Interview to Thanasis Koukakis
In an exclusive interview to the Sunday edition of To Vima, world-renowned Swiss banker and former CEO of Deutsche Bank Dr. Josef Ackermann talks for the first time about the February 2010 background discussions over a secret Franco-German plan providing financial support to Greece, just months before the country was locked out of the financial markets.
Mr. Ackermann, who was recently nominated as Chairman of Bank of Cyprus, confirms that he had proposed a plan that would help Greek government to buy time, initiate new reforms and set the country’s finances in order. The plan was dropped because Germany hesitated.
Mr. Ackermann also talks about aspects of policy concerning the future of the Greek economy. He argues that Greece should continue reforming the economy and the state and he puts special emphasis in promoting competition and tackling tax evasion. In addition, he comments over the recent monetary policy decisions of the ECB President Mario Draghi and expresses some thoughtful and important views over inequality that could cause a wider discussion over this sensitive issue.
On October 11, Dr. Ackermann will be in Greece, in the island of Samothraki in the Northern Aegean, where he is key-note speaker in the 5th Economic Forum of Thrace.
The late Theodoros Karatzas, one of the most prominent persons in Greece, who as far as I know was a friend of yours, referred 20 years ago to the ills of the Greek economy and said that the Greek state cannot meet the current needs because it hasn’t got enough representations of the contemporary world or imagination about the future.
First, would you like to share with us your opinion about Karatzas and, secondly, by generalising Karatzas’ old statement, do you share the view of those who argue that the crisis in USA and Europe is largely due to the lack of personalities capable to meet the challenges in an innovative way?
Theodoros Karatzas was a dear friend of mine and a wise man indeed. I personally cannot testify to a lack of expertise or creativity from the numerous encounters I had with Greeks. Quite to the contrary. I think the country’s main problem is a lack of trust in the state. The years of dictatorship Greece had to endure deepened the distance between its citizens and the state and negatively impacted the civic sense of shared responsibilities.
Three years ago you warned that Europe is entering a prolonged period of low growth, deleveraging and austerity. Your prediction was proved correct. However, you were also among those who argued that if we restore confidence in sovereign risk, conditions in the real economy will soon normalize. Although the conditions in the bond markets have been restored, private and public investment has been declining. Can you explain why?
Private investment is mainly inhibited by the low growth-prospects. That trumps all efforts to revive investment through reduced financing costs. In such a situation public investment can and ought to come into play. But that possibility is constrained by the ongoing need to reign in public deficits. That is for example the reason why EU member states have mandated the European Investment Bank to enhance its investment programs.
The banking union is considered a key ingredient for the integration of euro area. However, since the European Central Bank has announced the AQR- stress test program, lending capacity and liquidity have declined, fuelling deflationary pressures. Do you believe that the outcome was inevitable? Was the timing wrong?
The Banking Union is of crucial importance for the stability of the euro area’s architecture. Without it EU banks would have to operate under the doubt of their viability with severe consequences for economic activity. It is clear that higher capital requirements impair, in the short term, banks’ ability to expand their balance sheets. However, the deleveraging at banks in the euro area as part of the stress test program consisted mainly in reducing inter-bank lending, international exposures and the trading book, whereas corporate loans have generally declined only modestly and primarily in response to weak corporate activity. Banks with sound capital ratios can and do expand their balance sheets.
For many analysts, ECB’s, TLTRO’s and ABS repurchasing programmes’ impact on the real economy will be limited and ECB will be forced to take additional measures at a later stage. For example Greek banks’ borrowing is limited due to eligible collaterals. Do you believe that ECBs monetary policy decisions are in the right direction to achieve the objectives for prices? Do you perceive any other problems with the strategy followed? How likely is the adoption of a US-style quantitative easing (outright buying of government bonds) in the near future?
I agree that the recent measures announced by the ECB, in and by themselves, will only have a limited effect. But they are nevertheless important as a policy signal, confirming the ECB’s determination to safeguard against the risk of deflation. I do not envisage full US-style quantitative easing in Europe, because that would be politically very difficult. We are already seeing unprecedented monetary expansion by the ECB which has done its utmost using unconventional policy instruments within the confines of its mandate. Its arsenal is now exhausted and the onus is clearly on governments to carry out the necessary structural reforms in order to re-ignite private investment.
You are among the few opinion makers who very early and publicly claimed that financial markets now are very political and that political considerations have to play an important role. German Finance Minister Wolfgang Schaeuble said recently that the European Central Bank does not have the instruments to fight deflation and that monetary policy has run out of tools. In other words he seemed to say that using leverage to cure the problems of too much leverage is not the solution. Do you agree with this interpretation?
My remark at the time was an observation not a value judgment. I simply meant to say that, at the height of the debt crisis, prices in financial markets were driven more by political decisions than by economic data. I think this still holds true, especially if you look at unconventional monetary policies. The longer those policies last, however, the more we need to consider their side-effects. Today, central banks undoubtedly stand in the first line in the fight against deflation as that is a monetary phenomenon. But as important as their role is, there is only so much they can do. Monetary policy alone is unable to solve the problem. It needs to be supported by incentives to invest. And that means above all structural reforms which improve growth prospects.
German bankers and many European politicians and officials argue that confidence in the Eurozone will be restored through debt mutualization and issuance of Eurobonds. Would you adopt such an approach? Are there any alternatives?
Ultimately, the mutualisation of debt in the euro area will be an necessary element of a stable monetary union. Today it is not a realistic political option, however. What’s more: if ill-prepared and ill-designed it could be a source of more rather than less market tension. Painful structural reforms are needed either way.
Do you believe that the economic recovery in the United States justified Federal Reserve’s «lift-off» from its current accommodative monetary policy? Do you believe that 2015 will bring rate increases in the United States?
The exit from the unconventional monetary policies was always going to be a delicate exercise. Obviously, the Fed will continue to watch the recovery of the US economy carefully – also having in mind the geopolitical risks and their potential repercussions. Key parameters will be the level of unemployment, which is at a six-year low now – despite still unusually low growth. The Fed seems to have settled on lower secular productivity growth and a higher structural rate of unemployment in the US due to a decline in labour force participation. As a consequence, monetary policy should reverse at a somewhat higher rate of unemployment. Interest rates may therefore rise sooner than expected, in Q1 rather than Q2 next year already – and at a faster pace than currently anticipated.
It’s a sign of the times, but recently many express concerns about a potential reversal of globalization. Do you agree with those who argue that complexity from globalisation and highly networked economic life needs to be countered by simplicity in financial products? Do you agree with those who argue that economic life should be ultimately “definancialised”?
A reversal of globalisation appears possible, indeed. There is a serious risk that the whole international system, not just financial markets, will re-fragment. That would be a most unwelcome development. Globalisation certainly has its downsides, but its benefits outweigh them by far. Without it hundreds of millions of people would still live in absolute poverty. And as to more simplicity in financial products and de-financialisation of economic life: If companies struggle with heightened political risk, exchange rate volatility and uncertain supply structures, then the answer cannot be to forego opportunities in international markets, but to enable them to hedge these risks. Similarly, if consumers feel overpowered by uncertainty and worry about pension risk, we cannot leave them alone with that, but have to offer them financial solutions.
According to Greek officials involved in the political and economic developments of 2010, the ones that eventually led Greece to seek IMF’s support, have sited that the only realistic proposal to the country’s financial needs was given by you as head of Deutsche Bank. During February 2010, it has been said that you proposed to the former Prime Minister George Papandreou the purchasing of a 10-year Greek republic bonds by a banking consortium led by Deutsche Bank. Would you confirm the existence of the «project Ackerman»? If yes, could you tell us why it was finally abandon?
The project was meant to gain precious time and and to soften the sovereign debt crisis, not to prevent it altogether. And it involved the support of the German and French governments. After the bank bail-out still fresh in taxpayers minds and in view of upcoming important regional state elections the government in Berlin was unwilling to participate, though.
Greece enters the fifth year of the crisis having lost almost 25% of its GDP while unemployment reached 28%. The majority of people think that the stabilisation program doesn’t work. Many analysts say that the fragile Greek banking system, bankrupt social security and unsustainable levels of public debt (of the scale of 177% of GDP, despite the 2012 PSI restructuring), provide the answer why reforms and austerity have never really worked. Many believe that troika’s recipe is wrong because it has been excessively influenced by the decision to accommodate European political imperatives, ignoring the real needs of an economy in crisis that begged for an emergency, full and swift restructuring? Do you share that view?
Greece’s road to recovery is thorny: The downturn in the real economy has been dramatic indeed. But progress has been impressive as well: The country is on track to achieve a primary fiscal surplus this year, the current account has shown a surplus in 2013 already, rating agencies have upgraded Greece – though not yet to investment grade – and the country has regained access to capital markets. All this shows that decline can be reversed by national reforms combined with European solidarity to provide for the necessary time. Greece therefore must continue on that path. Reform is in its own best interest. A recent study by the OECD estimates that removing restrictions to competition in the Greek economy for example would bring a net gain of 5bn EUR to Greek consumers. And fighting tax evasion and rent-seeking contributes to a fairer society overall and more trust in the state.
The main aspects of the European crisis have been a) the slow decision making process (followed by slower implementation) in EU, EC, EP and ECB and b) the imposing role of Germany, whose policy is considered to have further fuelled the turbulence. Looking back to the Eurozone crisis what was the greater policy mistake: The fiscal austerity that hit domestic demand, the delayed restructuring of the Greek debt (PSI), the decisions of Deauville in 2010, the delayed reactions addressing deflationary pressures or something else? From your own perspective, is Eurozone an optimal monetary union? And finally do you believe that Eurozone needs a distinct Eurozone Parliament and a «super» Minister of Finance (Budget)?
It is clear that the crisis hit the euro area unprepared. Its institutions simply were not adequate. A lot has improved since then, however: With the ESM we now have an emergency financing mechanism. We have pan-European banking supervision and first steps have been taken towards pan-European rules for bank resolution and a corresponding financing mechanism. But that won’t suffice in the medium and long-term: In the end we need a further integrated Europe based on common institutions.
On Germany’s role, one has to be fair: The country earned its pivotal role in the sovereign-debt crisis by accident, not by design and certainly not by any design to dominate Europe. Germany had overcome its own long economic malaise just as everybody else was entering into one and therefore was the only strong country and the natural leader. It assumed this role only reluctantly, though. The German government had to do a difficult balancing act: It needed to simultaneously calm the financial markets, exert sufficient pressure on crisis countries to reform and convince a sceptical national electorate and Constitutional Court.
On balance, together with its European partners, Berlin did quite well, some mistakes here and there notwithstanding.
Euroscepticism is at an all time high. Many fellow Europeans believe that the negative aspect of the euro era policies – as evidence by the social problems that have surface lately -, outweigh the advantages that EU brings. Recent election results have partially showed that and the strengthening of separatist movements through out Europe have sowed that. Do you believe there is a political risk resulting from the long austerity, high unemployment and low growth in the EU? If yes would this be manageable?
Euro-scepticism ebbs and flows with economic prosperity. But what is worrying is how quickly national stereotypes and antagonisms, which we thought we had left behind, have re-surfaced recently. I think it is due to a general loss of confidence in a world that has rapidly changed and become ever more complex and difficult to understand. People feel overwhelmed and look for more simplicity and control. This is in my opinion the main reason behind nationalist and separatist movements and, incidentally, the religious extremism we’re seeing today.
So, yes, there is a serious problem here. The best answer I have to it so far is subsidiarity. To engineer supranational structures for those issues that require supranational solutions and at the same time ensure democratic self-determination and let local, regional and national bodies decide what they can decide best. Yet, that is easier said than done.
Following the previous question. We are evidencing a growing chasm between rich and poor at an international level. Many think-tanks warn that rising income inequality is weighing on global economic growth and fuelling political instability. In retrospect of the last 30 years what led to such imbalances? Could that pose a threat to capitalism? How the world our children would live in, in 20 years time, would look like?
I share those concerns about the rising inequality over the past decades, but I am somewhat more optimistic regarding the future. The tide seems to turn again if you look at the relative scarcities of labour and capital and to their prices. There is a global glut in savings which should keep real interest rates low for quite some time to come. On the other hand you’ll probably see a rise in real wages due to the aging of populations and the ensuing scarcity of labour in the industialized countries. Both developments should reduce income inequality in OECD countries which is at its highest level for the past half century at present.
Governments can support this turn of events by helping to improve the education and training of their national workforces.
You live in Switzerland, a country that ranks first in global competitiveness, global innovation and prosperity. By the same terms the rest of the Western world seems to fall behind the growing Asian economies. Many perceive that under the weight of demographic pressures and the industrial and technical deleveraging of Europe, the wider Western world will «bow down» to the East. How excessive could such a thesis be?
The rise of Asia, especially China, is a fact. Europe’s and the West’s role in world affairs on the other hand is declining. But that is no reason to despair. First, we experience a return to the historical norm of sorts. Second, while the relative power and wealth of Europe and the West declines, it can still benefit from the rise of Asia and remain prosperous in absolute terms. Third, to a large degree it is up to us how deep our relative decline will be. If we pool our power, if we build a truly united Europe and cooperate more closely with the US via such agreements as the TTIP presently under negotiation we will still be able continue to see eye to eye with the East.
Are you afraid that the growing tensions from Gaza and Ukraine to the waters between China and Japan, pushes the world towards a new era of conflict?
I think the dreams of a global era of eternal peace and prosperity many of us dreamed after 1990 have already evaporated. Here as well we see a return to the historical norm. The peace dividend is gone. We have to get used to see more conflict again and learn to deal with it in rational ways.
