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Bank of Greece Governor Yannis Stournaras speaks to Politico

28/11/2023 - Articles & Interviews

- Bank of Greece to cut growth and inflation outlook

- Stournaras: Central banks can’t cop out of climate battle

- ECB’s arch dove pushes back against early rate cut bets

By Johanna Treeck

Bank of Greece to cut growth and inflation outlook

The Greek central bank is set to trim its growth outlook for next year significantly in its upcoming December forecasts, preliminary estimates show.

Central bank chief Yannis Stournaras told POLITICO that his institution now expects the Greek economy to expand 2.4 percent this year, and by 2.5 percent in each of the two subsequent years.

At the last official forecast round in June, it forecast 2.2 percent growth for this year, 3.0 percent for 2024 and 2.7 percent for 2025.

The numbers represent a significant slowdown after a robust recovery from the pandemic. GDP in the region’s former trouble spot expanded by 8.4 per cent in 2021 and 5.6 percent last year, thanks largely to pent-up tourism demand. But even after shifting down a gear, it’s still set to grow faster than most of its eurozone peers.

That growth is ensuring that a rapid decline in Greece’s debt-to-GDP ratio continues. Having peaked at well over 200 percent, it currently stands at around 165 percent and will fall to 144.7 percent by 2025, the bank estimates.

The Bank of Greece is due to release official forecasts in its regular interim monetary policy report in December.

The updated projections also show a lower trajectory for inflation. The preliminary estimate for 2023 remains at 4.3 percent, but inflation is now seen falling to 3.5 percent in 2024 and 2.2 percent in 2025, compared to previous forecasts of 3.8 and 2.3 respectively.

The preliminary estimates of the central bank are slightly more pessimistic than those of the Greek government.

Stournaras: Central banks can’t cop out of climate battle

Central banks must contribute to fighting climate change, European Central Bank (ECB) Governing Council member Yannis Stournaras said, dismissing concerns that this could expose them to excessive political pressures.

“We don’t live in an ideal world where the full separation principle works, that is, [one where] ‘the government does that and the central banks do price stability’,” Stournaras said in an interview with POLITICO on the eve of the 28th United Nations Climate Change Conference (COP28) in Dubai. “This is such a huge task that everybody should deal with that.”

Greece was the scene of some of the most devastating extreme weather events seen in recent summers, with wildfires raging close to the capital Athens and to some of the country’s most iconic tourist destinations. The events illustrate why the Greek central bank, and the ECB in general, are devoting ever more resources to assessing the economic impact of climate change, and consequently its significance for monetary policy.

“The cost is substantial,” Stournaras said. His bank’s models — the first attempt by a central bank to quantify climate change impacts — point to an estimate of €200 billion in damage by the end of the century. A decade and a half of experience have since “vindicated” those models, Stournaras said.

The models assume an average, climate-related cost to the Greek economy of €2.6 billion a year, significantly more than the estimated €1.7 billion hit from fires and floods that hit the Mediterranean country between January and August this year.

Such figures form the context for Stournaras’ vocal support for “greening” both the asset portfolios held by the ECB, something that implies discriminating in favor of securities that have been issued explicitly to finance investment in the transition away from fossil fuels.

Such action by the ECB isn’t without risk. Other Governing Council members, such as Belgium’s Pierre Wunsch, have questioned whether it represents slamming an additional tax on specific companies, on top of what has been agreed on by elected officials (Wunsch stresses that he “fully” backs the battle against climate change in general).

In a move that highlights how quickly green strategies and policies can turn into political pressures, a group of more than a dozen NGOs has urged the king of Belgium not to reappoint Wunsch for a second term and instead appoint a governor “who is equipped to meet the challenges of climate change.”

No stranger to political attacks, after helping to steer Greece through its sovereign debt crisis a decade ago, Stournaras said public servants must steel themselves against criticism and counter them with good arguments.

ECB’s arch dove pushes back against early rate cut bets
The European Central Bank is unlikely to start cutting interest rates before mid-2024, Governing Council member Yannis Stournaras said, pushing back against market bets for a first cut as early as April.

Coming from the Governing Council’s most dovish policymaker, the comments are the clearest signal yet that the ECB will sit tight in the first two quarters of next year as it monitors whether wage rounds risk keeping inflation unacceptably high.

“The current numbers betting on April seem a bit optimistic,” the Greek central bank chief said in an interview with POLITICO. Instead, he sees the first rate cut “in the middle of next year” if inflation then is slightly below 3 percent and points to sustained decline to 2 percent.

Stournaras’ colleagues have taken pains to avoid public discussion about a first cut, anxious not to signal overconfidence or, even worse, “complacency,” and encouraging what the bank would call an “unwarranted loosening of financial conditions” from bond and currency markets.

“In some countries, governors received a lot of criticism about credibility, about losing the inflation battle in the beginning,” said Stournaras, who is the second-longest-serving policymaker on the Council. “That has created some fear about sounding too optimistic,” he said, but “I’m not afraid to tell my views. I expressed my views in the Greek parliament when Athens was burning. I am so much more comfortable now, talking about inflation prospects and interest rate cuts.”

Stournaras argued that the ECB president appears to share his view on the timeline for a first rate cut.

“She said we cannot reduce interest rates in the next two quarters,” he said, referring to Christine Lagarde’s recent impromptu return to “forward guidance.” This “means in the beginning of the third quarter of next year, we might,” he concluded. “That’s how I read it.”

The ECB left its benchmark deposit rate unchanged at a record 4 percent at its last meeting, pausing its most aggressive tightening cycle on record after past hikes helped bring inflation down to 2.9 percent in October from a 2022 peak of 10.8 percent. At the same time, it has pushed the eurozone economy to the brink of recession, with growth coming to a standstill in the summer.

Stournaras warned against further tightening using other tools. Starting to unwind bond holding accumulated under the pandemic earlier than the end-2024 guidance, in particular, “would break a commitment — that could affect our credibility and, therefore, the effectiveness of our policies.”

On Monday, Lagarde told the European Parliament that the Governing Council will probably discuss the option in the “not too distant future.”

Soft landing risks getting bumpier

The Oxford-educated economist said he remains optimistic that the ECB can engineer a soft landing for the economy.

“The bad scenarios of a year and a half ago have not been realized,” Stournaras argued. “The numbers are not impressive as far as growth is concerned but … inflation is falling, inflation expectations are anchored around 2 percent and so far, signs of second-round effects are contained,” he said. “So far, so good.”

Even so, Stournaras stressed that downside risks to the outlook have increased in recent months and he fears worse could be ahead.

Interest rates significantly outpacing growth rates traditionally have been a sign that we are heading toward a problem, Stournaras observed, especially when compounded with the ongoing high geopolitical risks.

“The combination of the two might create an explosive situation on public debt on the one hand, and stagflation on the other hand,” he said.

“We need very sophisticated central bank and government intervention.”

Populist surge revives unpleasant memories

That seems increasingly hard to come by at a time when the U.S. has put globalization into reverse and, closer to home, Euroskepticism is reviving.

Stournaras, first as finance minister and then central bank chief, experienced first hand what happens when the eurozone’s integrity is called into question. He’s now unnerved by the recent surge in Euroskepticism, which last week made right-wing populist Geert Wilders’ PVV party the largest in the Dutch parliament.

“Populism provides easy answers,” he said, harking back to January 2015, when crisis-worn Greeks elected anti-austerity party Syriza under the leadership of Alexis Tsipras. Having promised to roll back austerity measures imposed by its creditors, Tsipras was forced to accept even harsher terms six months later after a failed bluff in negotiations with the so-called troika of the ECB, IMF and European Commission.

“People opted for a solution that created more problems than it solved. The country realized how much time had been wasted much later,” Stournaras said.

A decade on, Greece has turned into a success story: it has regained its investment grade sovereign rating and is enjoying some of the best growth in the currency union. But it will not withstand challenges without European partners, Stournaras said.

“All the big challenges I can imagine need more Europe, not less,” he said.

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