutral as far as inflation is concerned. Okay, we had 1.7% in September and then, back to 2% in October. Well, I think that now we are going to hit the inflation target on a sustainable manner much earlier than we thought in our September forecast, perhaps towards the end of the first quarter of 2025, rather than in the last quarter of 2025. So, inflation is falling.
F. LACQUA: The negotiated wages, I think, actually had a pretty big jump in the third quarter. How does that complicate matters for the path forward?
Y. STOURNARAS: I think that reflected backward cases, like wage negotiations in Germany, but we expect that to fall in the months to come. So, we thought it’s one blink, but not a permanent increase.
F. LACQUA: Governor, in the ECB policy statement, there has been for a while a reference to rate saying “sufficiently restrictive for as long as necessary”. Would you drop that language come December?
Y. STOURNARAS: We discuss these things in the Governing Council. Nobody can say before.
F. LACQUA: Things are changing. I’m trying to understand basically how you would do and how you see the way forward.
Y. STOURNARAS: Maybe the time has come but these things are being discussed in the Governing Council after a very careful examination of data, we are still data dependent, we examine all the evidence, but we are in quite restrictive territory now, it is true.
F. LACQUA: Governor, talk to me about how much we should worry about Central Bank independence, especially coming from the US and the worry that because of President Trump’s certain words about Jay Powell and about the Fed, that would also then migrate actually to potential concerns in Europe.
Y. STOURNARAS: It is a very important issue, I think even more important than tariffs. I think governments did one of the best things in economic policy in the past, to give Central Banks independence. So, if we backtrack on this, it will be tragic, I think. Jay Powell is an excellent Central Banker, so it wouldn’t be advisable to intervene in the independence of the Federal Reserve. Then, that would be an even bigger mistake than tariffs, I’m afraid.
F. LACQUA: And this would have huge implications actually for the rest of the world.
Y. STOURNARAS: Yes, of course. Both for other Central Banks but also for the markets, for the bond market. But I don’t think it will happen. It’s my estimation.
F. LACQUA: Governor, do you believe, I mean, again, we talked, and you talked so eloquently about these unchartered territories, that there is a real role for the markets and for bonds to try and keep everything in check, including, you know, Central Bank independence, the market would be the first to react to any such events.
Y. STOURNARAS: But we don’t want to arrive at this point. It will not be nice. I mean, we don’t need to invoke market turbulence in order for governments to understand that they should not intervene in Central Bank independence.
F. LACQUA: Governor, as always, thank you so much for your time.
Y. STOURNARAS: Thank you, thank you very much.
F. LACQUA: With these very wise words, Yannis Stournaras, the Governor of the Bank of Greece.