 Morning, good afternoon, depending on where you are. I'm sitting in Dublin. This is the Institute of International and European Affairs, another webinar. And today we have the privilege and pleasure of hosting Eve Merch. And I'm going to have a conversation with Eve. Eve is, as you all know, he's a member of the executive board of the European Central Bank. And in that capacity, he is vice chair of the supervisory board of the single supervisory mechanism of the ECB. So we're going to have a discussion this afternoon. It's going to be on the record. You have the opportunity to use the Q&A function to call in some questions. So when we've sort of run out of our discussion, we'll give you some time to have your questions. I'll pitch some of the questions that we get to Eve and continue in that way. Eve Merch, of course, I've known Eve for many years. And we're almost exactly the same age. So I don't have to tell you how old he is or how old I am, but we're almost exactly the same age we were born right just a few days apart. Eve's a completely different academic background to my own as an economist. He is a lawyer and he studied, took several degrees at the Sorbonne in Paris, even though he's a Luxembourger. I think, I always think of Luxembourg as having a foot on both sides of the Franco-German axis around which the euro was constructed. Eve had a very distinguished career in the public service in Luxembourg. He was in the Ministry of Finance. He was seconded for a couple of years at the IMF. He was also seconded to in the role of permanent representation of Luxembourg at the United Nations. Eventually, he became director of the Treasury. That was 1899 to 98. And then the central bank of Luxembourg was set up in order to make sure that Luxembourg as a founder member of the euro area, the euro system would have representation at the governing council because every member of the euro should have a central bank. So the central bank of Luxembourg was set up in 1998. Eve was the first governor. And he's been on the governing council of the ECB ever since. So he's the longest serving member of the governing council in two capacities. First, in 1998 to 2012 as governor of the central bank of Luxembourg. And then he was appointed to the executive board in 2012. And if you count around 2020, and that means his term is coming to an end in just a couple of months. So after outliving all other members of the governing council, nobody has gone close to being on the governing council for 22 years. So he has an unrivaled experience and background of everything that has happened at the European central bank over the years. Since 2019, he took over from Sabine Lautenschläger as vice chair of the supervisory board, as I mentioned. So a special interest and involvement there in bank supervision. Eve, welcome to the institute. And thank you for agreeing to come and discuss various topics with me. We talked about what we might talk about and just to give people an idea of the topics that we'll probably touch on. Of course, we start with the COVID with the monetary policy reaction of the ECB in handling the impact of the COVID-19 crisis and fostering recovery of the Euro area. One of those techniques was an additional wave of public sector bond purchases in the pandemic emergency purchase program. But more generally, our second topic, I think would be to look at the public sector purchase program, which has been in effect since 2015. And to talk about the whole question of whether this is a proportional response to the challenges of maintaining inflation on the target path for the ECB, a matter which has become the subject of a considerable legal debate over the last number of years. Then I'm gonna move on to another topic, which is becoming very current. So the whole question of technology and the disruptive effect of technology on banking, particularly in the payments area and the whole question of whether central banks and European central bank in particular should think of having a digital currency, a Euro digital currency. We talk about that area. And then finally, I think we would like to talk a bit about whole question of bankers and the personal responsibility of bankers in improving their performance in relation to their customers in relation to society at large and what can be done to improve that. So monetary policy in the pandemic, Eve, what was it like when this crisis emerged even more rapidly than the previous crisis in 2008 and engulfed the economy or economies of the Euro area very suddenly in March. And there were fireworks in the financial markets. What was it like deciding on the reaction of the ECB at that stage to this crisis and stepping up to the plate? Well, first of all, Patrick, thank you for having me with the Institute. I greatly appreciate it. It is not the first time. I think the last time I have been with the Institute, we were still fellow governors on the governing council so a long time ago. But as you just said that we are not far apart with our birthdays, let me also present to you a happy birthday. But let me come to your first question. We had to some extent gathered already experience with a sudden crisis in 2008 and 2011 which to some extent were also not only a cyclical reversal but they were coupled with a structural evolution and crisis. And we were also experiencing how monetary policy would be much more efficient if it would be able to interact with other policy areas be it supervisory or regulatory policy for the banking sector, for maintaining the intermediation of the banking system in the economy but also above all fiscal policy. And at the beginning of the crisis the biggest concern was that we would have market seizures. So the obvious reaction function of central banker is to flood the market with liquidity and that is exactly what we did. But at the same time we also were able to interact actively with the national level to start fiscal policy programs and they became very important especially in the dimension of extending moratorial payment systems and also on giving public guarantees. But on top we were this time able at European level to also have a European wide reaction on the fiscal side. And that is the first. And that was so important in creating confidence that it also contributed to the stabilization attempt of the central bank in the markets. We were quite successful in stabilizing and freezing to some extent the economy by bringing forward not only asset purchase programs but also by extending new long-term credit operations which gave money at very favorable rates to those banks who landed on to the economy. And as a consequence, what would have been a very pro-cyclic reaction by the banks to stop lending was avoided. And we had record credit extension and also in demand for credit lines and liquidity lines from the corporate sector above all and this helped to stabilize the market. Then came the second phase and the second phase is of course still ongoing because we on the health front we have now moved into the threat of a very broad-based second wave but we have also learned our lessons how to react to such a pandemic and as opposed to the first broad-based lockdowns which were extremely taxing on the economy and which provoked a downfall of the economy which was extremely large but subsequently also a rebound which was quite strong but a rebound which is not yet bringing us back to the levels where we had been. So by and large I would say this time around what was different from previous crisis was that the monetary policy was not only the only game in town but was much more reinforced by the collaborative efforts from the supervisory side, from the regulatory side, from the fiscal side and also the broad-based approach in the use in our instrument box which has been anyway quite large. Interest rates were already very low going into this particular crisis normally if you have a crisis with a sudden shock loss of demand central banks usually reach to lower interest rates to stimulate demand and this in a way wasn't immediately available to you but now the actions of the ECB do seem to have reassured markets right across the Euro area that interest rates will remain low for a protracted period to what extent do you think that this low interest rate environment is something that has been generated by central banks like the ECB and to what extent do you see it really more as a longer term trend pushed by demography, pushed by changes in saving behavior pushed by concentration in wealth in different places. Inevitably, I think there is an element of truth in both interpretations it is true that through central bank intervention and especially since we do not concentrate our activity only to the very short-term level of the markets but through the whole spectrum we have been exercising downward pressures on the whole yield curve and thereby also affecting the expectations but by and large it remains that interest rates always reflect the natural rate in an economy and which is subject to longer term structural effects and in all our advanced economies the natural rate has been down trending over the last couple of decades and this is a trend that has to do with structural demographic factors the aging of a society with lower productivity this might also have to do with globalization all this has affected the lower levels of inflation but was reinforced by also the action of central banks which determinedly wanted to put the inflation rate down as an instrument level this being said we however have been very daring at the ECB in going into negative territory which has not been done all over the world and the question then begs what is the effective lower bound and this effective lower bound of course has also to do with the reversal rate from what level on is going further negative creating a reverse effect by not inducing people to spend but rather inducing them to save even more and not spending so these are of course questions which are very hotly debated among economists there is no clear cut answer on this but we still have the instrument of the interest rate in our toolbox and it is available and each time we take a decision and we look at our toolbox and we look at what would be the instrument that would be most conducive to respond to what we would like to do and it was in looking at our toolbox that we came to the conclusion that we left the interest rate at the level it was but we complemented it with an expanded asset purchase programme as you know the asset purchase is not exactly with us since 2013 because we had suspended it at one moment then of course when the crisis struck it was again resumed so we complemented also this purchase programme with a specific pandemic programme which was also specified for the pandemic in so far that it had an increased amount of flexibility compared to the constraints with which we had surrounded our discretion for the normal asset purchasing programme then we had also a smaller landing on Teltrow as I mentioned before was extremely large we are in the trillions of euros that were extended to the banks with an obligation to lend on to the economy and we found that these instruments have been extremely effective in combating the uncertainty that was ambient and with the risks that were threatening our economy and which would be a much deeper downfall with much more tentative recovery than what we have seen in the figures up to now One of the elements there that you touched on is the kind of tiering of interest rates for those bank lending operations which is something new this time round the interest rates have been negative at least the deposit rate had been negative for quite a few years since I guess 2014 or it had been zero 2014 but now there's a tiering where the banks are allowed to borrow at an even lower rate than they would normally have expected given the structure how is that working out is that an attempt to enable the banks to continue an operation and be viable and profitable despite the fact that negative interest rates are very damaging normally for a bank's profitability There are two elements to this tiering One is the outright tiering where one share of the bank's reserves would be exempt from the negative interest rate or deposit rate that we would have if they would deposit their funds with the central bank a certain amount would be exempt from the negative rates That is the outright tiering and that was also introduced in order to alleviate the concerns in the banking sector for having downward pressure on the net interest rate margin but then what has been in my opinion more effective is the normal conditions of our long-term operations where we allow the banks to borrow at even lower than our normal deposit facility under the condition however that they do not re-deposit the banks with the central bank but lend it on to the economy This is to some extent the conditional lending and I think in that respect it has even been more and there I would say the objective was less to support the profitability of the banks also it is very helpful for banks' profitability I do not deny it It was more to be sure that we would not have a credit crunch and that the flow of credit to the economy would be maintained in difficult times And I think this is really for lending to business it's not for lending on residential mortgages which is a point that people often notice It is true although it is very difficult to control where the money is lending I do not deny that if we have had also during these difficult times a certain increase in stock prices and in real estate prices somehow money has also must have been flowing into those sectors and whether those money has been flowing exclusively outside the banking sector would be a little bit difficult to imagine You mentioned the purchase programs in their two varieties the original program which was slowed down and then the new program Now it was the original program, the PSPP which was the subject of the Constitutional Court in Germany finding earlier in the year that they concluded that the ECB really hadn't fully explained or justified them or at least they called on the ECB in some way to fully justify the proportionality of this measure in response to the period of low inflation Do you think that an ECB has made responses or at least the Bundesbank drawing on the ECB's work has made responses to the various German authorities explaining why this program is proportional Do you think that whole debate has now been put to an end and nobody can raise any problems about public sector purchase in the coming years? This is an ongoing procedure since those claimants now ask the German Constitutional Court to have an implementing order as they call it to see whether what they have received is satisfactory So it's still an ongoing case in Germany but let me put it straight however that as a European institution we only have one court and that is the European Court that is our natural judge and our natural judge has already received from the German Constitutional Court a prejudicial question which means a question whether this was lawful and constitutional and the European judge had unambiguously stated that this was fully in line with the treaties and with the laws so from that point of view we have received the green light on the lawfulness of this purchase program and the German Constitutional Court was much more criticising the European judge than the ECB they said the European judge had not asked us sufficient questions on the proportionality so since most of our argumentation on proportionality is publicly available we allowed the Bundesbank to share this publicly available information and to some extent also some documentation that was not made public but which documented exactly what has been published to make it available to the German Government and the German Parliament which were those who were attacked in the German Court by the German individual claimants and the German Government then looked at the documentation and they said what we told you German Constitutional Court two years ago that we believed this was all right we can confirm it even more on the basis of the newly made available documentation on the documentation side let me also underline that since the beginning of these court cases we have issued now public accounts which are a summary of our minutes and which contribute to share with the public at large mostly all arguments and all thinking in relation with our decision making and this helps also to broaden our transparency and our accountability with the public at large and most of what we had made public through the public accounts was then shipped also to the German Government and to the German Parliament these purchase programmes have been really at the heart of the attempt by the ECB to get inflation back up to the 2% it hasn't worked so far completely inflation is still drifting lower because of the pandemic now what's the sense in Frankfurt and around the Government Council table about the effectiveness of these purchase programmes for that overall attempt to boost demand and thereby bring inflation back up to the close to 2% mark which is the objective we have of course econometric models which try to calculate or to assess exactly what is the effectiveness of our programmes and what we are being told at the Government Council level is that in terms both of growth and in terms of inflation they have been extremely effective because we would have even much lower inflation would we not have taken those measures and they speak of amounts of like 0.8% on inflation over the next year and on growth it's even in higher amount now I am the first to acknowledge the limitation of the econometric models as well especially in a pandemic crisis which mixes not only the cycle but also structural elements and therefore I think the reflection of inflation in our advanced economies has to be made broader it has also to go into the direction to what extent we will have structural changes what is the effect of the crisis also on the natural rate of interest rate what does it mean for the transmission mechanism of the monetary policy on the relation between inflation and output seems also to have changed in a low growth environment we were used to have low inflation attributed mostly to global value change these value change are now being disrupted to some extent how will they be replaced what will be the effect on inflation this is an extremely rich discussion that is ongoing and due to the pandemic we have a wealth of documents that I have never seen before from all the academics but also researchers and analysts which helps us also because we also decided that there might be structural breaks so we cannot continue to change ghosts which do not exist anymore so that is why we started the review of our strategy and in this strategy review we discussed all these elements on the transmission on inflation how are the instruments are our instruments still having the same traction on price developments that they had in the past how is the flattening of the Phillips curve being also affected you see this is a very broad discussion that would be filling a whole discussion that we have today but we do not shy away from having this discussion because we might feel that the traditional ways of analysis might not lead us to the proper conclusion now that whole review of monetary policy strategy takes as given the existing treaty framework but I think I saw you mentioning somewhere some idea that there might be scope or desirability of some kind of treaty change to take account of the new instruments that have been developed including the pandemic purchase program which has some slightly different features as you mentioned including relaxing it does not have to be strictly according to the capital key the purchase could vary a little bit from country to country could you say a little bit more about what you have in mind in terms of treaty change there because after various referenda everybody gets alarmed about the prospect of a treaty change discussion I think Patrick you know me long enough that you believe that I did not imply that we would give up our red lines that we would move into monetary financing in the world no that's not what was intended what I said is if we have in a low gross and low inflation environment necessarily a closer need for having monetary policy and fiscal policy complement each other then we would also need to have efficiency and the efficiency of fiscal policy is so much higher if we have it at the European level then if we only have it at the national level and I always said that it is not normal that a centralized single monetary policy would buy local government debt and by local I mean national government debt but as all jurisdictions we would only operate through federal debt and we do not have that federal debt but in order to have a federal debt you also need to change the treaty because the treaty says exactly the country that fiscal policy is a national competence and only the consequence of fiscal policy the debt can then be assessed at the European level but if we want to have a European debt then we need also a higher amount of European democracy otherwise you disenfranchise the citizens because the citizens can influence with his vote the national parliament which controls the government's debt the European parliament has no such capacity to create taxation taxation is a national competence so if we want to have European debt we also transfer some powers to the European parliament and that needs treaty change this cannot be done through the back door that is a kind of treaty change of logic that I mentioned if you have a fiscal if you have a safe asset at European level if you have a fiscal capacity at European level you must also have democratic control parliamentary control at European level the citizens must be able to increase its choice of representation at the European level so the whole thing of debt is the same as the thing of taxation and is the same as parliamentary control and that's democracy and we cannot simply transfer to the European level one area and not the other area let's move to the more technical issue that we said we would talk about of digital money the ECB published I think about ten days ago maybe roughly then a major report on central bank digital currency a digital euro that might be issued by the European central bank it wasn't saying it would happen it's a very interesting perspective of the issues that arise and the sort of principles that might have to be adopted if the ECB were to go down that route you think this is something that's going to happen in the next number of years what are the challenges I think it's an issue that is extremely broad and it's not an issue that is one that has been brought up by the ECB that has been discussed at the global level already and which has received a certain or seen a certain acceleration with the development of private initiatives which were aiming at replacing central bank money with private money and there we became alarmed and we say if that is really something that our citizens would like we have to see why at the global level including a report that has been done by the G7 or the G20 and the FSB and they have all been looking into this matter and our report is to a large extent reflecting the consensus among the larger advanced economies on this matter that we should not let private currencies de-anchor national currencies or single currencies which for Europe is than the national currency so from that point of view I would not say this is a decision to move to that situation but it is a decision to be ready if there are certain scenarios that would be unfolding one scenario being that the citizens would not accept cash anymore which is far from what we see we see on the contrary that the amount of demand for cash has increased during the crisis and not decreased but we on the other hand we also see that the amount of transactions for payments in cash has decreased and the digital use has increased now there is another element to it Europe does not have a Europe wide payment instrument and instruments are either national or they are credit cards from another jurisdiction that is also a consideration and a third consideration is that we have with Facebook or Libra initiatives which are ready to start and which we consider could be highly disruptive if they would start without respecting a properly established regulatory framework that would respect the European sovereignty that would respect the safety and the efficiency of payment systems which is a basic task for the central bank inscribed in the treaty and then there is an additional element and that is if foreign jurisdictions would start a digital currency and try to distribute it to European citizens and we would not have the equivalent to offer there would not be competition but there would be a threat to the national currency so these are the different basic starting points which prompted an increased interest with the subject and which prompted us to publish this report which only says these are the possibilities, these are the scenarios but then we also see that there are risks which come with the different possibilities of a central bank digital currency there are risks for the banking system there are risks for the privacy of people's transactions there are different risks that you could consider but this is what we are now trying to deep drill down and study in order if the situation arises that we can come up with a rapid response to the new request by our citizens it could involve an enormous amount of new technology being used by the central banks and reaching out to a much larger client base which is much larger than the central bank than is imagined today of course the ECB has some hundreds of counter parties but then it would be millions or tens of millions or even hundreds of millions so it would be a huge step for a central bank to go down that route technology today allows it we have also the platforms but that's a technological problem it's more a policy problem because if we would undermine an economy that is financed by the deposits of the citizens in the banks and the banks use these deposits to finance the economy and do the risk assessment for the allocation of capital this model could be undermined if we would have an alternative that would diminish the deposit in the private banks and thereby could even increase the cost of intermediation and thereby the cost to finance the economy so this is all acknowledged and this is exactly part of the design features that we have to see what are the advantages of a certain design we could cap the amount of central bank digital currency available for each citizen we could say it is not in an account it's not an account based but it's a bearer based that is more like bank notes I think the easiest way is always to do something which is as close as possible to what people know and that is bank notes if we would have a digital representation of a bank note we would not undermine any bank account and any deposit in any commercial bank so but this is yet to be discussed these are the different models that are on the table and we have to see what is the best response and the best response to what situation because we first have to see the situation to which we want to respond before rolling out the design and as you say the practices and behaviours are quite different in different parts of the Euro area and the European Union even more widely and some parts use of bank notes not just during the pandemic but use of bank notes to buy cars which seems extraordinary to us in Dublin but then in other parts you hardly see a bank note anymore it is curious the way the number of bank notes in circulation has increased during the crisis I wonder is it because people are always ready to accept money and they don't want to handle it so they just put it on the shelf they are not losing any interest other people say it is nefarious it is harder for drug dealers to launder their illicit gains but I suppose we will never get to the bottom of why there is an increase in the circulation of money during this pandemic you know the relation to money sometimes goes beyond the borders of rationalism we have to live with it so even if the banks are not made completely redundant by digital money or if they are not we still have bankers with us and I know that is a topic that you have been interested in is how to hold bankers to a high standard of responsibility what are the hasn't been any progress there since the crisis of 2008-9 where so many bankers were might have been held responsible for some of the things that went wrong and yet dissatisfaction on the part of the general public about how this was dealt with there are the bankers and there are the institutions let's first start with the institutions after the crisis in 2008 and 11 we forced banks to hold much more capital and by that we also lowered their profitability per each euro so this time around we went into a crisis with a capital level of about 15% this compares to a capital level barely a little bit over half of this 8% when we went into the 2008 crisis and even in 2011 we did not have enough capital so the capital buffers of the banks which absorbs the losses that come with a return of the cycle has been this time much larger and thereby it was even further reinforced by some of the measures we took in order to keep the capital inside the banks for example by saying we do not give you relief measures in order to increase dividend payouts so the dividends have to be retained but we also had at the same moment the moratoria and the public guarantees which also had the banks to protect to some extent the complete turnaround and souring of all the assets but that does not mean that we can continue to freeze the situation as we have done now forever because in a free market economy obviously there needs to be destruction there needs to be also a reallocation of resources both capital efficient segment of the market and not to otherwise we will have large scale zombification which would lead to even lower growth and even more difficulties in our economy so the only problem is from what moment on do we move from the support measures that we still have now and which in my opinion are still necessary both in monetary policy and fiscal side to a situation where we need to let the market forces play their role and shift the resources to the more efficient parts of the economy because inevitably we will not return to the old normal we will not return to the different sectors playing the same role as they played before the crisis some sectors inevitably will undergo deep structural changes and we cannot oppose it unless we pay for it with lower growth