You’ve been on the board of the ECB since 2005, a time when the economy was very different. How has the global financial crisis affected what you and your colleagues do?
First, keep in mind that we are the only federal institution that can make decisions in a matter of a few hours by teleconference and that there is nothing similar to this in Europe at the political level. The crisis meant that were often pushing governments to act very quickly. We adopted interest rate cuts to address the money market crisis, then the banking crisis, then the sovereign crisis. We also developed some new instruments to deal with the new problems as they emerged, and pushed governments in trouble to implement tough measures — even when they posed political difficulties for the leaders. It was a much more forceful role than we ever needed to play before.
What has the ECB, as an organisation, learned from the crisis?
First, no crisis is similar to the previous ones. Crises are very difficult to forecast, even when certain risks emerge; and this crisis in particular has shown contagion and interconnections between different risks. We started with a liquidity risk, which affected the money market; that, in turn, affected the broader aspects of the financial sector, the capitalisation of the banking system, then sovereign risk. It is a multidimensional crisis that has affected our economies profoundly, and we have had to learn how to operate in a flexible manner in response — while also maintaining our key objectives and priorities.
Who was at fault for the crisis: bankers, politicians, the markets or some combination of those factors?
Everybody took advantage of the system. In part, it was because it is human nature to be optimistic when things are going well. But, with that comes a tendency to take more risk. It’s why it is important to have someone or some organisation with responsibility for taking a longer-term view — and that person or group must be independent enough to issue warnings and even to take measures to prevent short-term behaviour. The sub-prime crisis was a result of incentives that promoted leniency and complacency. The politicians had an interest in helping the poorest people borrow cheaply to buy houses. The poor themselves were happy to acquire homes. And the bankers were happy because they would make money out of it and shift the risk somewhere else. No one was looking at the long term instead of the short term; and there was no regulator, central bank or independent group signalling risks and issuing warnings. I hope the resultant crisis has created the conditions for such warnings to be given at an earlier stage — and heeded.
What are some of the changes we are likely to see the ECB make going forward?
A number of changes are necessary, and some of them are going to be unpopular. The main challenge we face is stopping states from inflating their debt burdens away. Unless we do that, we will be unable to convince the markets that member states are going to bring public finances back under control. I believe in that because, in the Euro area — where inflation is forbidden and the ECB has ensured price stability — that trust is there. I also believe that we must put in place a mechanism that monitors national supervisory authorities to verify the way they conduct their activities, including stress tests on the banks.
Do you think people understand the role of the ECB?
I think people who follow financial news and are aware of the broader issues involved in the economy appreciate some of what the ECB has done. For example, it has held down inflation for the past 12 years. People also seem to appreciate our flexibility and ability to adjust to the new challenges that have emerged. Moreover, they seem to value our quick work when it comes to reminding governments what their responsibilities are. Lastly, they hopefully applaud our ability to force governments to take responsibility for some of the problems that they created themselves, particularly with respect to the solidity of their banking systems.
Can the ECB prevent another financial crisis?
For most people, our role has not been something they have thought much about until they learned about a financial crisis in some country — such as those in Ireland, Greece or Portugal — from the news headlines. This lack of economic savvy has played a large part in the problems many nations are now facing. In the case of the Irish, they had effectively voted for a property boom in the good times without being aware of the reality that they might have to pay for it all in bad times. In general, voters need to be aware of the risks that certain policies entail, as well as the risks inherent in a big financial system.
What makes it difficult is that preventing these sorts of problems requires good regulation and good supervision, which often result in a less consumer-friendly banking system. I can only hope that people keep in mind what happened when there was a failure to regulate. People need to learn from the current crisis and accept the changes that are needed. With those changes, a new financial crisis is less likely to occur. But, as important as the ECB is in this regard, it’s impossible to prevent a future financial crisis from occurring unless everyone involved acts responsibly at all times.
Where does this leave the euro?
The crisis has changed the way people and politicians view the euro. Monetary union has pushed governments to make decisions. And decision making is one of the things the ECB brings.
We can take decisions in a few minutes. In contrast, for politicians it is more difficult. This means we are often frustrated and have to push politicians. They often miss the global picture.
For me there has been huge satisfaction in finding a solution to a problem over a weekend. As a board we analyse the options, discuss them, take a policy line and then submit the decision. This way, you find out the limits of efficiency are less tight than you might think.
How would you describe your leadership style?
To understand that you are giving an example to others; to act in a way others should act. Listening is important as is commitment to certain values – such as the European project. It is sometimes more comfortable to avoid asking questions, but as a leader you have to do what is necessary even if it is disturbing. In a crisis you have to question certain prevailing thoughts.
The opportunity in our situation is to understand the mistakes which were made and to make the euro more resilient and more competitive. Europe will come out of this crisis stronger thanks to fundamental structural reforms.