Despite the crisis in Greece, Axel Weber was in a good mood when he arrived for an interview. For UBS, the bank Mr. Weber has led since 2012, the situation is good – its share price has risen 25 percent in the last five years and Mr. Weber's strategy has been well received by capital markets, by customers and within the bank itself.
And the problems with the euro? He's warned about them for years – even resigned in 2011 from his position as head of the Bundesbank, Germany’s central bank, in protest at the European Central Bank’s first decision to buy the bonds of Greece and other embattled nations in the 19-nation currency area.
With Greece now facing a potential “Grexit,” and the ECB in danger of not getting paid back the money it lent Greece, his warnings that the ECB was going beyond its own mandate back in 2011 seem to have a ring of truth to them. Policymakers may listen to him more carefully than before.
Gabor Steingart: Professor Weber, you resigned as the president of the Bundesbank in 2011 because you no longer wanted to have a hand in the European Central Bank's policy of printing money. “We're buying time,” you were told. Four years and many billions of euros later, time has run out for Greece without any notable reforms to speak of. Do you feel satisfaction or bitterness?
Axel Weber: Neither! I don't tend to be emotional. But today it's become clear what I meant at the time. In May of 2010, as the largely unconditional purchase of government bonds began, the cornerstone of today's problem was laid. My recommendation was for the IMF to intervene as an independent authority for reform. Instead, Europe bought itself the illusion of prosperity.
Does that mean the ECB failed?
We can't solve the structural problems in Europe with monetary policy. In my estimation, there's been too much discussion about a debt haircut or the monetary policies of the central banks, and too little discussion about structural reform.
I was and am of the opinion that the ECB as a central bank is not in the position to solve these problems and that's not its assignment. In addition, the financial aid program should have only been implemented according to the rules of the IMF. The E.U. didn't even manage with the stability pact to sanction those who violated the rules.
But didn't everyone get burned in Greece and by those responsible there? The track record of the IMF as a partner of the European Central Bank and the E.U. Commission doesn't look much better.
The IMF wasn't alone at the steering wheel. But if you take a look at what the fund achieved in Mexico, Argentina, Turkey or Asia, the track record of success speaks for itself. The fund's approach has been tried and tested for decades.
First, the IMF produces an unvarnished analysis of the country's ability to shoulder debt. If this analysis is negative, then there's a debt haircut that the private sector also has to carry, though not alone. The whole approach is accompanied by an IMF loan with tough conditions. There was never the three-prong approach of monetary, fiscal and economic policy in Greece.
The Europeans wanted to demonstrate that they're in the position to solve their own problems. That hasn't succeeded. Why?
I wouldn't presume to make a judgment. Now we have to start work where it would have been sensible and necessary to begin much earlier. Structural reforms have to be placed in center focus – in the labor market, the tax system, the social programs and education policy. That would be much more promising than what's been attempted until now.
In Greece and elsewhere there are calls for more debt forgiveness. What do you make of that?
The word of the hour is reform. Monetary policy made its contribution. I don't think it's obligated to do any more. It's time for the policymakers to take responsibility. Greece needs reforms like the kind Germany implemented with its Agenda 2010.
There's little enthusiasm for reform among European governments. Isn't there a big danger that the ECB is buying time that nobody will use?
It makes sense to buy time with liquidity policy only if this time is used for reforms. The chance for reforms must be seized – right now. Monetary policy has created a favorable economic environment. Right now in Europe we are growing above our potential growth rate. What are we waiting for? We are waiting for the growth to become self-sustaining. But that won't happen without structural reforms. It's an illusion to buy additional growth for years on end with monetary policy.
The financial markets have been characterized by high volatility for weeks; there's still a lot of insecurity about how events will play out. You said that a Grexit, Greece leaving the currency union, would be a “negligible event.” Do you stand by that?
I was talking about UBS, the bank that I'm responsible for. The risks that we are directly exposed to are limited. At UBS we're talking about €9 million of country risk that would be jeopardized in the event of a Grexit.
But UBS is not on its own. Rather, it is part of a financial structure that could very well slide into disorder if there's a default. The budgets of all European states, the balance sheet of the ECB, and also the banks in Greece and France would be affected. For the German taxpayer alone we're talking about €90 billion that will be lost with the bat of an eye. A negligible event?
Like I said, I was speaking of the direct exposure of UBS in Greece. As for other effects, we can count on our stable foundation. That's been shown by the regular stress tests that we undergo internally and externally. These tests have simulated the simultaneous exit of five countries from the euro zone and the impact on the banks, companies and bonds of these countries.
Even in the most critical scenario that includes a lot of blowback, we have a capital ratio of considerably more than 10 percent. This is a reflection of how we reduced our risks and strengthened our capital base after the crisis.
Your capital ratio currently lies at...
13.7 percent. We're the best in our comparison group of banks.
Do you remember the discussion in America about Lehman Brothers in the days before the bankruptcy? The hectic phone calls between the stock market regulators, Wall Street bosses, Treasury Secretary Hank Paulson and President George W. Bush? The search for a buyer for the financially stricken bank was ultimately broken off because in the end the view prevailed that a bankruptcy would be manageable and one had to make an example. Today we know the kind of chain reaction that can come even from a small player in the market.
I'm not making a comparison. You can't ignore that a lot has happened since then. In the meantime, the big banks have increased their capital ratio tenfold on average.
All eyes are on ECB President Mario Draghi, the only true multinational actor on the European stage. What would your advice be to him?
As a matter of principle, I don't give former colleagues advice.
You're considered a sharp-tongued critic of near-zero interest rate policy. Are you advocating an interest rate hike in the euro zone?
No, the effect of low interest rates is indeed serious. But the Americans and the British are the only ones who find themselves in the fortunate position of raising interest rates.
It appears that calm has returned on the inflation front. Will it stay that way?
Former U.S. Federal Reserve Chairman Alan Greenspan recently described the inflated central bank balance sheets with the word “tinder” - the Federal Reserve's balance sheet is the equivalent of tinder, though it hasn't yet been ignited. I think this is a very good analogy. It makes clear that there could be an unexpected and rapid increase in the rate of inflation.
What would be the consequences for the financial markets?
The central banks would have to respond – and they would. Every correction in U.S. monetary policy has led to distortions in the past. Since the current period of low interest rates was a long one, the correction could be even stronger this time.
And what should stockholders and other investors do in order to prepare themselves for day X?
We should all keep an eye on inflation in order to anticipate a tightening in monetary policy. The outlook of the central banks suggests security for the markets, but we shouldn't expect their outlook to be perfect. If the so-called “forward guidance” proves false, the central bank will have to respond to stronger growth and rising price pressure, even if this leads to a market reaction.
In Europe, a change in interest rate policy doesn't seem to be on the horizon. Or is the impression deceiving?
What happened in the U.S. after three bond-buying programs is now happening in Europe. That means the returns on bonds are lower, so stocks have become more attractive. In my assessment, there won't be a reversal of trends in Europe before September of 2016.
But that also means savers are becoming poorer and the rich richer. Right?
It makes me worry that the channel of wealth in the current interest rate environment functions above all for those who are wealthy. All those who don't have an investment strategy could see their earnings suffer considerably. There's the danger that the guaranteed minimum interest rates for pensioners won't be reached because these monies are tied to the market for low-interest government bonds and investments. That could lead to a big disappointment.
Above all the social welfare state of the German kind will come under pressure?
That's it. The first pillar, the system financed through shared costs, doesn't really work correctly anymore because of our demography. Now it's become apparent that the second pillar also can't yield enough.
That means Germans will receive less and work longer in their old age?
Yes. The retirement age will be raised in the future simply because many people can no longer afford to go into retirement early. They will have to work longer because the contributions they invested in the pension system will not yield what they had hoped. Without structural reform, policymakers will produce distortions even though it's actually their job to avoid this.
The misery in the public sector stands in contrast to a private sector characterized by vitality. Company profits are rising and they are investing. The DAX companies as well as family-owned small and medium-sized businesses are present in every region of the world in order to balance out the weak growth on their home continents. Doesn't that give reason for confidence?
These accomplishments are considerable, but they alone are not responsible for the good results. Low oil prices are having an effect, and don't forget the stimulating effect of the weak euro for exports. If Germany's exchange rate had developed like the Swiss franc, a very strong currency in the shadow of the euro, then the success of the German export industry would perhaps be less pronounced. What's true is reforms like Chancellor Gerhard Schröder's Agenda 2010, which created an impetus for growth, appear to have been abandoned.
Why is Chancellor Merkel hesitant when it comes to the future strength of this country?
I can't make a judgment about that. And I'm also not an advisor of the German federal government. But I've always said that politicians and governments have to act when times are good. These are good times right now.
What can we learn from Switzerland?
In Switzerland, there's a very fundamental discussion about how more reforms should be advanced so that the Swiss economy, with its strong exchange rate, can live. There's been talk about further cost-cutting programs and increasing efficiency, about how the economy can better integrate itself into globalization. Switzerland's success proves the country right. It has an unemployment rate of 3 percent and government debt of just a little over 30 percent.
What do you see when you take a look at the U.S.?
Fundamentally, I see four factors that are decisive for economic success: Capital, labor, technology and energy. And when we observe the U.S., we see the most effective capital market in the world; we take note of an energy transformation which, thanks to the extraction of shale gas, offers cheap prices; we are astounded by technological leadership, not only in the digital economy; and we’re seeing a demographic development that in the next 10 years will remain positive. The U.S. is better off than us Europeans in all these areas and therefore has the better outlook.
Can it be that you are overestimating the importance of demography? Even a shrinking country that lets its capital work for it around the world can be prosperous. Germany represents a small fraction of the global population but has the most important automaker. Switzerland is tiny in terms of demographics and is home to the biggest wealth manager in the world, UBS. Haven't prosperity and the national labor reserve decoupled?
German policymakers certainly cannot be happy when large companies like Volkswagen primarily create jobs abroad. Wherever conditions don't develop positively, where they become an obstacle, companies will concentrate on other markets in order to share in the growth. And whoever believes that a missing demographic dynamic can be made up for by immigration is surely wrong.
...we're talking about global market allocation, not migration.
This business model of investing in the rest of the world has been consistently pursued by four big countries. Japan, China, Germany, and Switzerland. They're all net capital exporters that have invested all over the world and bring the returns home. The biggest debtor nations on the other hand are the U.S., Spain, Australia, Great Britain, France and Italy. Do the creditors get the face value including interest back on these investments? Or don't we find ourselves much more in a situation in which the debtor is advantaged?
Now you sound like former Chancellor Helmut Schmidt, who says Germany's large foreign surpluses no longer result in greater prosperity.
He's right, but it mostly has to do with the excessive growth of indebtedness around the world. And that doesn't mean I'm of the opinion that we should withdraw from the world. Financial services in particular can no longer be performed in other markets on a permanent basis solely from the home market. They have to be on location and work with the forces there. That's why the presence of UBS in the U.S. with 20,000 employees and with more than 7,000 in Asia is so important.
The stock markets have rewarded your strategy. While Deutsche Bank's stock fell by more than a third over the past five years, UBS increased its stock value by about 25 percent. After 10 years as Deutsche Bank's CEO, Josef Ackermann recommended you to the supervisory board as his successor. Would you be the better Deutsche Bank CEO?
I am responsible for 60,000 employees at UBS and our strategy has gained traction, but we still have a lot of plans and ambitious goals. My work doesn't allow me the time to concern myself with issues that other companies have.
But you're aware that Deutsche Bank changed its leadership?
I read about it in Handelsblatt. But believe me, my place is in Zurich.
Gabor Steingart is publisher of Handelsblatt and Handelsblatt Global Edition. To contact the author: [email protected]