In an interview with Handelsblatt publisher Gabor Steingart at the Handelsblatt Banking Summit, UBS Chairman and former German central bank governor Axel Weber lashed out at the European Central Bank, warning that monetary policy had deteriorated into a "repair shop" for governments and financial markets. Here's the full-text of his forthright remarks in the wide-ranging interview.
Handelsblatt: Mr. Weber, you were one of the early critics of ultra-lax monetary policy. Your views have now become much more widespread. The policy of cheap money is counterproductive, hurts savers while rewarding debtors and creates new risks. Why doesn't the world learn from its mistakes?
Axel Weber: I think financial markets are basically very well adapted to estimating risks and probabilities. However, when it comes to extremely unpredictable events like Brexit, or the long-term effects of short-term policy, the financial markets struggle to react rationally. We're currently seeing this every day.
But what about the operators behind what we refer to in abstract terms as the markets - the central bankers, politicians, financial experts. A monetary policy is being implemented here, against better judgment, that is failing to achieve its targets - inflation at 2 percent, growth, stimulus for reform.
All operators in the financial markets have a far too short-sighted focus today and I no longer exclude the central banks from that. Monetary policy has very strongly deteriorated into a repair shop for the state and financial markets. Central banks have reached the point where they’re only attempting to solve the problems that are directly in front of them. We can see this from the intensive discussions about whether the U.S. central bank, the Fed, should raise interest rates by a quarter of a percentage point this year or not. I think we need to look at this short-term debate under the adage of "one big step for the Fed, one small step for mankind."
We're living in a world of hypercomplexity and disruption. Are market operators even able to make rational decisions in a world that is partly irrational?
The market itself is complex. Banks and financial markets have divided themselves up into such small subsegments and have become so specialized that operators no longer have an overview of everything that's going on. What banks and central banks need is a refocusing on the big picture and the major trends. As the world's biggest asset manager, UBS looks after a lot of customers, for example, who we know very well are not concerned about attractive returns in the next two or three months, but about protecting their assets for the next generation.
But small investors have the same concerns in principle. Their survival depends on obtaining adequate returns over the next few decades to fund their retirement.
That's true, and there's also a second factor. In a world of zero or negative interest rates, monetary policy only works via its influence on the capital markets or the exchange rate, meaning indirectly. That's why it requires ever larger operations by the central banks to achieve the same effect as in the days when monetary policy still worked via the interest rate channel or the credit channel.
In the United States, the stock market grew by 20 percent per year over three years during the Fed's bond-buying program. That can't be sustainable in the current growth climate. Axel Weber, UBS Chairman
That's why central banks are using strong words so often today - "whatever it takes" - because their actual weapon, interest rate policy, has become blunted.
That's true, when interest rates reach zero the sword becomes blunt. We can also see this from the fact that interest rate cuts used to benefit all market participants. Nowadays monetary policy only reaches some players, mainly financial investors.
You'll have to explain that to us. Who is reached and who isn't?
If you implement a capital market-oriented monetary policy today and try to influence the prices of assets in a targeted way, you will cause a stock market boom that has been induced by monetary policy, which will benefit those who have invested in shares. However, that won't affect the wider population in Germany, because savings accounts are still widely used here and even long-term government bonds will have negative or zero returns.
And even for those operators who are reached, the effect is dubious. Or, to put it in concrete terms: Is this stock market boom that the central bank has triggered actually based on capital growth, or isn't it all just castles in the air?
These days capital markets more strongly reflect monetary policy, whereas previously they were more a reflection of the real economy. If you look at the long period of zero interest rate policy in the United States, it actually wasn't good economic news that caused share prices to rise, but expansionary monetary policy. This development entails big risks, I don’t need to explain that any further.
That's why virtually no analysts are visiting factories or looking at production any more. All eyes are on the Fed and the European Central Bank. The market doesn’t develop, it is being made.
It would be a mistake by analysts if they actually acted that way. If they really want to advise customers, they need to go to companies and look very closely at their products and strategies. The upturn in the stock market is built on sand if it isn’t driven by fundamental data.
Like Wall Street, for example.
In the United States, the stock market grew by 20 percent per year over three years during the Fed's bond-buying program. That can't be sustainable in the current growth climate. We can see from the correction at the start of this year that prices will fall as soon as there is a threat of a stricter monetary policy.
I don't think monetary policy should still be geared towards the growth rates that were being achieved 10 years ago, and I don’t think we should be attempting to achieve them through monetary policy.
Another point is that companies are using cheap money to buy back their own shares. Fifty years ago, companies used 2 to 3 percent of their profits for share buyback programs, now some corporations are actually borrowing money so that they can spend more than they have earned on buybacks. What do you think of that?
Share buyback programs can certainly be a reasonable strategy if they are used in a very targeted way. The alternative would be a payout to shareholders…
…or an investment in the future!
Yes, at UBS we operate a sustainable dividend policy. We want to continue paying out at least half of our profits to shareholders. Particularly when interest rates are low, a reliable dividend policy has become a key benchmark of investments for many investors such as pension funds and insurers. I think that is a very sensible focus.
Monetary policy attempts to stimulate growth, which isn't really working any more, at least not in Europe. Why not?
I don't think monetary policy should still be geared towards the growth rates that were being achieved 10 years ago, and I don’t think we should be attempting to achieve them through monetary policy. Monetary policy simply can't afford to do that, in view of demographic change. Europe should do more here in terms of structural reforms and fiscal policy. In other words, political leaders need to get involved.
There is a Juncker plan, which involves investing billions in infrastructure.
Yes, but the whole thing still only really exists on paper and hasn’t properly got going. As a reminder, 10 years ago the European Commission was talking about becoming the leading technological region in the world with the Lisbon Agenda.
Not much came of that. The world's leading technological region is Silicon Valley.
When I visit our UBS office in San Francisco, the major tech companies are within a 150-mile radius. We Europeans will only be able to keep up in this race if we invest in technological innovation, but also in the infrastructure that makes these innovations possible in the first place. But there are certainly also developments that make me optimistic.
The European Commission devotes a lot of attention to recognizing risks but not to averting them. Important initiatives like the Lisbon Treaty gain headlines, but the promises aren’t even kept in the end…
…because the European Commission doesn't have the authority to do that. The only two areas of competence that have been delegated to Europe are the monetary policy of the European Central Bank and the common competition policy.
We won’t get back control there if we regard the European Union as part of the problem. It's part of the solution.
At the same time, we're seeing the rise of populism: in Switzerland, in Austria, in France. We’re not talking about minority phenomena here: the Alternative for Germany party is polling ahead of Chancellor Angela Merkel’s Christian Democrats in the run-up to the Mecklenburg Western Pomerania state election on September 4. Is this linked to the issues we've been discussing here?
Of course it plays a part. Think about the catchy slogan used by the Brexit campaign in Britain: Let's take back control. That kind of thing sounds good to every voter. The campaign built up E.U. bureaucracy as the straw man of globalization and then flogged it. But the British won't get back control by leaving the European Union.
So how can they get it back?
What actually drives policy in many of our countries is global trends: migration flows or global trade flows and the agreements needed for them, such as TTIP. And we won’t get back control there if we regard the European Union as part of the problem. It's part of the solution. I think that European countries should exercise a lot more powers jointly within the European Union. On the other hand, those that don’t want the euro and regard themselves more as a member of a trade or mobility zone need fewer binding regulations. That should also be possible.
So you're advocating not just a two-speed Europe, but a multi-speed Europe?
Yes, variable geometry, multiple speeds and more contractual arrangements. I think that to have a functioning European core we need more European powers, going as far as a banking and capital markets union. But the preconditions for this are currently poor. A European capital markets union without Britain would be difficult. After the financial crisis, London overtook New York as the number one capital market. If the British leave the European Union now, the European capital market will to a certain extent be outside the European Union. The British often talk about the Continent being cut off when there's fog in the Channel. This image happens to be true regarding the capital market: When London leaves the European Union, the Union will take a long time to form a capital market with uncertain prospects of success.
Some people here in Frankfurt believe they now have a chance. On Wednesday we were encouraged by Friedrich Merz, the supervisory board chairman of fund management firm Blackrock’s German operations, to regard Brexit as an opportunity. Is it?
It's an opportunity that a great many cities are seeing: Rome, Paris, Madrid and Frankfurt. But I see a risk in that. If a European competition erupts here, the global financial market could move to other regions. I think the British will recognize that their future will depend on the existence of the London City financial district and they will do a lot to maintain this supremacy. When Britain leaves the European Union, London will have much more room for maneuver, for example in taxation. “
That sounds very pessimistic.
It's highly likely that financial centers like London, New York, Mumbai and Zurich will benefit. Globally operating banks can pass their books on around the world throughout the trading day without the European Union playing a significant role. We only have to process transactions in the euro zone, for which we need the so-called European passport. But this passport isn’t required for a large proportion of institutional business, you can do that in any country where you are represented.
Gabor Steingart is Publisher and CEO of Handelsblatt and Handelsblatt Global Edition. To contact the author: [email protected]