Bank reforms The Good, the Bad and the ECB

The Spaniard José González-Páramo, a former board member of the European Central Bank, talks tough on banking unions, reviving Spain and ditching quantitative easing.
Banking union good, quantitative easing bad.

José González-Páramo was a member of the executive board of the European Central Bank, the financial authority that controls monetary policy for the euro zone and since November is the chief supervisor of the euro zone's banks, from 2004 to 2012. In 2013, he joined the executive board of Spanish bank BBVA, the third largest banking institution in the euro zone with a market value of €53 billion ($65.93 billion).

The bank established a German division 35 years ago and concentrates on corporate and investment banking in addition to the capital market business. Mr. González-Páramo, who was an economics professor and a member of Spain’s central bank before becoming a banker, is based in BBVA’s Frankfurt office. In this Handelsblatt interview, he offered some unique insights from a man who

Mr. González-Páramo, you have knowledge of both central banks and the private banking world. The ECB last month took responsibility for oversight of banks in the 18 euro zone countries, relegating the role of individual national central banks. Was it the right decision?

I am convinced that banking supervision should be situated very close to the central bank, simply so both sides share the same information. The financial crisis of 2008 has shown that countries where supervision is far removed from the central bank need much more time to identify problem banks.

You see no conflict of interest between monetary policy and banking supervision?

The ECB has set up a separate supervisory body for this.

But important issues like the liquidation of a bank are still decided by the ECB's Governing Council?

That’s right. As I said, I have much more trust in a system where supervisors and central banks are working closely together, but with separate entities.

Many new measures have been introduced at the ECB since you left two years ago. Has the creativity of its president, Mario Draghi, surprised you?

In reality, the ECB didn’t invent many of these measures. But when the final political decision was made that the euro was irreversible, Mr. Draghi did come up with something original - the program of purchasing sovereign bonds (OMT) to fend off speculation against the euro.

Mr. Draghi is currently hinting that the ECB could purchase massive amounts of sovereign bonds, an unconventional stimulus method known as quantitative easing (QE). Will this happen?

I hope not because all unconventional methods have one thing in common: Getting into them is easy, getting out of them is hard. And there are always undesirable side effects. But, if the present means are not enough to anchor inflation expectations, the ECB will use all its means.

There is now strong opposition to QE in the ECB council, mainly from Jens Weidmann, the president of the German central bank, the Bundesbank. Is a monetary policy that runs counter to the will of the largest economy in Europe conceivable in the long run? Don’t the disputes damage credibility?

You can turn the question around. Is it good for the ECB’s credibility when it makes monetary policies to suit the Bundesbank against the will of the rest of the ECB council?

Central bankers accuse Mr. Draghi of being a dictator, such as when he announced balance sheet targets without prior discussion. . .

I don’t see it that way. Mr. Draghi is the speaker of the council. And he has since shown that the council stands behind his announced balance sheet targets. When differences of opinion are waged publicly, we weaken the central bank.

The ECB has played a strong political role. Its former president, Jean-Claude Trichet, even wrote threatening letters to the Italian and Irish governments.

That was an atypical situation for the ECB. And I don’t believe that Mr. Trichet gladly signed those letters. By statute, the ECB cannot lend money to banks that are insolvent. Sometimes the ECB has to point out a problem to those who are politically responsible for it, which was the case with Ireland.

ECB interest rates and balance sheet-01

In your view, what has to happen to overcome the current crisis?

We have to make clear where we want to go institutionally in Europe. The banking union was certainly a decisive step in the right direction. What it still needs is a final safeguard, in other words, a type of backstop.

Europe doesn’t seem capable of adhering to the European Fiscal Compact (a set of rules placed on euro zone countries to control, for example, deficits). France didn’t meet its budget targets again and doesn’t fear any consequences. Should the country be punished?

France signed the pact like the others and must keep exactly to the rules. We have to learn from the mistakes of the past.

Spain is now considered the country that best handles reform. Its policies demonstrate that German-style austerity can work. Is that a fair assessment?

When a country is over-indebted, and when that country has lost the confidence of the financial markets, there is no other solution than to consolidate. It doesn’t make a difference whether German Chancellor Angela Merkel says it or not.

But Spain has been unable to lower its 25-percent unemployment rate. What more should the government do?

We can’t stop reforming. Unemployment is being reduced slowly and, compared to other countries, the number of temporary workers is very high.

Does that mean Spain needs a deflationary development to become competitive again?

No, I would be careful with that term. Deflation means a sustained decline of prices on all fronts, with all its dangerous implications. I would speak of disinflation, meaning an adjustment of prices that increases competitiveness.

Spain also has spectacular cases of corruption.

Corruption is a major problem. Where there is corruption, there is less growth. But I believe there has been a change here too.

Spain’s banks ignored warning of the country’s property boom in the mid-2000s. What went wrong?

The Banco de España had been constantly warning since 2002 that real estate was being overvalued by up to 35 percent, but Spaniards just couldn’t imagine prices could sink.

And didn’t the banks apparently think that way, too?

No, the experts knew, but no one had the power to apply the brakes and slow the process. It isn’t that the central bank didn’t do anything; it just wasn’t enough.

 

Jens Münchrath leads Handelsblatt's coverage of economics and monetary policy. To contact the author: [email protected]