Robert Holzmann (72) has been Governor of the Oesterreichische Nationalbank since September 2019. The economist, who worked for a long time at the World Bank in Washington, also has a seat on the Council of the European Central Bank (ECB) in Frankfurt, where monetary policy decisions for the euro area are made. The monetary authorities not only have to steer through the devastation of the pandemic, but should also take on a role in the fight against climate change.
“Wiener Zeitung”: The ECB and the US Federal Reserve are the main players in a one-off monetary policy experiment, but nobody knows whether it will turn out well. How do you answer those who fear for the stability of their currency?
Robert Holzmann: The greatest security lies in the very good governance structure. Both the ECB and the Fed not only support their decisions with extensive empirical analyzes, but also make them with a keen sense of the right timing. But I am happy to admit that when it comes to such large amounts, it is almost imperative that you carefully consider every decision. At the same time, there was no alternative to the path taken by the central banks. The reason for the beginning of “quantitative easing” is – and this is still the case today – that the equilibrium interest rate (this is the interest rate at which supply and demand balance or an economic equilibrium occurs; Note) has been falling for a long time and is now close to and sometimes below zero. That requires adjusting monetary policy, either by lowering interest rates below zero or by buying stocks to support the economy. Both are processes that are, to a certain extent, new to everyone, even if we have already been able to gather experience in the past few years about the effectiveness of unconventional monetary policy. It is therefore important to observe and control the consequences very closely. And that’s what we do at the ECB.
For the consequences, however, the central banks are also dependent on politics. In the wake of the financial crisis, the aim of the ECB was to buy the governments time for necessary structural reforms, but politics did not deliver. Now the challenges are even greater: What happens if politics again only uses the opportunity for debts, which is favorable thanks to zero interest rates, without tackling reforms?
I don’t see it that badly. Compared to the situation of the great financial crisis of 2008/9, Europe’s financial system is now much more stable. Where we are lagging behind is in the area of structural change in our economy, although here the pandemic is certainly contributing to faster digitization. It is also correct that productivity in individual regions of the eurozone has not developed as necessary.
Do you mean Italy and other southern European countries?
For example. But there is also hope here, not only through the resources of the EU reconstruction fund, but also because of the guidelines on how this money must be used. With Mario Draghi, a proven financial expert and ex-President of the ECB is now at the top of the government in Italy, which gives cause for confidence.
The policy of the central banks has resulted in money no longer having a price. However, this lacks a crucial point of orientation in order to direct investments to where they generate the greatest economic benefit. But states and companies have got used to cheap money. How does the ECB intend to change that?
That is a crucial question. As long as the equilibrium interest rate is below zero, an early rate hike would weaken the economy. It is therefore important to create a new start-up period in which new technologies and investments trigger a boost in productivity. The possibilities for this exist; digitization and the need for an ecological restructuring of the economy are of central importance. The second option we have as aging societies is to keep the elderly in the labor market longer. This, too, is a way to get to a higher equilibrium interest rate and relieve the public finances. Both are necessary, but are outside the competence and responsibility of the ECB.
Because there is the impression that unlimited money is now available, demands are pouring down on the ECB from all sides: to expand the welfare state, to cushion the negative consequences of digitization, to finance climate protection. How does the ECB deal with these expectations?
By making it clear where the tasks of politics and where the limits of the ECB mandate lie and communicating this clearly. The German constitutional court in Karlsruhe has also emphasized that the ECB has to act within the framework of the EU treaties.
Are you happy that there are judges in Karlsruhe?
“Happy” may be the wrong word, but the rulings are serious and the ECB has responded accordingly.
Christine Lagarde says that the ECB, like all organizations, is called upon to help protect the climate. What can and what should the ECB do?
We discussed this in an initial meeting two weeks ago as part of our strategy review process. In essence, it is about two questions: Which climate-damaging consequences influence the policy of the ECB? This could affect inflation on the one hand and the risks on the financial markets on the other. Such connections actually exist. The second question is about the ECB’s options for action. From my point of view, it should be noted that when it comes to climate change, it is politicians who bear first responsibility. So when it comes to the fact that we have too much CO2 emitting is the best way for economists to do this via a CO2-Tax tax in the long term. But we also have to keep an eye on the effects of all measures on the financial markets. In summary, this means that the ECB is not in the driver’s seat when it comes to climate protection, but we will support this necessary structural change constructively.
Should the ECB only or preferentially buy bonds from “green” companies in the future?
For assets in our portfolios that do not serve monetary policy, such as pension funds, we have already set up a mechanism with clear criteria that is also being further developed. With “monetary” assets like corporate bonds, more discussion is needed because the distinction between “green” and “brown” assets is sometimes not as straightforward as it seems. If, for example, a large oil company is now investing in order to become “greener”, this should not be made more difficult. So we first have to better understand how such mechanisms work. But we’re not that far yet.
In the USA there is growing concern that the inflation rate will be too high. Does that also apply to the euro area?
Once the pandemic is over, there will probably be a surge in growth in Europe in autumn, if only because of the catch-up effects. Irrespective of this, the question arises whether this could jeopardize the medium-term goal of an inflation rate of around 2 percent. Our aim is to keep inflation expectations in line with our medium-term goal of price stability. Ultimately, that is also a question of our credibility.
So first rate hikes in 2022?
An exit from the previous monetary policy will one day be part of the discussions. Whether, when and how we will discuss, this applies to the USA as well as to the euro area after we have overcome the pandemic. Personally, I consider an interest rate at or even below zero to be an exception.