Introductory remarks by Fabio Panetta, Member of the Executive Board of the ECB, at the ECON Committee of the European Parliament
Frankfurt am Main, 14 April 2021
Madam Chair, honourable members of the Committee on Economic and Monetary Affairs,
Let me start by thanking you for inviting me to report on the outcome of the ECB’s public consultation on a digital euro. We are publishing our analysis of the responses we received on our website today.
A digital euro can only be successful if it meets the needs and expectations of European citizens. This is why our consultation will provide valuable input for the Eurosystem’s decision – this summer – on whether we should start a digital euro project. The consultation will also inform future work on the design of a digital euro if a project is launched.
For the participants in the public consultation, the most important features of a digital euro are privacy, security and broad usability. In my remarks today, I will discuss how we can meet their expectations. But first let me share with you the main findings from our consultation.
Main findings from the ECB’s public consultation
We received more than 8,000 replies, an all-time record for ECB public consultations. The overwhelming majority of the responses came from citizens, while 460 were from businesses and professionals in the payments sector.
The consultation was open to everyone, and participants contributed on their own initiative. This means that the sample of respondents is not statistically representative of the European population. Nonetheless, the breadth and depth of the responses offer valuable insights.
Our report discusses the results in detail. Today I will therefore simply highlight the key findings.
Privacy was considered to be the most important feature of a digital euro in about 43% of replies. Nevertheless, respondents recognise the need for the digital euro to have features that prevent illicit activities like money laundering or terrorist financing. Other important characteristics include the possibility of using the digital euro for secure payments (ranked first by 18% of the respondents), throughout the entire euro area (emphasised by 11% of the respondents), without additional costs and offline (underlined by 9% and 8% of the respondents respectively).
Citizens and professionals agree that a digital euro should be integrated into existing payment infrastructures. The vast majority of respondents believe that banks, payment institutions and other intermediaries have an important role to play in providing services related to a digital euro. They suggest, for example, that a digital euro should be integrated with mobile and online payments and banking services. They expect the additional services that would build on the basic payment functionalities of a digital euro to trigger innovation and efficiency. A sizeable share of participants also highlight that the digital euro should make cross-border payments faster and less costly. And more than half of respondents are willing to test, adopt or contribute to the design of a digital euro in order to make it an effective means of payment.
As I have already mentioned, privacy emerges as the most important feature of a digital euro. Protecting users’ personal data and ensuring a high level of confidentiality will therefore be a priority in our work, so that the digital euro can help maintain trust in payments in the digital age.
At the ECB we started to explore privacy in digital payments early in our work on a central bank digital currency, and we will continue to do so through further analyses. The results of our technical experimentations are available on our website and summarised in to my remarks today.
Let me emphasise, first of all, that a digital euro would in fact increase privacy in digital payments. As a public and independent institution, the ECB has no interest in monetising or even collecting users’ payment data. A digital euro would therefore allow people to make payments without sharing their data with third parties, other than what is required by regulation. This differs from private payments, where services are generally offered in exchange for personal data that are then used for commercial purposes.
Privacy is an important prerogative because it influences people’s personal lives and fundamental rights. It must nonetheless be carefully assessed against other important considerations in the general interest. Digital euro payments could guarantee different degrees of privacy, involving different trade-offs with other policy and regulatory objectives such as the need to combat illicit activities. Such trade-offs also characterise traditional means of payment, which provide various degrees of privacy, ranging from anonymity for cash payments to full disclosure for digital transactions that require documentary verification and monitoring of operations.
In theory, digital euro payments could be anonymous if users’ identities were not verified when they access digital euro services. But this anonymity would provide fertile ground for unlawful activities and could prevent compliance with regulations on anti-money laundering and combating the financing of terrorism.
Anonymity would also prevent limits being imposed on the use of digital euro when necessary – for example to safeguard financial stability and banking intermediation by preventing excessive capital flows or excessive use of the digital euro as a form of investment.
Even if users have to identify themselves when they first access digital euro services, different degrees of privacy can still be maintained for their payments. Certain transactions could be conducted without the payment details being shared with third parties. For example, if low-value offline payments were offered, they could be settled between the payer and payee without any data being shared with intermediaries.
For electronic and large-value transactions, details should be available to intermediaries. But privacy enhancing techniques could still ensure a high level of privacy. For example, the identity of users could be kept separate from payment data, allowing only financial intelligence units to obtain this information and identify the payer and payee when suspicious activity is detected.
Our preliminary experimentation on a digital euro is showing promising results on how technology can be used to protect user privacy without relaxing standards against illicit activities.
But there could also be cases where transparency of payments would be in the interest of consumers. For example, it may be necessary to verify a payment after it has been conducted to prove that the transaction took place or if a refund is required. In any event, cash would remain available alongside a digital euro. Consumers would be able to continue to make anonymous payments with banknotes, if they wish to do so.
We will take all these factors into consideration as we continue our work and seek the views of stakeholders to find the right balance. This includes maintaining a close dialogue on the implications of potentially issuing a digital euro and the framework that would be needed to do so with the legislators and institutions that set the rules on privacy and data protection.
A digital euro as a new and secure payment solution
The security and usability of the digital euro are also particularly important for prospective users.
Electronic payments are becoming increasingly popular, so a digital euro would ensure that sovereign money – a public good that central banks have been offering to citizens for centuries – remains available in the digital era. People could have full confidence in both the digital euro and cash, since they are both backed by a credible central bank. This is a unique feature that no private payment scheme can provide.
Let me emphasise, once again, that a digital euro would not mean the end of cash. It would complement cash, not replace it. In doing so, a digital euro would contribute to a more diverse payments landscape, giving people greater choice in how they pay. This is also why the digital euro cannot and will not be a tool used to impose negative remuneration on money. If digital euro holdings were to be remunerated, the remuneration of individuals’ holdings for basic retail use would not go below zero. And effective choices on the design of a digital euro would eliminate risks to financial stability and banking intermediation.
A digital euro would encourage further innovation and digitalisation in retail payments. Supervised intermediaries such as banks and payment institutions could build on the digital euro to offer additional services to end users. Respondents to our consultation expect the digital euro to foster the provision of services that add value, like those covered by the revised Payment Services Directive and those that could offer the possibility of linking a payment to an external condition.
We are currently focusing on domestic needs in the euro area. But a digital euro could also help to address inefficiencies in cross-currency and cross-border payments. We are working with other major central banks to reap the potential benefits of digital currencies at the global level. We want to gain a better understanding of the implications of different types of central bank digital currencies while controlling the possible risks to both domestic and foreign economies.
Let me conclude. The record level of participation in our public consultation and the willingness of citizens and professionals to support a digital euro are encouraging. Their responses show the high expectations that prospective users have for a digital euro and provide valuable input for our work.
We are treating this matter with priority and will move as rapidly as possible. But we also need to take the time to do it right. In the coming months, the ECB’s Governing Council will decide whether to start a formal investigation phase on a digital euro.
In such a phase, we would carefully analyse possible design options and user requirements as well as the conditions under which financial intermediaries could provide front-end services built on a digital euro. We expect this analysis to take around two years.
At the end of the investigation, the Governing Council would take a decision on the design and on whether to move to the implementation of user requirements. This phase, which would take several years, would see the development of integrated services, testing and possible live experimentation of a digital euro.
Only at the end of this process would the Governing Council be able to decide whether or not to launch a digital euro. We will do our best to ensure that a digital euro meets the needs and expectations of Europeans.
But it can only be a common European enterprise. The alignment of European authorities and institutions, mindful of their respective mandates and independence, will be key if a digital euro is to be accepted. I am therefore pleased to see that this Committee welcomed our work in its recent resolutions on the ECB Annual Report and the international role of the euro.
As co-legislators and representatives of Europeans, you have a fundamental role to play in the discussions on the framework that would be needed to issue a digital euro. This is why I very much appreciate exchanges like the one today.
In view of the economic fallout from the resurgence of the pandemic, today the Governing Council recalibrated its monetary policy instruments as follows:
First, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00 per cent, 0.25 per cent and -0.50 per cent respectively. The Governing Council expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2 per cent within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.
Second, the Governing Council decided to increase the envelope of the pandemic emergency purchase programme (PEPP) by €500 billion to a total of €1,850 billion. It also extended the horizon for net purchases under the PEPP to at least the end of March 2022. In any case, the Governing Council will conduct net purchases until it judges that the coronavirus crisis phase is over.
The Governing Council also decided to extend the reinvestment of principal payments from maturing securities purchased under the PEPP until at least the end of 2023. In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance.
Third, the Governing Council decided to further recalibrate the conditions of the third series of targeted longer-term refinancing operations (TLTRO III). Specifically, it decided to extend the period over which considerably more favourable terms will apply by twelve months, to June 2022. Three additional operations will also be conducted between June and December 2021. Moreover, the Governing Council decided to raise the total amount that counterparties will be entitled to borrow in TLTRO III operations from 50 per cent to 55 per cent of their stock of eligible loans. In order to provide an incentive for banks to sustain the current level of bank lending, the recalibrated TLTRO III borrowing conditions will be made available only to banks that achieve a new lending performance target.
Fourth, the Governing Council decided to extend to June 2022 the duration of the set of collateral easing measures adopted by the Governing Council on 7 and 22 April 2020. The extension of these measures will continue to ensure that banks can make full use of the Eurosystem’s liquidity operations, most notably the recalibrated TLTROs. The Governing Council will reassess the collateral easing measures before June 2022, ensuring that Eurosystem counterparties’ participation in TLTRO III operations is not adversely affected.
Fifth, the Governing Council also decided to offer four additional pandemic emergency longer-term refinancing operations (PELTROs) in 2021, which will continue to provide an effective liquidity backstop.
Sixth, net purchases under the asset purchase programme (APP) will continue at a monthly pace of €20 billion. The Governing Council continues to expect monthly net asset purchases under the APP to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.
The Governing Council also intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
Seventh, the Eurosystem repo facility for central banks (EUREP) and all temporary swap and repo lines with non-euro area central banks will be extended until March 2022.
Finally, the Governing Council decided to continue conducting its regular lending operations as fixed rate tender procedures with full allotment at the prevailing conditions for as long as necessary.
Separate press releases with further details of the measures taken by the Governing Council will be published this afternoon at 15:30 CET.
The ECB monetary policy measures taken today will contribute to preserving favourable financing conditions over the pandemic period, thereby supporting the flow of credit to all sectors of the economy, underpinning economic activity and safeguarding medium-term price stability. At the same time, uncertainty remains high, including with regard to the dynamics of the pandemic and the timing of vaccine roll-outs. We will also continue to monitor developments in the exchange rate with regard to their possible implications for the medium-term inflation outlook. The Governing Council therefore continues to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner, in line with its commitment to symmetry.
• Cash most popular instrument for in-person retail payments, but use gradually declining
• Card payments becoming increasingly contactless
• Survey suggests coronavirus pandemic has accelerated use of cashless payment methods
Euro area consumers are gradually shifting towards cards for in-person retail payments, although cash
remained the most used instrument at the end of 2019, data published today by the European Central
Bank (ECB) show.
Last year euro area adult consumers used cash for 73% of their point-of-sale and person-to-person
retail transactions (48% in value terms). In a previous ECB study conducted in 2016, the figure was
79% of these transactions (54% in value terms).
The use of cards for in-person retail payments increased by 5 percentage points over the same three
years, from 19% to 24% (41% in value terms). Almost four out of ten card transactions were made
using contactless technology in 2019.
For their online shopping, euro area adult consumers paid mainly by card (49% of transactions) and
one out of four online transactions was made using e-payment solutions. Four out of ten bill payments
were made using direct debit and two out of ten by credit transfer.
In order to understand the potential impact of the ongoing pandemic on consumers’ payment behaviour,
the ECB complemented its 2019 study with an ad hoc survey carried out in July 2020. Four out of ten
respondents replied that they had used cashless often since the start of the pandemic. While most of
those who fell into this category expected to continue to do so after the pandemic, the long-term impact
on payment behaviour is still uncertain.
“Consumers’ freedom to choose their payment method is of the utmost importance to us. Therefore we
aim to ensure acceptance of and access to cash throughout the euro area, while promoting innovation on digital payments, including in our work on the possible issuance of a digital euro,” said Executive
Board member Fabio Panetta.
The data published today will help the ECB and the national central banks of the euro area to better
understand consumer demand and market trends, as well as to implement the Eurosystem’s retail
payments and cash strategies. These include the promotion of competitive, innovative and resilient
pan-European market solutions, as well as a commitment to keep cash accessible and accepted as a
means of payment throughout the euro area.
Article by Christine Lagarde, President of the ECB, in L’ENA hors les murs magazine
Paris, 30 November 2020
Important lessons can be drawn from the past to understand the factors influencing the journey towards the future of money, including the possible introduction of a digital euro. Ensuring the euro meets the needs of European citizens is at the core of the ECB’s mandate.
Throughout history, the nature of money has evolved in response to socioeconomic changes. But the functions of money – as a means of exchange, a unit of account and a store of value – have remained the same for centuries.
One reason why money first emerged was to overcome the limitations and inefficiencies of bartering. As economies became more specialised, trade became all the more essential, and a universal medium of exchange was needed to facilitate it. Coins made from (precious) metals fulfilled that purpose for centuries.
But with the development of international trade, coins became increasingly impractical because they are difficult to store and transport in large volumes.
This led to the next phase in the evolution of money through medieval times into the late middle ages and early modern times. Developments included the advent of Templar’s credit notes in France, private giro banking in Italy, bills of exchange and promissory notes, and the first predecessors of paper money.
Role of the public sector
All of these instruments foresaw convertibility into precious metal coins. The acceptance of these forms of dematerialised and easy-to-carry money depended on the reputation of the issuer, and credit risk became relevant.
This led to the public sector playing an increasingly important role in issuing money and ensuring its value remained stable. Examples include the emergence of early public giro banks at the beginning of the 15th century and the first attempts to issue modern banknotes in the second half of the 17th century.
In today’s modern economies, including in the euro area, money is no longer convertible into, or backed by, any commodity. Fiat money, as it is known, serves as legal tender by decree of the government or even constitutional legislation (such as the EU Treaty). The value of money is based on citizens’ trust in it being generally accepted for all forms of economic exchange and in the ability of central banks to maintain its purchasing power through monetary policy. Central banks’ institutional independence also bolsters their ability to maintain trust in money.
Since early modern times central banks have gradually been assuming an increasingly pivotal role in ensuring that money delivers on the three functions I outlined. They must be fully aware of and adapt to changing realities.
As we enter the digital age, the nature of money, but also of goods and services, is changing quickly. Digitalisation and technological advances are transforming all areas of society, accelerating the process of dematerialisation.
Non-cash payments continue to increase. In the euro area, over the last year the total number increased by 8.1% to 98 billion. Nearly half of these transactions were made by card, followed by credit transfers and direct debits.
The coronavirus (COVID-19) pandemic has accelerated this trend towards digitalisation, with a surge in online payments and a shift towards contactless payments in shops. Market participants expect payments to be the financial service that will be most affected by technological innovation and competition over the next five years, according to a survey conducted in 2019.
To meet the demand for digital means of payment, new forms of private money (i.e. a liability of private entities) have emerged. They are available as commercial bank deposits which can be used for transfers and direct debits, and as electronic money through credit cards and mobile payment apps.
In the euro area, the Eurosystem’s supervision mechanisms ensure commercial banks and payment service providers are effective and safe. This enables people to continue to have confidence in private money, which remains an integral part of our financial system.
But central bank money in digital form is still not available for retail payments.
The ECB wants to ensure the euro remains fit for the digital era. Early this year, the Governing Council decided to explore the possibility of issuing of a digital euro – digital central bank money for retail payments, in other words.
The Eurosystem is assessing the implications of the potential introduction of a digital euro, which in legal terms would be a liability of the central bank. In October the ECB published the Report on a digital euro and launched a public consultation.
But why issue a digital euro, if other forms of (private) digital money are already available?
Central bank money is unique. It provides people with unrestricted access to a simple, essentially risk-free and trusted means of payment they can use for any basic transaction. But for retail use it is currently only offered physically in the form of cash.
A digital euro would complement cash and ensure that consumers continue to have unrestricted access to central bank money in a form that meets their evolving digital payment needs.
It could be important in a range of future scenarios, from a decline in the use of cash to pre-empting the uptake of foreign digital currencies in the euro area. Issuing a digital euro might become necessary to ensure both continued access to central bank money and monetary sovereignty.
A properly designed digital euro would create synergies with the payments industry and enable the private sector to build new businesses based on digital euro-related services.
A digital euro would also be an emblem of the ongoing process of European integration and ultimately help to unify Europe’s digital economies.
Crypto-assets pose risks
But what about bitcoin or other crypto-assets that have been trying to gain a foothold in the digital payments space and to anchor trust in their technology?
Innovations like distributed ledger technology (DLT), in particular blockchain (which is at the core of crypto-assets such as bitcoin), bring both new opportunities and new risks.
Transactions between peers occur directly, with no need for a trusted third-party intermediary. The trust that is usually inherent in a transaction is replaced by cryptographic proofs and the security and integrity of records is ensured by DLT, which avoids the “double-spending” problem. Nevertheless, trust is not entirely dispensable.
The main risk lies in relying purely on technology and the flawed concept of there being no identifiable issuer or claim. This also means that users cannot rely on crypto-assets maintaining a stable value: they are highly volatile, illiquid and speculative, and so do not fulfil all the functions of money.
Recently, we have seen the emergence of stablecoins, which try to solve crypto-assets’ problem of a lack of stability and trust by pegging their assets to stable and trusted fiat money issued by States. And the issuers of “global” stablecoins, which target a global footprint, further aim to introduce their own payment schemes and clearing and settlement arrangements.
Although stablecoins could drive additional innovation in payments and be well integrated into social media, trade and other platforms, they pose serious risks.
If widely adopted, they could threaten financial stability and monetary sovereignty. For instance, if the issuer cannot guarantee a fixed value or if they are perceived as being incapable of absorbing losses, a run could occur. Additionally, using stablecoins as a store of value could trigger a large shift of bank deposits to stablecoins, which may have an impact on banks’ operations and the transmission of monetary policy.
Stablecoins, particularly those backed by global technology firms (the “big techs”), could also present risks to competitiveness and technological autonomy in Europe, as they would attempt to leverage their competitive advantage and control of large platforms. Their dominant positions may harm competition and consumer choice, and raise concerns over data privacy and the misuse of personal information.
“Money is memory”
In general, end users prioritise ease of use and smooth integration with other apps or services, and therefore welcome new solutions in exchange for providing their personal data. Public authorities are open to innovation and are prepared to act as catalysts for change, while implementing appropriate policy measures to ensure this innovation helps consumers rather than hindering them.
Payment providers and their payment solutions must be subject to appropriate regulation and oversight – in accordance with the principle of “same business, same risks, same rules” – to protect users and safeguard the stability of the economy against new risks that even go beyond financial ones.
Some say that “money is memory”, and it seems that this memory is becoming increasingly digital. But consumers’ digital data and records must not be misused. The abuse of personal information for commercial or other purposes could endanger privacy and harm competition. These and other potential risks are being assessed by the Eurosystem and European institutions.
At the same time, public authorities must balance the benefits and risks of innovation in payments and be prepared to take a leading role in ensuring that payments remain efficient, safe and inclusive in the digital age.
As the economy continues to evolve and new expectations about the nature of money emerge, the Eurosystem must be ready to respond and ensure that European payments adapt to changing consumer preferences and remain inclusive and efficient.
Speech by Fabio Panetta, Member of the Executive Board of the ECB, at the Deutsche Bundesbank conference on the “Future of Payments in Europe”
Frankfurt am Main, 27 November 2020
Retail payments play a fundamental role in our daily lives and for the economy. Last year, adults in the euro area made two payments per day on average. The universe of retail transactions amounted to 213 billion payments – two million every five minutes – with an estimated total value of €164 trillion.
As part of its mission to promote the smooth operation of the payment system, the Eurosystem has two main objectives in the area of retail payments. The first is to guarantee that people have access to efficient payment solutions that meet their preferences. The second is to ensure that transactions remain safe, underpinning confidence in our currency and the functioning of our economy.
Technological innovation means that the policy implications of these objectives are changing, and new opportunities and risks are emerging. Today I will present the Eurosystem’s response: a strategy for empowering Europeans with efficient, inclusive and secure payments in the digital age. And I will argue that the impending revolution in payments requires us to stand ready to reinvent sovereign money.
Convenience and safety in the digital age – Payments
Payments have evolved substantially over time, but the key determinants of their success have remained fundamentally unchanged. People want payments that offer convenience and safety at a low cost. Convenience requires payments to be easy to use, fast and widely accepted, while safety requires low risk from an economic, financial and societal perspective.
The digital transformation is raising the bar for convenience and safety. With the growth of e-commerce and connected lifestyles, people are increasingly demanding immediacy and seamless integration between payments and digital services. At the same time, they are increasingly concerned about privacy, cybersecurity and reliability.
This wide range of desirable features creates scope for innovative payment solutions. Currently, none of the existing solutions – cash, cards, credit transfers, direct debits and e-money – meet all the required features at once. People are forced to use several instruments at the same time. In-person transactions are mostly conducted with cash and cards. Remote purchases are dominated by cards and e-payments. And bills are generally paid using direct debits and credit transfers.
The coronavirus (COVID-19) shock has accelerated the trend towards digitalisation, leading to a surge in online transactions and contactless payments in shops. This trend is likely to persist once the pandemic is over. So we must ask ourselves whether the available means of payment adequately meet the needs of consumers in the digital age.
Cash offers a secure and inclusive way of making in-person payments, but it is not well suited for payments in a digital context, such as in e-commerce. So it is no surprise that it is being used less. Payment cards, on the other hand,facilitate digital, contactless payments. But they are not accepted everywhere. And the Europe-wide acceptance of cards issued under national card schemes currently relies on agreements with international card schemes. As a result, people mostly use international schemes for cross-border card payments, and the European market for card payments is dominated by non-European schemes.
Generally, Europe is increasingly relying on foreign providers, with a high degree of market concentration in some segments, such as card transactions and online payments.
We should not let this reliance turn into dependence. Dependence on foreign providers and excessive market concentration would harm competition, limiting the choice for consumers and exposing them to non-competitive pricing. It could reduce the resilience of the payment system and weaken the ability of European authorities to exercise controls.
We must ensure that the payment market remains open to competition, including from European suppliers and technology.
The influx of technology firms
Fintech companies have sparked the latest wave of innovation, accelerating the evolution of the payment system. Many of them have adopted data-driven business models, where payment services are provided free of charge in exchange for personal data. Numerous banks are expanding their range of digital services by entering into agreements with fintechs; in some cases, integration is achieved when a bank acquires a fintech firm.
The global tech giants – the so-called big techs – are aiming for a revolution in the payments landscape, and represent a threat to traditional intermediation. These firms can use data-driven models on an entirely new scale by leveraging their large customer base, real-time data and control of crucial infrastructures for commerce and economic activity – from online marketplaces to social media and mobile technologies. They can use these advantages, their financial strength and their global footprint to provide new payment solutions and expand in both domestic and cross-border transactions. This would offer them an even stronger base to further expand the range of their financial activities, including lending, as their superior ability to collect and analyse large volumes of data gives them an information advantage.
If not properly regulated, big techs may pose considerable risks from an economic and social perspective and they may restrict, rather than expand, consumer choice. They can aggravate the risk of personal information being misused for commercial or other purposes, jeopardising privacy and competition. And they can make the European payment market dependent on technologies designed and governed elsewhere, exacerbating its vulnerability to external disruption such as cyberattacks.
The big techs may also contribute to a rapid take-up, both domestically and across borders, of so-called stablecoins. As I have argued previously, stablecoins raise concerns with regard to consumer protection and financial stability. In fact, the issuer of a stablecoin cannot guarantee the certainty of the value of the payment instrument it offers to consumers. Such a guarantee can only be provided by the central bank.
Moreover, unlike bank deposits, stablecoins do not benefit from deposit guarantee schemes, their holders cannot rely on the degree of scrutiny that is now the norm in banking supervision, and the issuers do not have access to central bank standing facilities. As a result, stablecoin users are likely to bear higher credit, market and liquidity risks, and the stablecoins themselves are vulnerable to runs, with potentially systemic implications.
These risks could be mitigated if the stablecoin issuer were able to invest its reserve assets in the form of risk-free deposits at the central bank, as this would eliminate the investment risks that ultimately fall on the shoulders of stablecoin holders.
This would not be acceptable, however, as it would be tantamount to outsourcing the provision of central bank money. It could endanger monetary sovereignty if, as a result, private money – the stablecoin – were to largely displace sovereign money as a means of payment. Money would then be reduced to a “club good” offered in return for the payment of a fee or membership of a platform.
We should safeguard the role of sovereign money, a public good that central banks have been managing for centuries in the public interest and that should be available to all citizens to satisfy their need for safety.
Monetary sovereignty could also be threatened if foreign central bank digital currencies became widely used in the euro area, with implications for international monetary spillovers.
These risks are not imminent. We must nonetheless be alert to possible non-linear developments that could endanger financial stability and monetary and economic sovereignty. As we aim to enhance the efficiency of European payments, we therefore need to be prepared to rethink the nature and the role of sovereign money.
The Eurosystem policy response
The Eurosystem is implementing a comprehensive policy to ensure that citizens’ payment needs are met, while safeguarding the integrity of the payment system and financial stability. Our policy is based on interconnected elements addressing the entire payment value chain.
First, we have enhanced our retail payments strategy, in order to foster competitive and innovative payments with a strong European presence. We are actively promoting pan-European initiatives that offer secure, cheap and widely accepted payment solutions.
We are supporting access to bank accounts by non-bank providers, so that they can expand the range of payment initiation services they offer. Yesterday the Euro Retail Payments Board, chaired by the ECB, launched a work stream to facilitate this access. We are working to make the European e-identity and e-signature frameworks better suited for payments and the financial sector more broadly.
Our retail payments strategy also builds on the promotion of instant payments, which make funds immediately available to recipients. We have created a solid basis for instant payments, with commonly agreed rules and powerful infrastructures, including the TARGET Instant Payment Settlement (TIPS) service, operated by the Eurosystem. Thanks to the measures we have taken in recent months, all euro instant payment providers and infrastructures will have access to TIPS by the end of 2021.
Second, we are adapting our regulatory and oversight framework to the fast pace of financial and technological innovation. We have reviewed our Regulation on oversight requirements for systemically important payment systems, introducing a more forward-looking approach to identify payment systems that are systemically important. And today we are launching a public consultation on the new regulation, which will then become operational by mid-2021.
We are also completing the public consultation on our new framework for electronic payment instruments, schemes and arrangements, the so-called PISA framework. PISA extends our oversight to digital payment tokens, including stablecoins, and to payment arrangements providing functionalities to end users of electronic payment instruments. As a result, technology providers can become subject to oversight.
As part of our comprehensive policy, we are working to safeguard the role of sovereign money in the digital era: we want to be ready to introduce a digital euro, if needed.
A digital euro would combine the efficiency of a digital payment instrument with the safety of central bank money. It would complement cash, not replace it. Together, these two types of money would be available to all, offering greater choice and access to simple, costless ways of paying.
We have started a public consultation to seek feedback from people across Europe and gain a better understanding of their needs. It will be completed in January, and the results will be published once they have been analysed.
A digital euro would need to be carefully designed, in order to enhance privacy in digital payments, respect the rules on countering illegal activities and avoid interference with central bank policies, first and foremost monetary policy and financial stability.
In particular, a digital euro should be a means of payment, not a form of investment that competes with other financial instruments. This would require limiting the holdings of individual users and mean that, unlike stablecoin issuers, the issuer of the digital euro – the ECB – would not aim to acquire deposits.
A digital euro would support the modernisation of the financial sector and the broader economy. It would be designed to be interoperable with private payment solutions and would thus represent the “raw material” that supervised intermediaries could use to offer pan-European, front-end payment solutions.
A digital euro would also generate synergies with other elements of our strategy, facilitating the digitalisation of information exchange in payments through e-invoices, e-receipts, e-identity and e-signature. And in making it easier for intermediaries to provide added value and advanced technological features at lower cost, it would give rise to products that could compete with those of the big techs, thereby benefiting end users.
The ECB and the national central banks have started preliminary experimentation through four work streams. First, we will test the compatibility between a digital euro and existing central bank settlement services (such as TIPS). Second, we will explore the interconnection between decentralised technologies, such as distributed ledgers, and centralised systems. Third, we will investigate the use of payment-dedicated blockchains with electronic identity. And fourth, we will assess the functionalities of hardware devices that could enable offline transactions, guaranteeing privacy.
We will take the necessary time to explore all aspects of different options: whether they are technically feasible, whether they comply with the principles and policy objectives of the Eurosystem, and whether they satisfy the needs of prospective users.
Let me conclude. The digital transformation is triggering a revolution in the financial sector, which will bring innovation but also risks. In particular, big techs and stablecoins could disrupt the European financial system. And while they could offer convenient and efficient payment solutions, they also risk endangering competition, privacy, financial stability and even monetary sovereignty.
Our policies provide a forceful policy reaction to the digital shock. We want to create the conditions for a resilient, innovative, diverse and competitive payments landscape that can better serve the evolving needs of European people and businesses. We are promoting safe, pan-European instant payments.
What is at stake is nothing short of the future of money. As private money goes digital, sovereign money also needs to be reinvented. This requires central bank money to remain available under all circumstances – in the form of cash, of course, but also potentially as a digital euro.
We want to enable people to choose their preferred way of paying without having to compromise on their expectations of fast, secure, inclusive and seamless payments. This is our aim today, and it will remain our aim in the future.
Speech by Bank of Greece Governor Yannis Stournaras at the 86th Annual Meeting of Shareholders
2019 marks the beginning of new course for the Greek economy. Following the successful completion of the last economic adjustment programme in August 2018, the activation of the enhanced surveillance framework and with Greece now subject to the improved institutional framework for economic governance in the European Union and the euro area, the Greek economy is called upon to operate in a new economic policy context. It is our duty, as individuals, businesses, political and institutional stakeholders, to prove that we have taken ownership of the lessons of the crisis.
2018 saw the recovery of the Greek economy gain traction, with a GDP growth rate of 1.9%. The key drivers of growth were a rise in exports of goods and services, reflecting a greater extroversion of the economy, and a pick-up in private consumption supported by employment growth and an increase in households’ disposable income.
The smooth execution and completion of the economic adjustment programme, improvements in confidence and the ensuing strengthening of growth led to a return of deposits to banks. This, in turn, enabled an increase in bank liquidity, a significant reduction and almost elimination of emergency liquidity assistance (ELA) from the Bank of Greece, a small recovery of bank credit, as well as a further relaxation of capital controls.
All of the above led to upgrades of the credit rating of the Greek sovereign and enabled Greece to return to international financial markets a year later, in February 2019, when, taking advantage and of the favourable global investment climate, the Greek government successfully issued a five-year bond. The successful issue of a five-year government bond was the first positive step on the way back to normality.
Moreover, the successful 10-year bond issue in March 2019, for the first time since the start of the public debt crisis in 2010, marked a more decisive step in the same direction, i.e. towards reconnecting Greece with the markets. The legal provision recently passed by Parliament on primary residence protection also contributes in this direction, as it reforms the relevant legislative framework, incorporating specific eligibility criteria and safeguards.
The debt relief measures agreed in June 2018, together with the increased disbursements from the European Stability Mechanism (ESM) for the creation of a cash buffer, have significantly improved the sustainability of public debt in the medium term. However, given that Greek government bonds are still rated at below investment grade and in the absence of access to a precautionary credit line, Greek bonds remained ineligible for the ECB’s quantitative easing programme (QE) that would have helped strengthen economic activity and further improve the credit standing of Greek bonds. Greek government bond yields are still high and volatile. They are sensitive to potential disturbances in international financial markets and are influenced by increased uncertainty regarding the maintenance of reform momentum. In fact, the yield spread of Greek 10-year government bonds remains elevated, at just under 400 basis points, despite the recent decline in yields. This persistent phenomenon is a matter that needs our serious attention.
2019 will be another challenging year for the Greek economy. In the external environment, the slowdown of world trade amid rising protectionism could dampen export growth.
On the domestic front, increased uncertainty about the continuation of reforms coupled with credit constraints are weighing on investment. High taxation in recent years has taken a toll on the growth dynamics of the economy, the competitiveness of Greek enterprises and confidence, and has caused tax fatigue leading to a contraction of the tax base and an exhaustion of the taxpaying capacity.
In 2019, the growth momentum of the Greek economy is expected to continue at the same pace as in 2018, despite a further slowdown of growth rates worldwide and, especially, in the euro area. However, this forecast is conditional upon the resolute pursuit of structural reforms, the implementation of the privatisation programme without delays and the strengthening of productive investment. These conditions are essential to completing a successful transition to a sustainable and extroverted growth model.
More specifically, according to Bank of Greece forecasts, GDP at constant prices is expected to grow by 1.9% in 2019, driven mainly by exports and private consumption. However, in order to make up for the huge losses suffered by the Greek economy in terms of output and employment during the long period of recession, higher growth rates are needed.
The low level of investment, insufficient domestic savings, the high – albeit declining – stock of non-performing loans, the large loss of physical and human capital during the recession, as well as the apparently low expectations regarding medium-to-long term potential output growth as a result of adverse demographic trends and the sluggish adoption of new technologies in production processes, all weaken the growth dynamics. Meanwhile, the outlook for the economy still depends largely on foreign investor confidence and on foreign capital inflows.
Turning to the domestic environment, and the fiscal front in particular, the possible implementation of Council of State Plenum rulings that earlier pensions cuts and the abolition of pensioners’ bonuses were unconstitutional, poses the greatest fiscal risk in the immediate future.
Furthermore, the fact that Greece is entering an electoral cycle increases the risk of a slowdown of the reform effort and of fiscal relaxation, compounding economic uncertainty. Thus, backtracking on agreed policies would undermine the significant progress achieved so far.
DEVELOPMENTS AND PROSPECTS OF THE GREEK ECONOMY IN 2019
Actual GDP developments in 2018 and the outlook for 2019 indicate that the Greek economy is back on a track of positive growth. The challenge now is to preserve and reinforce the growth momentum so as to enable strong growth rates over a long period.
The reason for this is that growth has yet to gain sufficient traction, as reflected in a negative rate of change in investment, a negative household saving rate and a still high – albeit decreasing – rate of unemployment. The continued underexecution of the Public Investment Programme is also dampening growth.
The growth prospects for 2019 will, to a large extent, remain conditional on the course of the global economy and of the euro area economy in particular, as well as on the continuation of the reform effort.
Economic expansion in the euro area is projected to continue in 2019, but at a significantly more moderate pace (1.1%), as recent data point to a considerable weakening relative to the strong growth rates of previous years. In order to avert the risk of a further economic slowdown in the euro area and to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term, the Governing Council of the European Central Bank (ECB) decided in March 2019 to maintain accommodative monetary policy by keeping the key ECB interest rates unchanged until the end of the year and by launching a new series of quarterly targeted longer-term refinancing operations (TLTRO-III) with a maturity of two years. This decision should improve financial conditions in Greece and support the growth effort. The ECB Governing Council additionally stressed, as it has been doing for some time now, that fiscal policy in euro area member states with adequate fiscal space should be supportive of economic growth.
The Greek economy in the current year is forecast to be driven mainly by export growth, albeit at a slower pace, and a rise in private consumption. Private consumption will be supported by the continued robust performance of the tourism sector, the ongoing recovery of the labour market and the improved disposable income of households, while investment will benefit mainly from a stabilisation of the real estate market.
HICP inflation fell to 0.8% in 2018, from 1.1% in 2017. The absence of significant further increases in indirect taxation during 2018, the sharp drop in international crude oil prices as from October 2018 and strong base effects were among the main factors behind weaker inflation developments. Looking forward, HICP inflation in 2019 is expected to fall to lower levels, as a result of low international crude oil prices, a slowdown in global activity and trade, as well as strong competition in the domestic retail food market.
In 2017, for the third consecutive year, the general government primary balance exceeded the programme target. An overperformance is also expected for 2018, according both to the Introductory Report on the 2019 Budget and to Bank of Greece forecasts.
However, the Public Investment Programme was once again underexecuted in 2018. Moreover, considerable delays were observed in the clearance of general government arrears to suppliers, despite targeted disbursements under the loan agreement. These developments, which have been observed repeatedly in recent years, tighten credit supply constraints, thereby depriving the real economy of much-needed financing resources and weighing on long-term growth, as also pointed out by the European Commission in its Enhanced Surveillance Report.
For 2019, an expansionary fiscal package amounting to roughly 0.6% of GDP is envisaged, partly offset by a curtailment of 0.3% of GDP in Public Investment Programme expenditure. More importantly, possible further fiscal expansion in the run-up to the elections could put public finances at risk.
THE BANKING SYSTEM
Developments in the Greek banking system during 2018 were marked by an accelerating return of bank deposits, banks’ improved liquidity situation and diversification of funding sources through access to the interbank market and away from emergency liquidity assistance (ELA) of the Bank of Greece, a small recovery of bank credit and the maintenance of capital adequacy ratios at satisfactory levels. However, bank profitability remained weak.
In early 2018, an EU-wide stress test exercise was conducted, including Greece’s four systemic banks, in order to assess bank resilience to hypothetical shocks over the period 2018-2020. The stress test exercise identified no capital shortfall in any of the participating Greek banks. Non-performing loans
The high stock of non-performing loans (NPLs) on banks’ balance sheets remains the major challenge for Greek banks and a serious constraint on their lending capacity. Banks are using the options provided by the improved legal and regulatory framework, which has removed significant institutional and administrative impediments to NPL reduction. These important reforms have begun to bear fruit, as indicated by the reduction of the stock of NPLs to €81.8 billion at end-December 2018 (or 45.4% of total loans), down from a peak of €107.2 billion in March 2016. However, the NPL stock is still excessively high.
At the end of March 2019, Greek banks submitted to the ECB and the Bank of Greece their revised operational targets for NPL reduction, incorporating any recent changes in their strategies since September 2018 and any revised macroeconomic assumptions. According to the previous submission in September 2018, the banks aimed to reduce the aggregate stock of NPLs to €34.1 billion by end-2021, bringing the NPL ratio down to 21.2% of total loans. With the new submission, the Banks aim to reduce the NPL ratio even further, to slightly below 20%. Despite the significant reduction, this ratio is still roughly six times the EU28 average, meaning that the NPL reduction needs to be further accelerated.
The successful resolution of the NPL problem is one of the major challenges facing the Greek economy in its effort to achieve sustainable growth, given that bank lending is the main source of financing for non-financial corporations (NFCs), owing to their structure and size, and for households. Freeing the banks of the NPL burden would help reduce the financial risks and funding costs faced by banks, thereby improving their internal capital generation capacity on a sustainable basis and enabling them to resume their intermediation role. In addition, alleviating the NPL burden would strengthen banks’ resilience and shock-absorbing capacity against potential future shocks; support operating profitability and put the conditions in place for a gradual increase in loan supply and a decrease in lending rates to enterprises and households, thereby enabling the smooth financing of the real economy.
The Greek authorities will soon need to decide on new, more systemic tools that would complement the banks’ own efforts. The Bank of Greece has for quite some time now proposed a systemic solution, which provides for the transfer to Special Purpose Vehicles (SPVs) of a significant part of NPLs along with part of the deferred tax credits (DTCs) on banks’ balance sheets. This solution has the advantage of addressing two very serious problems at the same time: NPLs and DTCs. The government and the Bank of Greece are working together towards the submission for approval of such systemic solutions by the competent European authorities and their ultimate adoption with a view to successfully tackling the NPL problem.
Furthermore, as mentioned previously, the new legislation on primary residence protection is a first step towards an overhaul of the personal insolvency framework in pursuit of a holistic solution to the problem. The implementation of the new framework, which incorporates specific eligibility criteria and safeguards, aims to protect the more vulnerable social groups, to avoid creating moral hazard at the expense of non-delinquent borrowers and to ensure that the impact on bank capital is manageable.
PRIVATE INSURANCE UNDERTAKINGS
As a consequence of Solvency II, the Greek private insurance market matured further in 2018, with improvements in governance structures and human resources. Risk and solvency assessment capabilities were also improved, with a view to better capital and risk management and more effective protection of policy-holders. In 2018, insurers continued their efforts to reduce the long-term guarantees embedded in their products. In this context, the time horizon of coverages has been reduced, and the financial guarantees offered reflect more accurately the prevailing economic conditions. These practices have had a positive impact on the undertakings themselves, by enhancing their solvency position, and on policy-holders, by ensuring lower insurance costs and better quality of insurance products. Nevertheless, insurance undertakings must take care not to lose their long-term perspective.
In the life insurance sector, insurance undertakings are increasingly designing and providing insurance-based investment products. This business strategy supports the financial strength of insurance undertakings, while also enabling them to offer higher returns to policy-holders, although exposing them to higher investment risks. Against this background, it is of crucial importance that insurers provide accurate and relevant information to prospective customers, enabling them to understand the risks involved and avoid losses. In addition, with Law 4583/2018, Directive (EU) 2016/97 on Insurance Distribution was transposed into national legislation, and the Bank of Greece was entrusted with the supervision of insurance intermediaries and distributors.
The outlook for the domestic insurance market is promising. In particular, based on the recent proposal for an EU regulation on a Pan-European Personal Pension Product (PEPP), Greek insurance undertakings could assume a new role and offer personal pension products to customers seeking to supplement their pension entitlements. Likewise, insurance undertakings could be part of a broader scheme providing protection against natural disasters, climate change-related and environmental risks in general.
Moreover, insurance undertakings can take advantage of new technologies, such as big data analytics, artificial intelligence and machine learning, to improve risk assessment and pricing.
RISKS AND SOURCES OF UNCERTAINTY
Despite the progress made so far, as shown by key economic aggregates, risks remain, both domestic and external. On the external front, risks could arise from a possible further slowdown of global economic activity in 2019 amid increasing trade protectionism, geopolitical risks and vulnerabilities in emerging market economies. The slowdown of the European economy is also a significant source of concern, which together with heightened uncertainty over the outcome of the Brexit process, could negatively affect the growth of Greek exports and tourism.
Turning to the domestic front, the possible implementation of Council of State Plenum rulings that earlier pensions cuts and the abolition of pensioners’ bonuses were unconstitutional, poses the greatest fiscal risk in the medium term. The associated additional expenditure would weigh negatively on the public debt sustainability analysis and would feed uncertainty about the fiscal policy and the financial sustainability of the pension system.
Other domestic risks include the potential implications of high taxation and the overall fiscal policy mix, as well as the backtracking on reforms or delays in their implementation. In addition, in the labour market, the increase in the minimum wage, legislated last January, though expected to bring about short-term gains by supporting disposable income and thereby private consumption, is expected in the medium term to hurt employment, mainly of youth, and competitiveness. In any event, any raise of the average wage must be consistent with labour productivity growth, so as to preserve the gains in competitiveness and employment achieved through a painstaking reform effort since 2010.
CHALLENGES FOR GROWTH Greece is confronted with a dual challenge: on the one hand, to achieve strong and sustainable growth rates and, on the other, to ensure high primary surpluses in order to meet its fiscal commitments, as defined in the Eurogroup decision of June 2018 and by the broader framework of European fiscal rules. During the long period of adjustment, the Greek economy succeeded in correcting several macroeconomic imbalances. However, Greece continues to face vulnerabilities which can, to a large extent, be considered a legacy of the crisis, although the multiple and interrelated nature of these vulnerabilities reveals chronic weaknesses.
In greater detail: – The permanent return of the Greek State to international financial markets on sustainable terms is the greatest challenge ahead. The existence of a cash buffer, though useful, is only a temporary means for refinancing State borrowing requirements, and would prove rather ineffective in the event of future shocks in international markets. By no means, therefore, can the cash buffer substitute for a return to the markets at regular intervals and on sustainable terms. – The high public debt-to-GDP ratio increases public and private sector borrowing costs and puts a drag on growth. Although Greece’s debt sustainability improved markedly with the measures adopted by the Eurogroup since 2012 and up, most recently, to June 2018, debt reduction ultimately hinges upon both achieving the fiscal targets and remaining committed to the reform effort so as to ensure robust GDP growth. – The maintenance of large primary surpluses over an extended period of time (3.5% of GDP annually until 2022 and 2.2% of GDP on average over the period 2023-2060), especially when accompanied by high taxation, weighs on growth and consequently on debt sustainability. – The high stock of non-performing loans (NPLs) on banks’ balance sheets hampers the financing of growth, as it ties up bank capital and financing resources in non-productive activities. The successful resolution of this problem is absolutely necessary in order to improve the quality of bank assets. This, in turn, would enhance the access of healthy entrepreneurship to bank credit. – The rate of unemployment remains not only high, but the highest across the European Union. High unemployment, in particular youth and long-term unemployment, gives rise to inequalities that threaten social cohesion, devalues human capital, saps away any motivation for better education and work, and feeds the brain drain. – Low structural competitiveness, with in fact a trend towards deteriorating. – The still negative rate of change in investment, considering the need to replenish Greece’s capital stock, especially in the wake of a protracted period of disinvestment. Moreover, continued underexecution of the Public Investment Programme holds back growth, as it reduces aggregate demand, leads to a deterioration of public infrastructure and increases businesses’ operating costs. – Insufficient domestic savings. The rise in nominal disposable income per capita, in particular in the lower income brackets, supported by employment growth especially among youth and workers with part-time and intermittent employment contracts, was chiefly channelled into consumption. Thus, the household saving rate has remained in negative territory. – Delays in the delivery of justice. According to the Enforcing Contracts Indicator used in the World Bank’s Doing Business report for 2019, compared to the OECD average, the time for trial and to enforce the judgment is three times longer in Greece, while the time for resolving insolvency is twice as long. Therefore, the rapid and fair settlement of legal disputes in a transparent and stable legal framework is crucial to strengthening the rule of law, thereby also improving investor confidence. – The quality of institutions and respect for independent authorities. Countries with weak institutions lack in flexibility and adaptability, making potential economic disturbances more likely to occur and more difficult to address. – Adverse demographic developments. Over the past decade, Greece’s demographics have deteriorated dramatically, as evidenced by the decline and rapid ageing of the population and a very low fertility rate. This trend in demographic data was further exacerbated by the recent wave of migration of part of the population of reproductive age. The demographic crisis is one of the most serious challenges that Greece’s society and economy will need to address in the immediate future, as the rapid contraction and ageing of the population adversely impacts potential output and the pace of economic growth in the medium-to-long term. – The slow digital transformation of the economy. According to the Digital Economy and Society Index (DESI), Greece ranked second to last among the EU28 in 2018, meaning that the digital transformation of the Greek economy remains slow. As a result, Greece is still considered ‘digitally immature’. Consequently, policy action must be taken to eliminate this technological lag and reduce digital illiteracy. – Climate Change and the challenge of sustainable development. Redefining the concept of growth in a sustainability context and embracing the principles of a circular economy will be crucial to our future. According to the World Economic Forum’s Global Risks Report for 2019, three of the top five risks for the world economy are environmental and all three relate to climate change.
PREREQUISITES FOR SUSTAINABLE GROWTH
Addressing the above challenges effectively will require, as a minimum, the following set of policy actions:
First, a continuation and completion of structural reforms, so as to safeguard the achievements made so far, reinforce the credibility of economic policy and further improve Greece’s credit standing, paving the way to a permanent return to international financial markets on sustainable terms. In this context, top priority must be given to reforms that enhance public administration efficiency, legal certainty, especially in land use, and the faster delivery of justice.
Second, reducing the high stock of non-performing loans, so as to free up funds for viable businesses, facilitate the restructuring of the business sector and strengthen healthy competition. Meanwhile, the legal framework reforms currently under way should improve payment morale.
Third, a change to the fiscal policy mix geared towards lowering the excessively high tax rates, further rationalising public expenditure and enhancing the Public Investment Programme. Ideally, this change should be combined with more realistic primary surplus targets, considering that, with public debt close to 170% of GDP, one additional percentage point increase in GDP contributes 1.7 times more towards reducing the public debt ratio than does one percentage point of primary surplus.
Fourth, greater focus on attracting foreign direct investment of high value added, which would accelerate technology integration, strengthen Greece’s export performance, utilise inactive human resources, thereby increasing total factor productivity. This presupposes a continuation of privatisations, along with an encouragement of public-private partnerships and a removal of disincentives to investors.
Fifth, strengthening the “knowledge triangle” (education, research, innovation). As shown by the latest global trends, in modern efforts to reconcile the functioning of a market economy, i.e. capitalism, with democracy, investing in knowledge and the access opportunities to knowledge for all are a crucial catalyst both for economic growth and for social justice. The Greek education system, despite producing a pool of highly-qualified individuals, fails to equip them with the skills required in today’s digital world. The new technologies can generate employment opportunities, provided that labour can rapidly adjust to a human-centred working environment, in which knowledge, skills, personal initiative, mobility, flexibility and cooperation will play a key role. Investing in human capital and fostering entrepreneurship are strategies crucial to the successful adjustment of the labour market. All levels of the education system must therefore be redesigned in order to cultivate the skills required by the modern labour market. Closer links between education and the production process will contribute towards this goal. *** 2019 will be a challenging year, as domestic and external risks remain. Therefore, there is no room for complacency. Greece’s successful course in new, post-crisis, European normality calls for strict commitment to uphold the very important achievements made so far, conduct a prudent economic policy aimed at eliminating the remaining imbalances and pursue reforms. The ultimate objective is to complete the Greek economy’s safe transition to a sustainable growth model based on extroversion, entrepreneurship, investment, knowledge and social cohesion, with social sensitivity and respect for the natural environment. The benefits to be reaped are substantial: a rapid decrease in the unemployment rate, a reversal of the brain drain, higher total productivity, higher wages and incomes.
Keynote speech by Mr Olli Rehn, Governor of the Bank of Finland, at the Conference on financial market policy, at the Economic Council (CDU Wirtschaftsrat Deutschland), Berlin, 29 January 2019.
As the euro turned twenty at the beginning of this year, it is logical to have a look at the two decades, and to prepare for the third decade of the monetary union that has now started. After all, it is our clarity of vision and sense of purpose, as Europeans, as citizens and decision-makers, which will determine how the future of the monetary union turns out.
In my remarks today, I will discuss the challenges the monetary policy makers face, with an eye on the future of the euro. I will not talk about monetary policy only in a narrow sense, as we need to discuss our monetary concerns in a broader context of economic and political developments.
In this context, let me quote Joseph Schumpeter, one of the greatest economists of all time, who wrote: “Der Zustand des Geldwesens eines Volkes ist ein Symptom aller seiner Zustände.” [“The condition of the monetary system of a nation is a symptom of all its conditions.”] – What Schumpeter said about a nation, goes today as well for Europe as a whole, for our Economic and Monetary Union. What happens to our money, is a reflection of the state of our union and its economy. So we have to take a broad view.
Monetary policy has its own mandate in economic life, but it cannot solve all the world’s problems. However, monetary policy and economic success are interdependent: price stability is a necessary condition, although not a guarantee, for sound economic development. Simultaneously, the real economy together with political developments determines the preconditions for successful monetary policy. As Schumpeter understood, if the economic and political fundamentals are weak, that will be felt in the monetary developments as well.
The interaction of real and monetary factors brings me to the following point: Central bankers are often labelled as either hawks or doves. I don’t see this as a very useful classification. It is almost a caricature of one-eyed dogmatism, not fitting to any serious central banker that I know of.
Instead, a more relevant distinction was made by the philosopher Isaiah Berlin, who divided policymakers to foxes and hedgehogs: “the fox knows many things and the hedgehog knows one big thing”.
In monetary policy, pursuing the price stability objective with long-term consistency and resolve calls for the central banker to develop a personality of the hedgehog.
But monetary policy is not a mechanical exercise that can be done in a social vacuum. A strategic sense of the interplay between the economy and politics, the markets and the media is also essential – knowing when to play offensive, when to hold on to defence, and how to combine the two. By being aware of the big picture, and capable to navigate in uncertain seas, central bankers should be foxes, as well.
So, monetary policy must always take into account the analysis of the prevailing situation in the real economy, in enterprises and the society at large, recognizing its challenges and how they relate to the commitment and responsibility that central banks have for monetary stability.
Our present starting point has both positive and negative features.
On the positive side, the recovery of the euro area after the financial crisis has lasted for almost six years now. We should appreciate the achievements: the number of jobs in the euro area has now passed the pre-crisis peak of 2008, and the unemployment rate is continuing to fall. Over 9 million jobs have been created since 2013. There has also been a significant improvement in public finances of the euro area as a whole, and also the bank balance sheets are now stronger than before.
On the negative side, the convergence of the euro area price developments to our price stability objective is incomplete. For that reason, we still face the challenge of euro normalization after a decade with non-standard measures. Hence, we continue to aim at stabilizing inflation back to the target of “below but close to 2 per cent in the medium term”, so that we would be able to ensure ourselves with “policy space”, and thus be able to react to deflationary as well as inflationary shocks, by moving our interest rates as needed.
Such policy space would require higher interest rates on average than today, which will be possible when the European economy can sustain a clearly higher real interest rate than now, or when we see sustained convergence of inflation to the ECB’s definition of price stability, or both.
The context has become more difficult recently. As you know, uncertainty about the future of the European recovery has increased in the last months – the risks to the growth outlook have moved to the downside. This is largely because of the weakening of the global economic cycle, which is felt in European exports, also in Germany. The shadow of global trade conflicts and protectionism is hanging over the European recovery.
Not all risks are external, however: political uncertainties within Europe have increased. A messy Brexit, the worries about Italian fiscal policy, and the recent French unrest, are among the sources of this uncertainty.
All in all, my analysis is that the current situation requires patience and persistence in removing the monetary policy accommodation. Perhaps paradoxically, this is necessary precisely in order to reach higher interest rates in the future in a durable way. If we were to tighten monetary policy too soon, the interest rate increases might turn out to be unsustainable, and we might end up being stuck back in the ultra-low interest rate situation for even longer time than otherwise.
Of course, we should not wait for too long either: an unnecessarily long period of inaction could trigger financial stability issues that the low interest rate environment may bring about, such over-indebtedness in some sectors; increases in real estate prices or other market segments; and the squeeze on banks’ interest rate margins.
And, of course, if we were to wait for too long, inflation might eventually accelerate too much, which would require applying the monetary policy brakes harder than otherwise would be necessary.
This patient approach is reflected in the current forward guidance of the ECB monetary policy, by which the interest rates will remain at the present levels as long as necessary to ensure the sustained convergence of inflation to levels consistent with our definition of price stability; and the reinvestment phase of our bond purchase programme will continue for an extended period beyond the first increases of the ECB policy rates.
Forward guidance has been a very important instrument in the ECB policy toolbox in the recent years. A key reason for having a clearly communicated strategy for monetary policy is the management of expectations of general price developments among economic actors. This is so on many grounds, not least because inflation expectations are the most important immediate determinant of actual inflation. The effect is so strong that it is often said that inflation expectations tend to be “self-fulfilling”.
Over the last five years, however, the connection between the ECB’s price stability objective and the expectations has been weaker than it should be. I have elsewhere previously expressed my view that it would be wise to make a thorough analytical review of the monetary policy strategy of the ECB, in order to strengthen our ability to stabilize the expectations, and to improve our accountability and transparency even further. I would like to reiterate this view also here.
As I pointed out at the beginning, monetary policy is not made in isolation from the rest of the economy. In particular, successful monetary policy needs financial stability and healthy economic fundamentals.
The most fundamental challenge has to do with the real economy – to revitalize investment and productivity in the euro area countries. The economic potential of our enterprises and workers must be unleashed and developed.
This is of paramount importance for the well-being of our citizens, but it is also absolutely crucial for solving the monetary and financial problems that we still have, even ten years after the financial crisis. The real interest rate that is sustainable in the long run is determined by the growth of productivity and the demand for investment in the European economy.
I would like to stress that the entrepreneurial drive and long-term orientation of the German Mittelstand sets an important example for the business life all across Europe, an example that could help to strengthen the foundations of European productivity and competitiveness.
Climate change is not only an existential threat to our planet but also reinforces the urgency of Europe’s economic renewal. The transition of our economies to sustainability calls for both right incentives and plenty of investment. And turning big time to renewable energy – which is going on in Finland, in Germany and all over Europe – is also a major opportunity for businesses, which has to be enabled by consistent public policy. The central banks in the Eurosystem are committed to climate policy and support the ongoing work for removing the obstacles holding back sustainable finance and the disclosure of climate-related risks.
Another structural challenge is to improve financial stability in the monetary union. The most critical lesson of the two past decades was how important financial stability is for real economy and employment. It has become clear that financial stability was grossly disregarded when the Economic and Monetary Union was created – it was the “neglected stepchild” of Maastricht, as the economist Daniel Gros has put it.
Going forward, there are several initiatives already on the table, including those by Germany, France, and the European Commission. In my view the manifesto of 14 German and French economists, published last year, is a particularly substantive and important contribution.
The manifesto proposed a synthesis uniting the core principles of “German” economic philosophy, which calls for a stability union with sound incentives and firm rules, and those of “French” economic thinking, which emphasizes economic governance with insurance and stabilization.
In essence, such genuinely European synthesis could pave the way for a solid stability union, where the main responsibility for economic policies should rest with the member states. This responsibility can and should be balanced with the insurance provided by stronger common structures, designed especially to safeguard financial stability.
For example, the European Council of last December decided to create a credible liquidity backstop for the Single Resolution Fund, to ensure that bank resolutions could be effectively managed without recourse to the politically damaging bail-outs at taxpayers’ expense.
Finalizing the banking union also calls for a common European Deposit Insurance Scheme to prevent cross-border bank runs that could be dangerously destabilizing for the banking systems.
These remaining elements require convincing measures of risk reduction and possibly some co-insurance features to be feasible politically. In particular, legacy problems in the banking sector should be worked out in the member states, without shifting the risks to the euro area level.
A further area where work is needed is in the governance of the fiscal policy of the member states. There has been tension between reliance on market discipline and budgetary rules. However, the dichotomy between rules and market discipline is overstated. Both are needed. At best, rules and market discipline support and complement each other.
The obvious lesson is that the institutions and incentives have to be designed so that they help orientate the market forces to meaningful directions – you may call it ‘market discipline by design’ – an idea that immediately brings to mind the economic thinking of Ludwig Erhard, the architect of the German social market economy.
So we need fiscal rules, and they should be well designed. The European Union fiscal framework can be amended to emphasise national ownership of fiscal rules and to avoid forced pro-cyclical fiscal policy.
This analysis of the institutional challenges brings us into the realm of democratic politics and the development of the EU as an organization.
The EU is a union of democratic states. It is the citizens’ preferences and trust that count when the future of the monetary union is decided.
Today, the Enlightenment values, which underpin the European societal model, are challenged, both politically and socially, both from the inside and the outside. Politically, a populist and nationalist agenda is tempting to many. Socially, the values of tolerance, social market economy and inclusivity are increasingly under threat.
On the other hand, let us recall that the Europeans value their single currency. According to a fresh Eurobarometer survey1, as many as 77 % of euro area citizens support the Monetary Union and the euro. This is the highest figure since 2004. Only 18 % of the citizens of the area say they are against. In Finland, the percentage of those “for” was even higher, altogether 80 per cent; in Germany as high as 83 %.
This support for the common currency is of course conditional. It depends on the stability of the euro and its performance. Moreover, in any member state, the support for the euro also depends on how successful the economic policy in that particular country is in adjusting the economy to the requirements of life within the monetary union.
There is a reason why eurozone reform is anything but a technical matter. It is linked to the overall future of the EU.
First and foremost, we need a monetary union that is capable of delivering on the promises made to our citizens – promises of financial stability, sustainable growth, and opportunity for employment.
As Joseph Schumpeter said, money is a reflection of the condition of our economy and our polity. Looking from that angle, reinforcing the monetary union is an integral part of a broader endeavour to strengthen Europe.
Ladies and Gentlemen,
This is of paramount importance especially today, when the international role of Europe as a key standard-bearer of democracy and the rules-based international order has become even more essential than it may have been some years ago.
For politicians, my message is: instead of using political energy for drawing red lines to agitate the home audience, we’d do better by pursuing positive goals of reform and focusing on building bridges across Europe.
A stronger Europe and a more stable monetary union are essential for both internal and external reasons. And these goals can, as in the football field, only be achieved in unity and by teamwork. This is a vision we can only achieve in dialogue and with support of the citizens of Europe.
Three important interest rate decision for the upcoming week: ECB – RBA – BAC
ECB interest rate decision. Thursday December 8th at 7:45 AM ET/1245 GMT. ECB is expected to keep their interest rates unchanged. However, they are expected to announce an extension of the QE program. Draghi will have his usual press conference starting at 8:30 AM ET,
RBA interest rate decision. Monday December 5 at 10:30 PM ET/Tuesday December 6 at 0330 GMT. The Reserve Bank of Australia is expected to keep the rates unchanged at 1.5%. There has been more chatter recently, that the RBA may look to tighten in 2017. The RBA last changed rates in July.
BOC interest rate decision. Wednesday, December 7th at 10 AM ET/1500 GMT. The Bank of Canada is expected to keep rates unchanged at 0.5%.
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Here is a list of important news coming up this week and forex traders must watch:
Monetary data: Monday, 9:00. According to the ECB, M3 Money Supply, or the amount of money in circulation, rose at an annual pace of 5%, and no change is expected. Private loans advanced at a rate of 1.8% and a rise to 1.9% is predicted. Both numbers have been stable of late.
Mario Draghi talks: Monday, 14:00. The President of the ECB testifies once again in Brussels. His previous comments were relatively dovish, and there is a good chance he repeats them now. Tension is growing towards the ECB’s decision in December.
German CPI: Tuesday: the German states release the data throughout the morning with the all-German figure at 13:00. Prices rose in Germany by 0.2% in October. We now get the preliminary numbers for November. The German numbers feed into the all-European figures and they will impact the ECB.
French Consumer Spending: Tuesday, 7:45.
Spanish CPI: Tuesday, 8:00. Spain suffered from one of the deepest levels of deflation but managed to return to price rises. It saw an annual advance of 0.7% back in October. We now get the preliminary data for November. A rise of 0.5% is projected.
German Retail Sales: Wednesday, 7:00. The volume of retail sales disappointed with a big drop of 1.4% in September. For the month of October, an increase of 1% is expected.
French CPI: Wednesday, 7:45. Hours before the all-European release, we get figures from the second largest economy.
German Unemployment Change: Wednesday, 8:55. Germany enjoys a rather consistent drop in the level of unemployment. The month of September saw a drop of 13K in the number of unemployed. A drop of 6K is estimated.
CPI: Wednesday, 10:00. This is the first estimate of euro-zone inflation for November, data that will be closely watched by the ECB in Frankfurt. In October, headline inflation rose by 0.5%, an improvement led by the diminishing effect of the fall in oil prices. However, core inflation remained stuck at 0.8%. Another tick up is predicted in headline CPI, to 0.6%, while core inflation is projected to remain unchanged.
Mario Draghi talks: Wednesday, 12:30. The President of the ECB will make a second appearance this week, this time in Madrid, where the future of Europe is on the agenda.
Manufacturing PMIs: Thursday: Spain at 8:15, Italy at 8:45, final French figure at 8:50, final German data at 8:55 and the final euro-zone data at 9:00. Back in October, Spain had a score of 53.3 points, above the 50 point threshold separating expansion from contraction. A score of 53.7 is expected now.. Italy had a lower score of 50.9 points and 51.4 is forecast now. The initial number for France stood at 51.5 points in November. Germany had 54.4 and the whole euro-zone at 53.7 points. These numbers will probably be confirmed now.
Unemployment Rate: Thursday, 10:00. The unemployment rate in the Euro-zone had a few great months, sliding from the highs, but afterward, it stalled. In September it reached 10%. A repeat is estimated now.
Spanish Unemployment Change: Friday, 8:00. Spain still has a very high unemployment rate and the monthly release of the change in unemployment is eyed. Back in October, Spain saw a rise of 44.7K. A drop of 25.8K is predicted.
PPI: Friday, 10:00. The Producer Price Index ticked up by 0.1% in September. These figures eventually reach consumers. A rise of 0.4% is on the cards.
The day after an ECB event is important. It gives traders an important clue about how strong any moves were and whether sentiment remains strong enough to keep those moves intact. Traders are reacting to the headlines after the announcement and the next day are assessing what they actually mean for the long term.
The facts: ECB is keeping it’s foot on the easing pedal, while the market is looking for Fed hikes in the months to come.
We believe that the parity in EUR/USD forex pair will come before the end of 2016, but it will be not because of a regular fundamental shift.
EUR/USD will hit parity because of the big “Jon Doe”.
After yesterday’s reaction we believe that the possibility of EUR/USD hitting the parity by the end of the year is 90%, less than our previous forecast which was 96%..
Short term traders should follow the trend, but longer term still have to keep their target in parity.