It is not true that money is just lying on the sidewalk. A loan is still a loan

The Estonian state should not rush to borrow money that is exceptionally cheap because of central bank policies and to increase the national debt, because the Estonian economy is not currently in need of any additional stimulus, says Ardo Hansson, Governor of Eesti Pank.

He does however think it would be natural were banks to start to charge large clients a fee for depositing funds. Negative interest rates are one of the levers that the European Central Bank is trying to use more to channel money out of bank accounts and into the real economy.

SEB is considering applying negative interest rates to large clients. Is that what the central bank expects to happen? Whether we like it or not, this is a part of the effort of the European Central Bank to encourage companies and households to bring their demand forward in time. If we change monetary policy interest rates, that change has to get passed on somehow. This has already happened through market interest rates like Euribor, as the three-month and six-month Euribors are in negative territory. This being passed on at least to large clients would be a logical outcome. However, I don’t know of any country where negative interest rates have been introduced for small depositors.

Companies say that negative interest rates don’t make them invest more. Yes, I’m sure that companies are not going to start investing massively just because the interest costs are marginally reduced. The main force restraining them from investing is the lack of certainty and confidence. If you are considering investing tens of millions, but it is not clear whether growth has restarted or whether there will be another setback, whether there are reforms on the way that will affect the business of your company, or whether they will be postponed, then all this causes uncertainty. Companies need more clarity about which way their business environment is moving.

Banks will soon be borrowing from the European Central Bank at negative interest rates, so would it be appropriate for them in that case to have negative rates for their clients? Some of the measures taken by the ECB benefit the banks, others less so. The banks are unhappy about negative interest rates, but the other side of that coin could be that they face a lower percentage of bad loans and the economy grows a little faster. Banks should not take one or other element out of context.

Vitor Constancio, Vice President of the European Central Bank, has commented that the profitability of banks has not suffered. It hasn’t, not yet. I’d like to believe that the total effect of the ECB measures has been more supportive of the banks, given the state they would be in had nothing been done. The policy has reduced the sources of profit for the banks, but the banks are now better capitalised than they were some years back.

What are the implications for Estonia of the ECB starting to buy corporate bonds as part of the asset purchase programme? If that programme affects the economy of the euro area, the effect will get passed on to us by the principle of connected vessels. These transactions do not necessarily need to be made in Estonia. As we are connected by the euro and Euribor, and by the resulting faster growth in the euro area, then things become better at least in the short term.

Does Estonia lose out by not having issued any bonds while Eesti Pank as a part of the Eurosystem is printing cheap money for neighbouring countries? I really do not see Estonia issuing its own bonds as any sort of a solution right now. Maybe in the future if the economy were in recession, a stimulus could be called for. The Estonian economy is currently close to balance, and wages are already rising by 6% a year, which is more than the rate of productivity growth. If we were now to start borrowing money voraciously and building up debt, stresses in the labour market would grow further and wages would rise even faster. It would be good for employees in the short term, but elsewhere in the economy there are certainly companies that would not be able to cope and would go bankrupt. We must not amplify the economic cycle.

Even the German central bank is buying up lots of bonds, but the government is sticking to a policy of a balanced budget. The idea that money is just lying on the sidewalk, or that Father Christmas is handing out presents but passing us by is nonsense. Every loan still has to be paid back. We can argue about whether the interest rate should currently be a few tens of basis points lower but it is not the case that the more money you pump into an economy, the better. We saw what happened when Swedish bankers gave us great quantities of money, how it overheated our economy. At the end of it all we were worse off than we would have been had the capital inflows been more moderate.

Why not borrow to invest, so as to raise the potential for growth in the economy? Eesti Pank estimates that the Estonian economy could grow at a rate of 4%, but it isn’t doing so. The recent analysis by the European Commission found that several trends in the Estonian economy are in contradiction to what we say we want, as the share of low value added goods in exports is increasing, investment is mainly going into real estate, and we are not thriving well in global value chains. I am a member of the Prime Minister’s working group where we are looking for unexploited growth potential. One advantage Estonia has is that there is no area that has been blindly missed out, that really stands out. In the global competitiveness index of the World Economic Forum, we are generally in around 20th to 30th place out of 140 countries, depending on the particular indicator. There are few places where we are lagging seriously behind. At the same time that is also a disadvantage, as there are no low-hanging fruits we can easily pick. We don’t need to throw our economic model overboard, it has served us well thus far. We should however look to improve our environment here and there.

How can people save when interest rates are so low, and what happens to pension savings? This is again partly an expected consequence of central bank policy. Under current circumstances we want Europeans to consume more and invest more. A short-term reduction in savings will stimulate the economy. As we have chosen this path, the logical consequence is that there will be that many fewer opportunities to invest. We must hope though that this will be for as short a time as possible, and that the programmes and the other reforms will have a beneficial impact. Once inflation has started to rise, things can return to normal.

So we should buy gold and real estate now? I'm afraid they don’t come with any guarantees either.

What does the closure of the PKC factory in Keila mean for the Estonian economy? Is it a symbolic event? At first I was very shocked by this and saw it as a bad sign, but if you start to think about it, that need not be so. It depends what happens with unemployment. If this was the shot across the bows and it is followed by other closures and people being unable to find work, that would be a danger sign, indicating that we are staring to become less competitive. Again it is an illustration of how costs, including wage costs, need to rise in line with productivity. Another way of looking at it is as part of a natural process in which we slowly climb up the value chain.

Are you still sceptical about the ECB printing money? My main concern is the side effects, such as the impact on financial stability, if asset prices rise, which we will sooner or later come to call a bubble. And also that otherwise conservative market participants will start to take unnaturally large risks.

The other concern is the effect on governments, as the easier life is for governments, the less likely they are to carry out necessary reforms. People are people, politicians are politicians, if you let them put their feet up then some of them will. There are also examples of other countries that have reformed, like Ireland and Spain. The experience that Estonia and other catching-up economies had at the start of the 1990s was that things first get worse before they get better. If we had said in 1993 that everything has failed and had given up, we would never have got anywhere.

One problem is that our time horizon is so short and our reserves of patience so low that we want to see growth already appearing this year, this quarter. It is better to make structural reforms and explain to people that we will live through the downturn in order to have a stronger foundation to build on in a couple of years time.

A serious problem at the moment is the lack of demand. Finland and Canada are talking about instituting a citizens wage, and the head of the ECB, Mario Draghi was asked his opinion on using a helicopter money drop. Should a central bank print money to finance something like investment in infrastructure? There are reasons why demand is weak. One is that a lot of companies, households and even countries have maxed out their borrowing. The idea of helicopter money is discussed by theoretical professors, but wouldn’t be legal in Europe as it is a very direct case of monetary financing. It is also said that fiscal policy could be looser, which doesn’t seem right to me in Europe, where government debt averages 90% of GDP.

It is no problem to create inflation, you just have to print and print, but history teaches us that if you focus too much on the short-term gain you end up paying for it all later. I would favour patience and say that having made mistakes in the past, we should now be more restrained in what we can expect.

The IMF is again lowering its economic forecasts, does the ECB have anything left in reserve? I don’t believe that there is nothing more that can be done, but there are diminishing returns from each new measure that is taken.

What worries you as a citizen of Europe? The radicalisation of significant minorities in many countries, including Estonia. Such a poisonous atmosphere makes it harder to move forward sensibly and could destroy the foundations that have brought us thus far.

Published date: 
16.03.2016
Published in: 
Äripäev