Q&A with Ardo Hansson, head of Bank of Estonia

FRANKFURT — Eurozone countries should not get their hopes too high on ever-closer fiscal cooperation and a European finance ministry to help out countries in trouble, according to Ardo Hansson, head of the Bank of Estonia and a hawkish member of the European Central Bank governing council.

So long as only eurozone members already doing well have the fiscal capacity, pushing for additional spending is not the solution to the bloc’s economic woes and could even prove counterproductive, Hansson argued. His view directly contradicts ECB President Mario Draghi, who has called on all countries that have fiscal space to use it.

“I don’t think that it would help the long-term sustainability of the currency union, if you are telling people to do things that do not make a lot of sense from their own perspective,” Hansson told POLITICO in an interview.

Rather, in his view, the current arrangement of combining joint monetary policy with national fiscal policies is better because it takes into account the differences in business cycles and preserves democratic accountability.

Instead of “generating a lot of new ideas,” the EU should focus on completing agreed reforms, including the banking union and capital markets union, and ensuring that existing stability and growth pact rules are applied more strictly and evenly, Hansson said. The government of Estonia holds the rotating presidency of the Council of the European Union.

Turning to monetary policy a few weeks before a highly anticipated ECB decision about a possible exit from its ultra-loose monetary policy, Hansson called for a more holistic approach to policymakers’ communication to break a perceived direct link between the central bank’s massive bond buying and its overall policy stance.

Here are the highlights of the interview:

Do we need more eurozone integration along with a eurozone finance minister?

I think the devil is in the details. What [will the minister be] responsible for? How big are the sums of money involved? Will it be permanent projects or just crisis-related? … I also have doubts about a minister who would act as a policeman on the implementation of structural reforms, if that is the intention at all. You need to have democratic legitimacy, and I think having a czar that says you are doing good reforms and you are not may be too tricky.

Would greater fiscal cooperation be helpful?

The current structure with monetary policy at the union level and fiscal policy largely in national hands is actually not a bad model. Eurozone countries are different in many ways, and it may not be helpful to overly constrict countries’ ability to gear policies to their own conditions.

The question is: Does it makes sense for us to spend more in the name of the common good, if the price is that we send our own economy, which is already modestly out of balance, even more out of balance? …

This idea of euro-area aggregate fiscal stance is very tricky to apply. Academically it is interesting, but I don’t think it has a lot of policy relevance until countries that need stimulus actually have fiscal space. You would need to have a common budget that is massively larger than it is today.

This is where the capital markets union comes in. To have the private sector work in a more pan-European way, to be able to manage shocks by sending money to work where it is more productive, is a lot more promising because the sums involved can be quite large. But when you are starting from a common budget of 1 percent of GDP, even a few percentage point increase in that budget will not provide a very strong stabilization.

You have voiced a preference for changing the ECB’s forward guidance. What should it look like?

Our forward guidance is very closely linked to asset purchases and a pledge to increase them in case of need. If you keep focusing on asset purchases this way, you create the perception that the volume of purchases is synonymous with the policy stance. But there is no one-to-one link between asset purchases and our policy stance, which is actually much, much broader.

So the idea is to break the perception that there is such a direct link. If you reduce bond purchases, this is not necessarily equated with a much-reduced level of monetary accommodation. We could still have a similar level of accommodation delivered through different means. For example, we could be more specific about our intention on interest rates. You could also think about longer-term refinancing operations.

There’s also a point to be made about the composition of purchases. I am much more optimistic about private-sector bond purchases than public-sector purchases. We’re trying to get either the corporate sector or the household sector to spend more. But we use the government bond sector because that is where the volumes are … If it is feasible to buy more corporate sector and less public sector, then you get more direct impact, so purchases can have more impact.

Do you think the ECB should talk more about reinvestments of asset purchases? Also, do you think now is the time to reduce monetary support?

I think we should just draw more attention to it. The market underappreciates how accommodative our policy actually is and when you are thinking about normalizing in a net sense, perhaps actually your gross purchases are not changing all that much because of the maturity structure.

Monetary policy has to remain accommodative. I don’t think there is a lot of disagreement about that. But it is very, very accommodative now and if you were to do a little less, it would still be very accommodative. So I could support a modest move in that direction.

What future to do you see for Estcoin, and other cryptocurrencies?

It is a misunderstanding. There’s no minister that says Estonia is going this way. I think that the idea that we would have a kind of parallel currency won’t happen. You do not have two currencies in any country. It’s inconceivable. There has been a bit of overreaction to this.

I think there is a global [initial] coin offering bubble and when that bursts, things will look a bit different. I think there is something in the technology that will have lasting value, but I do not believe in these private sector currencies. If your domestic macro environment is completely dysfunctional, then I could see how the private sector solution could be attractive.

But if you have a very solid monetary policy, inflation under control, payments are working, the idea that somehow somebody would come along with a private-sector solution that is going to somehow change that equilibrium … I find very hard to believe.

Johanna Treeck

This interview has been edited for length and clarity.

To view online: http://www.politico.eu/?post_type=pro&p=739317

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