25th European Banking Congress Frankfurt: shocks can force people to search common solution

by Elisabeth Hellenbroich

This year’ 25th European Banking Congress (Frankfurt 20/11) was characterized by a certain ambiguity which had to do with the fact that the most relevant strategic issues (Ukraine-, Greece debt-, refugee-crises,Syria war, IS terrorism) were blacked out from the main debate.The focus of the Congress was the speech given by ECB chairman Mario Draghi who presented his monetary strategy that intends to pump more money into the banking system and financial markets, in order to alleviate the pressures from the Euro Zone and bring inflation rate to a reasonable level.

What was noteworthy however in the context of this year’s 25th European Banking Congress -as was confirmed to the author by a key organizer of the Congress- was that for the first time since the lifting of sanctions against Iran a “Business Forum Iran- Europe” was organized under the chairmanship of the president of the International Bankers Forum, Dr. Nader Malekiin cooperation with the Iran Embassy. The forum was held during the Frankfurt 18th Euro Finance Week (16-20 Nov), which is part of the European Banking Congress that concluded the Euro Finance Week November 20th in Frankfurt. Participants of the Business Forum Iran- Europe included the Ambassador of Iran H.E. Ali Majedias well as high level representatives from the Iranian government,among them deputy Minister of Foreign Affairs, the Vice Minister of Ministry of economic Affairs and Finance,the Deputy Minister of Industry Mine and Trade , the head of Iran’s Trade Promotion organization , as well as deputy Minister of the Ministry of Road and Urban development and many other senior representatives from Teheran, in order to transmit to a German and international audience firsthand information of the new Iranian projects planned for the next eight years both in the public and the private sector.

We will continue our ECB policy whatever it takes

In the center of the European Banking Congress were the speeches by ECB chairman Mario Draghi, by Bundesbank chairman Jens Weidmann and an interview that “Die Welt “ editorial board member, Jörg Eigendorf conducted with German Finance Minister Wolfgang Schäuble at the closing of the congress. In his speech Mario Draghi presented the perspective that the ECB will keep the option open to pump more monetary liquidity into the markets and purchase more assets in order tostimulate the economy further and bring inflation rate up to approximately 2%.

In January 2015 Draghi had announced a massive asset purchasing program to last till September 2016, in the dimension of 1 trillion Euros. Since then the ECB has been pumping 60 BillionEuro into the markets per month, however the inflation rate is still almost close to 0%. “We will do whatever we have to do”, Draghi told congress participants, by making reference to the present slump in economic growth. “While global trade slowed remarkably in the first half of 2015, Euro- area export growth has held up relatively well”, he said. He further warned that “growth momentum remains weak for an economy coming out of a deep recession and the headwinds blowing from the global economy have increased.” According to Draghi the ECB monetary stimulus measures have been “instrumental in arresting and reversing the deflationary pressures that hit the euro a year ago.”Yetin light of the fact that growth momentum remains weak (the lowest since 2009), and inflation remains well below the objective of below but close to 2%, and given the fact that the economic repair in the Euro area is not complete, Draghi announced that at the December 3rd governing Council meeting of the ECB “we will thoroughly assess the strength and persistence of the factors that are slowing the return of inflation towards 2%.(…) If we conclude that the balance of risks to our medium price stability objective is skewed to the downside, we will act by using all the instruments available within our mandate.In particular we consider the APP (Asset purchase program) to be a powerful and flexible instrument, as it can be adjusted in terms of size, composition or duration to achieve a more expansionary policy stance.(…) If we decide that the current trajectory of our policy is not sufficient to achieve our objective, we will do what we must, to raise inflation as quickly as possible. That is what our price stability mandate requires of us.”

While growth has been the weakest since 2009, the positive news according to the ECB chairman is that small and medium (SME) sized firms had profited from the monetary policy:“The macroeconomic impact of our policy on small firms is already clear. In the most recent October round of survey,the number of SME’s reporting an increase in revenues was almost 20% larger than those which reported the opposite.The improvement has also been widespread across most countries, with the notable exception of Greece.For the first time since 2009, the net percent of firms that register an improvement in business activity has turned positive for all size sub-groups, including for the micro firms that had in the past suffered most.”

“We cannot say with confidence that the process of economic repair in the euro area is complete.The moderate growth and price dynamics imply that we need to monitor closely whether – if left to its own forces- the economy will be able to reach a self- sustaining growth trajectory in conditions of price stability. If not, then it will require more monetary stimulus, which the ECB will not hesitate to provide.”

Countering his speech was Bundesbank chairman Jens Weidmann who in his speech warned about theECB monetary easing policy, underlining that “without profitable investment projects, lowering funding costs will not go very far in stimulating the economy” and that “we need to be aware that the longer we stay in ultra –loose monetary mode, the less effective this policy will become and the more the attendant risks and side effects will come into play.” Furthermore he warned that the “extreme low interest rates should not lower the readiness for consolidation of state budgets in Euro zone member states.” He emphasized that there are stilltoo many barriers and structuralproblems as well as debt mountainsin the euro zone. Yet at the same time he underlined that he sees no reason to paint a dark picture about the Euro zone, despitemigration and a weak economic outlook.

There was very little talk during the congress about a directed economic investment policy, with the exception of former Center for Economic Studies (CESifo) director Hans Werner Sinn, who emphasized the need to boost investments in the Eurozone. During a podium discussion he at one point emphasized the need to have Trans-European energy and railway corridors.”

Crisis as a chance to force the EU to search for a“common policy”

In an interview conducted between German Finance Minister Wolfgang Schäuble andJörgEigendorf (“Die Welt” editorial board), which concluded the Congress, Schäuble warned about the irrational behavior of certain bankers underlining thatthe “BIS (Bank for International Settlement) is right when it complains about too much liquidity and debts”. “For 20 yearspoliticians deregulated banks until they could not master the risks anymore and until the state had to bail them out.”Now,according to Schäuble, the pendulum is swinging to the other side. And the basic truth which the present crisis reveals is that under massive pressure people begin to move. “We will have to deal with the tension between freedom and security while at the same time we have to understand that in respect to our populations we deal with “human beings and not algorithms”.

Schäuble remained overall optimistic in respect to Germany’s budget that in 2016 could be able to stem the refugee crisis without incurring new debts.He particularly emphasized that crisis and external shocks should beseen as a “chance” also for Europe. Hence his thesis: “Crises are needed and shocks can be a healthy stimulus to find a common solution, like more EU unity.” He called for a better management of the EU external borders, not a fortress Europe. Therefore there would be negotiations with the Turkish government and this inreturn could only function if it goes along in cooperation with the neighboringcountries. At the same time the UNHCR(United Nations High Commission for Refugees, coordinating since the 1950ies the refugee problems worldwide) should be given a more important role in the handling of migration and more finances mobilized.

Schäuble urged to further strengthen Europe and begin building a more unified economic, financial, political Europe. Politically important was a remark which Schäuble made at the end of the interview. In the context of saying that crisis often urge politicians and people to look for more quick solutions, he mentioned as a key example how quickly things can change and move the recent Vienna negotiations betweenRussia, Syria, the US, Saudi Arabia, Iran, Germany, France and EU High Representative for Foreign Policy FredericaMogherini, in order to find an exit out of the Syrian war. As Schäuble put it: “What was unthinkable weeks ago is now happening, as Foreign Minister Steinmeier told me, namely that Saudi Arabia, Russia, Iran, USA and Germany would negotiate in Vienna how to find a peaceful solution to the Syrian war.”