Governor Olli Rehn
Bank of Finland
“Printing money alone does not create prosperity”
The original article was published in German in Welt newspaper on 25 March 2019.
The interview was conducted by Anja Ettel and Holger Zschäpitz
“Printing money alone does not create prosperity”
WELT: You are the only member of the ECB Board who actively tweets. Why is that so important to you?
Olli Rehn: I had already been tweeting even before I became a member of the Governing Council of the ECB. But I really find it important that thanks to Twitter or Facebook, we as a central bank also have the possibility to address those target groups which we wouldn’t have been able to reach otherwise. Therefore, I actively encourage my team in the Bank of Finland to tweet actively.
WELT: But don’t you fear the negative sides of social media?
Rehn: Of course, we must be aware of the risks and know how to deal with trolls and bots. But so far, we haven’t had any problems with that. However, there is also one clear rule: We do not discuss politics. Doing so would not be fitting for an independent central bank. On the other hand, private tweets are absolutely allowed. I myself like to tweet about football. And try to follow people from all walks of life on Twitter as much as I can. Otherwise, you quickly run the risk of ending up in your own filter bubble. Social media is prone to link you with like-minded people, while ignoring other voices and opinions.
WELT: Would it then be appropriate for the next ECB President to be on Twitter?
Rehn: (laughs) Let me put it this way: It would at the least be no obstacle if he or she were to be active on Twitter.
WELT: In fact, you are considered to be one of the hot candidates to succeed Mario Draghi when he leaves the ECB in October due to the end of his term. Would you dare to take on the position?
Rehn: At the moment, I’m fully focused on my responsibilities as President of the Finnish Central Bank, and as an active and constructive member of the ECB Board. My function allows me to combine national and European competences, which I find very fulfilling.
WELT: How important is it then to have the next ECB President coming from northern Europe, after having a Frenchman and an Italian at the helm?
Rehn: You surely are aware that Germany is not a northern European country either, right? (laughs) But seriously: The next ECB President should be selected only on the basis of how qualified he or she is for this European responsibility, and not what passport he or she has.
WELT: Nevertheless, this would contradict with all the experiences to date regarding the wheeling and dealing of European positions.
Rehn: I trust that the European state and government heads will choose a person who will contribute the competency needed for this position and enjoy the trust of the general public.
WELT: Which office is more important then: the office of ECB President or President of the EuropeanCommission?
Rehn: I know that this matter is the subject of intense discussion here in Germany. But I will not take it upon myself to make a judgement on this. Both offices are important for Europe.
WELT: You yourself are a veteran in European matters - for ten years, you were the EU Commissioner for enlargement issues, as well as for the economic and monetary affairs, among other roles. Does is not frustrate you that the EU has such a bad reputation with many people?
Rehn: I am probably a structural optimist, because I always remember the positive aspects of my jobs and suppress the frustrating experiences. It’s certain that as EU Commissioner, my experiences were more intense than now, when I am a central banker. But as far as the issues in Europe are concerned: Quite honestly, things have never been easy for Europe, and we’ve had to overcome many a crisis. The most important thing is that the European partners continue to stand together in spite of it all to maintain their position in the era of globalisation. We are small when compared to large blocks, even powerful Germany makes up a mere one percent of the world’s population.
WELT: Despite that, the EU has up till now not necessarily won the hearts of people. How would you explain to our children that the Union and the euro are important?
Rehn: Europe makes it easier for its citizens to conduct cross-border transactions, and to work and pay across borders.
WELT: That statement is still rather abstract for our children.
Rehn: On the whole, we’ve be living in peace for the past 70 years here in Europe. We are united by a similar approach - we decide on key economic and political matters in a democratic manner. It is important that we maintain this particular liberal basic order.
WELT: Was it a mistake to have let so many countries into the EU?
Rehn: We could philosophise about that for hours on end. But I would like to put it this way: All the countries have benefited from the enlargement. Neither the accession countries nor the original EU states would be better off if we hadn’t enlarged the EU.
WELT: You have only recently become a member of the Governing Council, but you’ve already initiated a small revolution: You want to put the ECB strategy to the test. There hasn’t been anything like that for over 15 years. What specifically are you proposing?
Rehn: Definitely not a revolution, but rather an evolution. By no means revolution, but gradual development, steps towards the goal. In 2014, the ECB had successfully combated the risk of deflation. At the same time, the world has been rapidly changing: Ageing population and advancing digitisation of the world are for example two effects which have a tendency to have a curbing impact on inflation, as well as lower inflationary expectations in the markets. My intention is that we discuss these issues and look into the ECB strategy to see where it would possibly need to be adapted to them. Since the 1980s, inflation expectations have been playing a key role in monetary policy. And when these expectations deviate too far off from the self-defined two percent target, it might hamper the effectiveness of monetary policy and ultimately the credibility of the ECB.
WELT: So you are in favour of lowering the current two percent target?
Rehn: Please do not misunderstand me here. Price stability is the priority, we may not move away from that. The aim of the ECB to allow for an inflation rate of close to, but below two percent in the medium term further on applies. We should not question the mandate of the ECB. The effects that demographics and digitisation have on inflation cannot be precisely evaluated, but we must understand the phenomenon and draw our conclusions based on that.
WELT: But what does that mean?
Rehn: Perhaps a look back into central bank history will help to make my intention clear. In the 1970s, the central banks were surprised by the oil price crisis. A decade later, monetary policy was successfully adapted to these types of shocks following the idea that inflation expectations are formed rationally and reflect the central bank’s monetary policy.
In the 1990s, the inflation target of two percent became widely accepted. Now we need to make sure that the expectations are not decoupled from the inflation aim. Based on this possibility, a review of the strategy would be welcome.
WELT: What do you actually invest your own money in?
Rehn: I am a very conservative investor.
WELT: So as a saver, you rather come away empty-handed given the current interest rate situation?
Rehn: There really isn’t much out there for conservative savers currently. Yet as a central banker, I need to follow restrictive rules in any case. They were by the way even more restrictive when I was an EU Commissioner.
WELT: The economic situation within the Euro zone has deteriorated dramatically. Are we falling into a new recession now?
Rehn: Indeed, growth has weakened considerably, and we need to worry about the economy. The situation is due to the numerous uncertainties inside and outside the Euro zone. Above all, the trade disputes between Washington and Beijing are a concern. The economy in China has already considerably cooled down as a result of the uncertainty. Our analysis suggests that the official growth figures presented by the Communist Party have been embellished. China has become a major global economic player. Anything that happens there in terms of the economy affects Europe as well. Nevertheless, I am not expecting a recession in the Euro zone. This is because the EU has been playing its cards well so far in its own trade conflicts and has avoided bigger tensions with China and the USA, and has even signed a new agreement with Japan.
WELT: And what about Brexit?
Rehn: Brexit is certainly the greatest risk in the short term. The financial markets seem to be too relaxed here and have been underestimating the risk.
WELT: What provisions have you made as a central bank?
Rehn: As the ECB, we must make sure that Brexit will not bring about any heavier turbulence, even if Great Britain leaves the EU without a deal, which I hope it won’t. As a precautionary measure, we have ensured liquidity arrangements with the Bank of England. The so-called Swap Line Agreements should make sure that financial institutes are supplied with sufficient amounts of euros and pounds, even if the money markets would collapse. Think of the financial crisis of 2008. At that time, the money markets were frozen in one go. A catastrophe did not occur most of all because we had such an agreement with the US Federal Reserve at the time, and the banks were able to withdraw enough dollars when the markets suddenly ran out of money.
WELT: Central banks have pumped trillions into the markets in the past decade, yet inflation has remained low. That has raised discussion. In the USA, supporters of the so-called modern monetary theory want to finance large-scale stimulus programs with billions from the Federal Reserve.
Rehn: I do not think much of such theories. These ideas contradict any monetary policy philosophy and would probably lead to disaster.
WELT: In Europe, ECB chief Mario Draghi referred to helicopter money, or money which a central bank dropson economy, as an "interesting idea".
Rehn: I can’t recall that Mario Draghi was supposed to have said that. Printing money alone will not create prosperity. As an entrepreneur’s son, I learned an important lesson early on: Only hard work leads to economic success.