Meeting

C. Peter McColough Series on International Economics With Sabine Lautenschläger

Thursday, September 19, 2019
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Sabine Lautenschläger discusses Eurozone conditions and the European Central Bank's economic tools, as well as the effects of U.S. trade policy on the global economy.

The C. Peter McColough Series on International Economics brings the world's foremost economic policymakers and scholars to address members on current topics in international economics and U.S. monetary policy. This meeting series is presented by the Maurice R. Greenberg Center for Geoeconomic Studies.

GEITHNER: Morning. Morning, all of you. Nice to see you so early on a—on a Thursday. I’m very pleased that Sabine Lautenschläger is joining us today for a conversation as part of the Council’s Peter McColough Series on International Economics. I’m Tim Geithner.

We’ll do this the normal Council way. We’ll have a conversation for thirty minutes or so and then we’ll give you guys a chance to ask some questions, better questions than I’ll ask. This is on the record. And I’ll remind you again when you—when we come to the discussion question, you know, please frame your questions as questions—(laughter)—and give people’s—give your colleagues a chance to—enough space so there’s room to cover a lot of issues.

We first met in 2004, you were reminding me. We’ve known each other for a fair amount of time. You know, there’s many types of central bankers. There’s some that come as economists, spend their lives in the forecasting and monetary policy of central banks. But there are others who have to understand that and master that but come with a mix of other responsibilities and backgrounds—as engineer, as banker, as someone knowledgeable about markets, sometimes as lawyer as in Sabine’s case, as psychologist, psychic, oracle. (Laughter.) Sabine has that full mix of responsibilities over the arc of her career and that full mix of talent. She’s had all the cool—all the cool jobs in central banks. So we’re very lucky to have you here.

So let’s start—let’s start with what’s happening in the global economy. I mean, you know, things are softer. How soft are they? What’s driving the softness? How concerned are we about—should we be about what you see happening in the major economies in particular?

LAUTENSCHLÄGER: Well, we at the ECB, we closely monitor the global economy, the evolution, the development, as every other central bank, and we do see a softness there. I mean, we still see growth for sure, but subdued growth. And I think one of the major factors for sure are global uncertainties, political uncertainties. Just to name a few: The trade tensions we do recognize as one of the major factors, where there is a kind of uncertainty moving into the investment behavior of stakeholders, where you see a decline in trade; political uncertainties like Brexit for sure weighing on some economies; and I’m pretty sure we can add to this list.

But coming back to the trade tension, I mean, you all will not be surprised that from the ECB side, from my side, we do see persuasive reasoning for having an openness and not protectionism as global trade is a factor for wealth for all of us, as protectionism as such is for sure a threat to the very complex production chains and the international production chains we have. And we strongly believe that these kind of trade tensions do hurt all countries, countries which take up tariffs too, and the medium and in the long term is will move through the economic factors and will show results, negative results, not only in trade but in growth, in activities—economic activities—and the labor market too. So that we are looking at.

GEITHNER: How significant is the slowdown you’re seeing so far? How concerning is it? How worried should people be about the magnitude of the slowdown so far?

LAUTENSCHLÄGER: Well, I think we should all look into the factors why we have a slowdown and should do our best to ensure that we do have positive factors counteracting. And that is not only for the central bank, but for the politicians, for the governments to counteract there.

How—hmm. That is, I mean, we should be concerned. We do have some calculations with regard to the trade tensions between the U.S. and China, and we do see that it does not hit the euro area overall in the aggregate in a huge way, just to give you the idea of the euro area because that is the region I’m representing. When you just think about the economic figures behind it, when you add in that you always have to add confidence question, investment behavior, et cetera. Then it gets a little bit bigger. We do believe that the counterparties in the trade tension will be hit much more severely, in particular in the medium and in the long term. But again, it’s not good for all of us.

GEITHNER: So in the—in Germany specifically now, are you seeing weakness spread from the trade-sensitive and the industrial manufacturing sector to other parts of the economy? Or so far is the effects contained and the slowdown contained?

LAUTENSCHLÄGER: Well, I mean—yeah, perhaps just to give an overview, for the euro area we do see a softening in the growth, but nevertheless it’s growth. So we are predicting 1.2 (percent) for this year, about—1.1 (percent) in our baseline scenario. So we do have a kind of heterogeneity right now. You have Spain, the Netherlands, France with a very resilient growth path. You have Germany and Italy weakening. And in Germany, as you mentioned, it is in particular the manufacturing side, which is then linked to some trade issues. But not only with regard to the overall trade tension, but with regard to Brexit too. So there you have to—you have to take into account different reasoning.

And the service sector is pretty resilient until now. Domestic demand is pretty resilient. That contributed quite effectively to the growth rate we saw. And there are other positive factors: labor market looks good, wages are rising, and the financing conditions are, I mean, excellent because of the very accommodative monetary policy we are putting on the table. So you do see a softening and a slowdown overall for sure, but it is not a huge drop and it is a little bit heterogeneous.

GEITHNER: You know, one of the—one thing people debate about the recession risk in the major economies today is—partly it’s a debate about the size of the impact of the—of the trade fight and the uncertainty that creates for investment, but a lot of it is about the underlying resilience or stability or fragility of the—of the economies themselves and the strength of the policy arsenal available to counteract weakness. So just putting aside the trade tensions for a moment, talk a little bit about how fragile or how resilient the economies of Europe feel today relative to, for example, ’07 or early 2010. Does it feel more stable and more resilient? Or do you think that there’s more to be concerned about in terms of the fragility of the underlying foundations of the major economies?

LAUTENSCHLÄGER: Well, I think—I mean, that is my assessment, my personal assessment. I think they are more stable, yes, for sure. There is more fiscal space left in some countries. Not all, but in particular in mine. (Laughs.)

I think that there were lessons learned, taken in from 2007 and 2010. Let me be very clear. I mean, in 2010, if I remember correctly, we had really a huge drop in growth. So we are talking now about a slowdown in a still-growing economy if you think about the whole euro area. So, for my personal assessment, it is much more stable than it has been in the years before, in 2007 or 2010. Labor market is extremely well.

I mean, just to give you a little bit of an anecdote, if you want to get a craftsman in Germany you have to wait for one year. I mean, if you want tiles on your wall, et cetera, it’s unbelievable. There are—there are no employees left. And I know what I’m talking about because I’m trying right now. (Laughter.) Don’t quote me on that. (Laughs.)

GEITHNER: Let’s talk about the policy debate. Maybe we should start with monetary policy. You know, part of the debate that you’re seeing in central banks today is—not just in the ECB but more generally is, does the magnitude of the slowdown and the risks associated with a slowdown justify another round of easing today, or is that a—is that response better left for a more alarming set of conditions. That’s part of the debate. Part of the debate is about the efficiency or the efficacy or the cost and benefit of the tools people are using today, both in terms of negative rates and asset purchases and forward guidance, that mix of things today. And you know, some of the—some of the debate is around these things are still powerful, but you should hold them for when you really need them. Some of the debate is that you could use them now or you could use them later, but the real concern is they’re not going to do that—they’re not going to do much for you, they’re not going to buy you very much—buy you much protection. So give us a feel for the—for how we should think about the debate about policy today, both in terms of how powerful it can be, the costs and benefits associated with negative rates and with asset purchases starting from very low levels of interest rates.

LAUTENSCHLÄGER: That’s pretty comprehensive, huh? (Laughter.) For that I’ll need a little bit longer. I’ll give you just a very short overview of what the Governing Council decided one week—exactly one week ago.

It is a comprehensive package we decided about, starting with a change in the forward guidance, very clearly linking it to robust convergence to our aim close to 2 percent but below 2 percent within our projected horizon, which is, you know, a clarification. And then we added wording which is new about—that this convergence needs to show consistently in the inflation—in the inflation outlook dynamics—inflation dynamics outlook—yeah, that is English. Still—

GEITHNER: Good—it’s good English.

LAUTENSCHLÄGER: Yeah, that’s good, you understood. Yeah? OK.

So we changed the forward guidance. That was one part.

Then we decided about lowering the main interest rate for ten basis points, from minus-forty MRO to minus-fifty basis points. We decided about chaining the TLTROs, so the funding we give to the banks against collateral, from a two-year into three years. And we installed a kind of tiering, meaning that banks with excess liquidity reserve in our balance sheet would get a different rate for their deposits, partly—not all, but partly. Decided about the multiplier, too. And then we decided about reinvesting what we already had put on our balance sheet, as we did before. So this was kept the same. And additionally, would restart the net purchases on the APP with twenty billion per month. So, from my perspective, a pretty huge and a pretty comprehensive package.

And we all agreed that an easing was necessary. But I mean, we have twenty-five people on the Governing Council. There were different assessments with regard to, first, the reflection on the economic development. So there were different levels of concerns with regard to the slowdown, and hence there were different understanding of which part of the package would be needed and which part would not be needed. So that was a discussion about, for sure, the APP, where—me too—there are representatives in the Governing Council which think that this is an instrument of an ultima ratio, only to be used when you do have deflationary risk. And we do not have any deflationary risk right now. The inflation ratio is not where we would like it to be, with 1.0 (percent), but it’s nowhere—there is nowhere deflation risk in sight. We had discussion about the negative interest rate, sure. Not everybody agreed to that cut, either.

You can ask yourself, I think, three questions about the reasoning for certain measures or not. The first one is, do you agree to the overall assessment of the economic outlook and of the necessity to act in certain areas? As I told you, we all agreed that we need to act, but it depended a little bit in which way. So you can—you can have—when you have this data-driven policy, you can have a different understanding of the necessity to act with different instruments. You can have discussions about the efficiency of measures, meaning—and I think we are obliged to do so—to balance the cost and benefit of different measures. And then you can have discussions about the understanding of certain instruments to be used under certain conditions like I do, for example, with the APP, where I say it’s for me ultima ratio, meaning it should only be used when there is deflationary risk. That is not, very clearly, saying that it does not have effects; it’s just a question whether you see the need for these kind of effects under the assumption that it is an ultima ratio instrument.

GEITHNER: How do you feel—or maybe you can—maybe just taking it beyond the debate in the ECB, how should we feel about—how confident should we feel about the power/efficacy/efficiency of the remaining room in this full arsenal of tools that central banks have today? Do you—I mean, you know, we’re—you know, we’re starting from a level that is low relative to any recent historical period, and you have yet to face an alarming deterioration in growth yet. Should we feel confident that if faced with a more significant slowdown that arsenal of tools you have, other central banks have, will be powerful enough to buy some protection, keep a floor under growth? Or do you—should we be—should we be alarmed by the weakness of the remaining room in those tools?

LAUTENSCHLÄGER: Well, I don’t think you should be alarmed, no. A central bank can always create new instruments and can be quite creative. Whether it needs to be, that is something else. And it should be for sure not the only game in town, using this to come to other stakeholders which need to do their part too. So you can always change forward guidance, for example, et cetera. I mean, you can debate when you need to do it and whether you need to always react. You should always keep in mind, from my perspective, that you can talk about the efficiency or the efficacy of the single instrument, but then you have to see the signaling effect of a package of instruments, too. So, from my perspective, I’m not worried as such.

But I do see that other stakeholders have to step up, too. So I’m talking about structural reforms. I’m talking about using fiscal space, when you do have it, in a sensible way, meaning, you know, not just using it but in something where you have a medium- and long-term growth impact. Yeah.

GEITHNER: Do you worry that by acting you relieve the pressure on the fiscal authorities to use fiscal policy appropriately now?

LAUTENSCHLÄGER: Well, for sure every human being has a certain kind of incentive setting. We all have. And when thinking about having a cost and benefit analysis, you have to take this into account. But foremost we have a mandate for price stability. So we are not having a mandate setting incentives correctly, but we have a mandate for price stability. And within this price stability we have to for sure take into account what kind of incentives do we set. Monetary policy is incentive-setting as such. But here and there, yes, I’m sometimes worried.

GEITHNER: Just to, again, set the table for our discussion, two other issues. Tell us how you feel about the state of the European banking system in particular. How strong is it today? And what do you think about the prospects for some further steps towards what the Europeans call banking union?

LAUTENSCHLÄGER: Well, first of all, the European banking system is much more resilient than it has been in 2008 or 2010 or 2012. I mean, the aggregate capital right now is beyond the 14 percent capital ratio. It has much more liquidity, huge LCR, a good NSFR. Risk management changed quite a lot. The overall concept, you know, changed quite a lot. We were at the SSM—I mean, I was five years part of the SSM, too. We worked really strongly on cleaning up balance sheet. So not everything is yet done in every country fully, but the ratio of nonperforming loans decreased dramatically over the last four or five years. So overall the European banks are much more resilient.

Now, I have a little bit of a caveat because I do not like this “European banks.” I mean, it’s not that they all are the same. (Laughs.) I don’t know, do you always say “the American banks,” you know? We do have—

GEITHNER: Henry James said about the U.S.: “It’s not a country—it’s a world.” So, yeah, there’s a lot of diversity. (Laughter.)

LAUTENSCHLÄGER: You see? And in the euro area, I mean, we have nineteen countries and we have banking systems, national banking systems, which have homework to do with regard to nonperforming loans. And this is the focus or the first priority. And then we have banking systems which have no problem whatsoever with nonperforming loans, but they might have a problem with too much competition in their national market. So it’s very diverse, very diverse. That’s why I have a problem with these “the European banks.”

What I can say, on average profitability is still too low from my point of view, and there needs still to be homework done. And homework with regard to the business model, homework with regard—and that was one of the horizontal studies we did in the SSM—homework with regard to the internal pricing and the strategy how, you know, business model risk strategy was then implemented in the—in the single business lines. Because we do have about twenty-four of the 110 banks the SSM—the biggest banks of the euro area, which we are supervising—twenty-four of these banks make good results for the last eight years. And they are diverse with regard to the size, so it’s not only small or big or medium-sized. They are—they do not have the same business model. They do not—they are not located in the same countries. So they have no common factor except that all twenty-four are very well in their strategy, that they are agile to change, and that they have a good pricing mechanism, an internal one.

GEITHNER: They’re better run.

LAUTENSCHLÄGER: It’s nice to say, yeah. So, from my perspective, there needs to be homework done still. So it does not mean that we can be satisfied. There needs to be—there needs to be a push on the profitability. And to be very frank, there needs to be consolidation, too. We have overcapacity. So that is the status about the European banks.

You ask about banking union, too. I mean, we made huge step forwards by establishing this euro area joint supervision with the ECB in form of the SSM, the Single Supervisory Mechanism, being in charge of the biggest banks in the euro area. Just to give you an idea, these biggest banks cover 80 percent of the banking assets in the euro area if I am informed correctly, because I’m not vice chair anymore since February. Yeah, yeah, it’s 80 percent. And we have about three thousand smaller ones and 110, 114 banking groups with about one thousand banks in there, which are then supervised by the SSM, and we’ve made huge progress there, I mean, that I can say from my own experience.

That is the one part of the banking union. A second part is the Single Resolution Board. And here we have, you know, an authority on the euro area side where we can more or less have a joint assessment and move together. What is still missing is the deposit guarantee scheme on the euro-area level, and I just hope that the high-level working group will make progress. I mean, there is a discussion on do we need more risk reduction before we have a joint deposit guarantee scheme or are we already far enough. From my point of view, I mean, whatever we still need to do on the risk-reduction side before sharing, I mean, it should be a kind of milestone plan where you move on both sides. When you reach certain objectives, you move the next step in the risk sharing, and that should be manageable. But it is very important.

What was decided and what I welcome very much is the backstop to the Single Resolution Fund, which I think is very important. Very important for the discussion on the deposit guarantee scheme in Europe is the reduction in the nonperforming loan book, which was quite successful, I think. But it needs still some more homework.

And then I would, if—I mean, if I look on the—on the EU and on the euro area, I would welcome—apart from the banking union with this deposit guarantee scheme, which is the last part in there, I would very much welcome a stronger push for a capital market union because I believe that an internal market, a single internal market in the EU needs more instruments which are raising the joint level of a capital market. And here I’m talking about insolvency regimes. I’m talking about instruments where you put the capital market to a different level.

GEITHNER: Great. Well, that was terrific. Nice introduction. And you know, I’m touched by your—struck by your relative calm, I would say, reassurance that, you know, growth is not—economies aren’t falling out of bed and that central banks, although they can’t carry the full burden, who are dealing with the many challenges many economies face, they still have substantial remaining ability to act and protect us from the risks we face in the—in the economy today. So—

LAUTENSCHLÄGER: But I wouldn’t like everybody to believe that then everything is fine and other stakeholders do not have to do their job. I mean—(laughs)—let me be very clear here, it’s a balance there.

GEITHNER: Balance, yeah. It’s a challenge.

OK, so, questions.

LAUTENSCHLÄGER: Oh. (Laughs.)

GEITHNER: And again, let me—let me just encourage you to be—to be—ask a question, be concise so you can keep some space for your colleagues to cover as many things as possible. Yes. And I think our convention is tell us who you are and—not your history, but just a brief description of your thing—(laughter)—and then—

Q: Hello, Ms. Lautenschläger. My name is Tara Hariharan. I work at a hedge fund called NWI.

My question for you is, now that the ECB has thoroughly linked forward guidance to inflation, could you comment a bit about the realism of having a 2 percent inflation target in the eurozone? Should we be revising it maybe more lower, given that structurally inflation seems weak across the world? Because otherwise, the feasibility of reaching that target in the short term seems very unlikely. Thank you.

LAUTENSCHLÄGER: We take one to one? I have quick answers so that we get to everybody, huh? OK.

I mean, you already mentioned some arguments by a strategy review as a necessity to do, and I hope that we will do so next year. I cannot tell you the outcome—(laughs)—already upfront because we haven’t started with it, but there are arguments in favor as well as against changing inflation aim. And let me be very clear, we do not have an inflation target; we have an inflation aim. And from my perspective it’s asymmetric until now. Before we did not change our strategy as the overall price stability is defined by the Governing Council by being below 2 percent and the inflation aim, which is, you know, below the definition for price stability, is then close but below 2 percent.

GEITHNER: Yes?

Q: Robyn Meredith, author of The Elephant and the Dragon.

I wanted to go back to the U.S.-China tensions or the trade tensions generally. You said—

GEITHNER: Are we—is the U.S. the elephant?

Q: (Laughs.)

GEITHNER: Yeah, OK. (Laughter.)

Q: India-China.

GEITHNER: All right. (Laughter.)

Q: When you talked about it, you said that in the medium and long term you saw a large impact for the trade talks. I’m guessing that what you mean is impact on supply chains in the real economy longer term. But can you drill down and tell us more about that, please?

LAUTENSCHLÄGER: Well, I’m—I have to admit that I do not have all the figures with me. We calculated different scenarios, and I do not know whether I said large but relevant because large is something, but it’s a relevant—it’s a relevant effect on GDP—on trade first and then GDP. And this, then, drills through all kinds of different factors, ending with the labor market for sure. But I’m very sorry I do not have these many, many figures with me, and I do not even know whether we published it. So I wouldn’t be allowed to talk about it.

GEITHNER: Yes.

Q: Thank you very much. Paul Sheard, Harvard Kennedy School. (Coughs.) Pardon me.

At the last Governing Council meeting there was an important shift in the wording around fiscal policy, namely that the Governing Council called for governments that had fiscal space to use that fiscal space in an efficient and timely fashion. Those that had high debt levels, to allow their automatic stabilizers to operate very freely. And President Draghi really highlighted that point in his press conference and used some very strong wording to the effect that it was high time for fiscal policy to take charge. So quite strong words.

My question to you is, apropos of this sort of fiscal policy response, what does the ECB envisage in terms of the nineteen governments, members of the fiscal union, either undertaking those helpful fiscal policy responses independently, or rather doing so in some sort of coordinated fashion, maybe through the euro group or the commission, particularly having regard to the fact that those countries with the most fiscal space are likely to be the ones that need it the least.

LAUTENSCHLÄGER: Well, first of all, let me clarify. We always had in our introductory statements of the press release a part, in the last meetings, where we talked about I think structural reforms as well as fiscal space. But it is correct that we changed the language around it and made it more obvious and stronger? We did not, and we should not, discuss about how then governments would do this. I mean, this is not our task to do. And I think we would move into a territory which is not ours. And it should not be done. You know, the mandate—I mean, we are independent. And I value the independence of a central bank very much. Hence, if you want to stay independent you keep in your mandate otherwise it gets endangered. So I would not give any government a clear public advice about where to spend. And whether it should be coordinated, that should be discussed within the right fora.

Let me be very clear. I mean, I fully agree with that there needs to be a discussion about how do you use fiscal space you have in order to support medium and long-term growth. But some of the concerns you could have, and I have too about global—the global economy and about the euro area economy, is linked to factors which cannot be addressed by just fiscal spending. I mean, trade tensions have to be resolved in other areas than in fiscal space.

GEITHNER: Yes.

Q: Niso Abuaf, Pace University.

At what level of low interest rates do the costs start offsetting the benefits?

LAUTENSCHLÄGER: That is a quite difficult question. (Laughs.) I will not give you a number, a figure for that one. I mean, it’s pretty obvious and you will be totally disappointed that the lower you get. And not only the lower, but the longer. The effect, the positive effect of such a measure gets less and the negative effects get more obvious. So there is for sure—I mean, you need to think very much about the cost-benefit—the cost-benefits of lowering interest rate further. And it needs to be seen together with—in a package together with the signaling effect. And pretty much not only with regard to the impact of the single instrument. Let me try to word it differently, because English is still not my native language, in order to make to clear. You can have single effects of single instruments. And they can have—they can have a low impact in the single impact, but they can have an impact in the assessment of the market in—within a package. So if you do have a comprehensive package, it can send signals about lower for longer, which then have an impact on the overall assessment of the market participants. But it might not be the single instrument which would have in its singleness an effect. Do you understand me? Sorry for—I mean, I could have said this in German much better, ja? (Laughter.) sorry for that.

GEITHNER: Let me say, your English is excellent and you’re very clear and crisp, and we welcome that.

LAUTENSCHLÄGER: OK.

GEITHNER: Maybe I’d just follow up on this question, just for the room. This is not a room all of central bankers. Why don’t you explain what are the negative effects? What are the costs? And which ones worry you more? Is it the effect on spending because people who live on fixed incomes have to save more? Is it the effect through the banking system in profitability and lending? Is it something else? What is the negative effect? Is it the long-term distortions to incentives, zombie companies?

LAUTENSCHLÄGER: Yeah, yeah. It’s for sure—I mean, for me, that’s why I’m perhaps a little more critical on cuts. It is—I mean, let—no, let me start so that I do not give the wrong impression. Let me start. I think that the negative rates had a very clear successful effect on the market the last years. So they had very clearly to show the market, to increase investment, you know, to spur investment. That is very clear. So I think it is a measure that you can use in order to ensure that market participants feel safe to invest for a longer time horizon, that banks are incentivized to increase their credit portfolio. It helps too to improve the quality of the loan portfolio. It showed very well in the euro area. So it was successful.

But the longer you have negative rates, and the deeper you go, the more the negative effects come up. And then, you know, at one point in time when you balance the cost-benefit, it might then turn. And it is always the question, do you need to still support lending when you have quite a good lending growth? And here, the negative effects are for sure not only with regard to bank profitability, but you have to take into account the behaviors of the retailers with regard to the saving behavior. You have to take into account, for sure, pension funds. I mean, it’s very clear if you have a short lift negative interest rate period, I mean, the investment horizon for a pension fund is a long one. So there is not a problem to have a dip in there, but the longer it takes the more problems you get.

You spur, perhaps, bubbles in the real estate sector. So you have to take into account financial stability risks with regard to asset price bubbles. All this have to be taken into account. Well, and then you have to ask yourself whether, with the economic environment, with the slowdown but not with—with a clear recession, you need to have even a further cut. I mean, that you have to ask. Data-driven, yeah.

GEITHNER: Yes. That was excellent. That was excellent. Thank you.

LAUTENSCHLÄGER: Yeah?

Q So given what you just said, then, why would there be—

GEITHNER: Remind us who you—who you are.

Q: Oh, I’m sorry. Charles Henderson, AIG.

So then, given what you just said, why more now, if those negatives are possibly going to come into play, and do you expect in fact even further easing?

LAUTENSCHLÄGER: Well, I mean, let me be very clear. The Governing Council decided on the basis of its joint assessment as a group that the slowdown we see in the euro area was worth of giving a very clear signal in the package, that we—that we support the economy in order to reach our price stability mandate. So there was a decision in the majority that the time now acting ahead of the curve would be the right—to do so. That was, you know, the overall decision.

Q: People are now coming forward—

GEITHNER: Hard question to ask a central banker, but we can try. (Laughter.)

LAUTENSCHLÄGER: Well, I mean, I can only—I mean, that is—let me be very clear. I mean, last week we had an assessment about the economic situation in the euro area and the global economy that made us decide to react in a decisive and comprehensive way. And in the full confidence that this would be sufficient, according to what we see in the current situation. And you can grab from my—from my position that I even perhaps was here and there, not in this camp. So for me, your question is pretty theoretical. (Laughter.)

GEITHNER: That was gracious. (Laughter.)

LAUTENSCHLÄGER: You know, when you speak English as a German, you always feel absolutely brutal in your language, you know? (Laughter.) Because in German you would say it much more politely and nice in between the lines, but when it’s a foreign language it gets much more difficult.

GEITHNER: You’ve done fine.

LAUTENSCHLÄGER: I can be very charming in German. I’m so sorry that you can’t—(laughter)—

GEITHNER: Yes?

Q: Ed Cox, Patterson Belknap.

And this may be another theoretical question, but you started by eluding the trade issues, particularly with respect to China. What are the possibilities of coordination between the EU and the United States with respect to China’s mercantilist trade policies, particularly as here in the United States what is a trade issue has morphed into a bipartisan national security issue, which I’m sure complicates it?

LAUTENSCHLÄGER: Well, this is really not my field of expertise, and I will not be here as a quasi-representative of the U.S. American government. Sorry for that.

GEITHNER: Yes?

Q: Francisco Blanch with Bank of America.

So I have a question for you again on negative rates; so sorry to bring you back to the topic. But under what conditions do you think Europe will be—if at all, be able to get out of this negative rate environment? Do you need to see—is it just about bringing inflation higher, growth higher, or—asked the question before, can—do we have to change the inflation targets? Or what are the conditions that we need to see?

Thank you.

LAUTENSCHLÄGER: Well, first of all, let me repeat we have an extraordinary accommodative monetary policy stance.

So you can see with regard to several factors in the euro area that there is a positive trend. I mean, the financing conditions are very well. I mean, how can you say this? I mean, the rates, they are easy. Yes, they are really easy. The labor market is doing very well. We do see a raise and a relevant rise in wages. Hence, there are a lot of factors, which should push the inflation rate higher. It needs longer than we expected, but I am still confident in particular with—I mean, the even further easing of last week’s decision, I feel confident that we will move into an area where we do see inflation rising.

I mean, when you look into the slowdown, you can see for sure some factors which might not be temporary, but you see one or two. And I mean, I always had to laugh a little bit—don’t quote me please—in the Governing Council last week because in Germany you can see again a dip because of the package holidays. It’s always the package holidays; we German, we travel quite a lot, and we love so—to do so. So we have a little bit of one-off factors. And I still feel confident that we will see growth even rising to what we have now, and hence, I’m not as negative as you are.

Q: A-ha.

GEITHNER: Yes.

Q: Hi. Andy Spindler, from the Financial Services Volunteer Corps.

What is your assessment of the economic performance and prospects of some of the southern tier countries? You mentioned Spain earlier, but what about Greece and Italy? Seven or eight years ago Greece was in real crisis. How do you see that situation today and how far has it come, and what about Italy?

LAUTENSCHLÄGER: Well, with regard to Greece, yes, they had a very tough and long, long period of tough economic development. But last year you could see that they even outperformed what was—what was asked by the different, you know, stakeholders. So they had a very good evolution. And now it is key to keep the measures and the instruments and the tools who enabled this kind of good performance, to keep them and to see that they move further along the very positive line.

So Greece, I mean, it’s—it’s not that they have done all the homework. Do not misunderstand me. I mean, there is still a way to go. But the last year’s figures show that they are on a good path.

And I would not like to talk only about single countries. I would rather like to ensure that everybody understands that all of the countries in Europe, mine too, have to think about their competitiveness, forward looking, and that they have to always check and do their homework with regard to structural reforms. And this is not limited to Italy or Greece or Spain, who did a lot of homework, but it is—it includes all of the countries.

GEITHNER: Sabine, can I just ask—I’m just sort of curious about this thing. Maybe it would be interesting for the room to hear how the ECB works. You don’t—do you—do you actually vote, or do you sometimes vote? How do you decide when you vote? Is it more a sense of the room? What’s the—what’s the dynamic?

LAUTENSCHLÄGER: We rarely vote.

GEITHNER: Rarely vote. How do you decide when to vote?

LAUTENSCHLÄGER: Excuse me, how?

GEITHNER: How do you decide when you vote?

LAUTENSCHLÄGER: How we decide?

GEITHNER: How do you decide, since you say you rarely vote—

LAUTENSCHLÄGER: Well, I mean, it’s very clear. We rarely vote. We are looking for consensus and you can get, you know, from—I mean, everybody speaks. Everybody of the—of the Governing Council members speak, whether you have a voting right or not, because you do know that with the increase of member states in the euro area the voting right is rotating.

GEITHNER: Like at the Fed?

LAUTENSCHLÄGER: Like at the Fed, exactly. But everybody speaks, totally independent of whether you have a voting right or not. And then you get—I mean, you get an idea where the large majority is heading to, you know?

GEITHNER: Mmm hmm. When you say you rarely vote, when do you vote?

LAUTENSCHLÄGER: I have to admit I cannot remember.

GEITHNER: Can’t remember the circumstance, yeah. (Laughter.)

LAUTENSCHLÄGER: Yeah.

GEITHNER: Yeah. The Fed, I mean—

LAUTENSCHLÄGER: No, I cannot remember, no. Mmm hmm. You vote pretty usually, yeah?

GEITHNER: Well, the—yeah, the FOMC, you know, like the central—the ECB in some ways, you know, has rotating votes too. Everybody speaks, but the voting members are asked to vote.

LAUTENSCHLÄGER: Oh, OK.

GEITHNER: Explicitly.

LAUTENSCHLÄGER: Ah, no, no.

GEITHNER: Or they can choose to—I guess another way of saying it, maybe a little more subtlety is they can choose to—to dissent, which is sort of like a vote. Not exactly the same thing.

LAUTENSCHLÄGER: Yeah, but then it’s not a vote. I mean, so it means if you are quiet, you say yes.

GEITHNER: No, I think that—

LAUTENSCHLÄGER: Yeah, yeah, yeah. I mean—(laughter).

GEITHNER: I always used to think about the Fed as voting and the ECB sort of sometimes, sometimes maybe.

Yes.

Q: Nick Bratt with—(comes on mic)—thank you. Nick Bratt with Lazard. Thank you very much for your clear comments.

I wonder if you could share with us when you were deliberating about the prospects of growth in Europe, what kinds of assumptions you were making about U.S. tariff policy, particularly with respect to European exports to the U.S.?

LAUTENSCHLÄGER: No, I can’t. (Laughs.)

Q: I’m not surprised.

LAUTENSCHLÄGER: I’m very sorry, but you have to wait for the minutes, the records to go out.

GEITHNER: You know, it’s an interesting thing in some ways because you’re putting a huge amount of weight, in terms of what is driving the slowdown, on the direct effects and the fear associated with—uncertainty associated with the trade—you call them tensions, euphemistically.

LAUTENSCHLÄGER: How do you call that?

GEITHNER: No, you could—that’s fine. (Laughter.) You could—you could say that’s reassuring, because that’s a—that’s a policy tool that can be changed. And that if you—if one were to choose, the countries were to choose to dial those risks back, things would be fine. You could say that’s a reassuring thing, or you can say it’s a troubling thing.

I think it’s—I think in the U.S. it’s a little different from Europe in some sense, in the sense that in the U.S. you can—I’m saying this as a statement, but you can disagree with me—you have other things that are affecting the economy, even though in the U.S. as well we haven’t seen alarming deterioration in growth yet.

But, you know, we’ve seen the fading of the fiscal stimulus. We’ve seen obviously the direct effects of the trade—the trade actions and the fear associated with it. And we’ve seen the effects on demand that come from China slowing. And China slowing is not—is not—is probably an induced slowdown as the economy, as the—as the—as the policymakers guide the economy towards a more sustainable growth rate. But part of it is the effect of the trade thing.

So I’m—I’m interested and I’m trying to figure out, well, should I be reassured by the fact that the way you think about the slowdown, it’s mostly around the direct and anticipated effects of the trade tensions?

LAUTENSCHLÄGER: I think there you slightly misunderstood. I mean, I think, yes, that the trade tension play a relevant role. I think part of it is Brexit, too, which is a political uncertainty, again, which you can, you know, zero/one or whatever. Orderly Brexit different from a, you know, no-deal Brexit, which does not—does not on an aggregate affect the EU or the euro area. Very big, but it’s, again, the confidence level which you have to take into account.

Yes, you have the China slowdown, but part of it is the follow-up, the consequence of the trade tension. So it’s a mixture. But trade tension plays a relevant part of it, yes.

GEITHNER: Well, you were excellent. Very grateful you came and shared your views with us at this interesting time in the world economy, and it’s nice to see you again.

LAUTENSCHLÄGER: It was a pleasure.

GEITHNER: Thank you. (Applause.)

(END)

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