Will the euro overwhelm the dollar in the years to come?
Ewald Nowotny: "The USA uses the dollar as a weapon"
What about the currency reserves?
Today the euro is only 20 percent. This proportion will certainly be higher in the future - because I am assuming that in 20 years' time there will also be a uniform European capital market which in terms of its liquidity and diversity will at least correspond to the American one. That improves the conditions.
What's so great about having a reserve currency?
It's about the so-called “exorbitant privilege”. This consists of running up debts in your own currency and a central bank can never go bankrupt in your own currency. There you have a lot more leeway than if you were to get into debt in a foreign currency. The USA already has a debt ratio of more than 100 percent of economic output. But that is not a problem immediately because it is a debt in dollars, in its own currency. If you are a developing country and the debt is also in dollars, the repayment has to be in a currency that you cannot print yourself. So the country can go bankrupt.
So is the euro a threat to the dollar's status as a global reserve currency?
What we see is more of a normalization. China and other Asian countries still have per capita incomes much smaller than the US, but growth is much higher in Asia. The population development is also more dynamic. So China will become the largest economy in the world in the foreseeable future. But trading is not a zero-sum game. If China gets richer, the West won't get poorer.
Is the euro a expensive euro?
No, the average inflation rate in the euro area over the past 20 years was 1.8 percent. In the previous ten years it was 2.2 percent. And ten years before that, it was even higher on average.
China is already buying oil in yuan today. Why don't we Europeans buy in euros?
There is a strong political aspect to the oil trade. The US is currently massively using the dollar as a weapon. In connection with the unilateral enforcement of sanctions. This is particularly important in the oil business. The oil price is forced to be invoiced in dollars. And with every transaction in dollars you are obliged to follow the American sanctions against Iran, for example. Even if the USA is not directly involved in any trade. When it comes to oil exports to a European country.
Is that why the Europeans and the Chinese reject the new sanctions against Iran?
The Europeans, yes. The Chinese are much more resilient. There is already an oil price in yuan. And various procedures, where instead of a direct payment, there is an offset between oil exports and imports from China and the dollar is bypassed.
So a barter deal. This idea has now also arrived in Europe.
Yes. There is an attempt to establish a so-called special purpose vehicle. That would allow an exchange without involving the dollar. But today's economic relations are so intertwined that you quickly end up in the dollar area - and that is especially true for banks. For them, compliance with American sanctions is still the least risky option.
But is it even new that the Americans are using the dollar as a weapon?
Before that, the trend was more that the sanctions have decreased. But the Trump administration is pursuing a much more aggressive foreign trade policy. That showed that there is a weakness in Europe and it is legitimate to consider how to counter it.
This new agency, the Special Purpose Vehicle, should have come to Austria. Did the Americans apply pressure to prevent that?
I don't want to comment on that.
Will the agency exist in the end?
Yes, I think so. But I cannot yet say how great the practical importance will be.
Could this result in something like a euro oil market and a euro payment system?
It is already the case that the euro is gaining in importance as an invoicing currency. The mentioned 36 percent share of payment transactions are the numbers of the Swift system. This is the world's leading payment instrument. It is not that we are at the beginning. It is an advantage for every exporter to settle in their own currency, because then they have no exchange rate risk.
What new institutions does the eurozone need?
First of all, a really functional European capital market is needed. The banking union works in essential areas. For a capital markets union, the financial markets need a uniform European product that corresponds to American government bonds.
Would that be the famous Eurobonds?
Something that is functionally equivalent to a Eurobond, yes. There are a couple of very interesting approaches. The so far unattained strength of America is based on the fact that there is a huge capital market that is absolutely liquid and has every kind of maturity and technically fulfills the best conditions as an investment instrument.
A complicated solution will not be able to replace this wide range of products. These can only be simple Eurobonds. If Germany and Austria resist, will they hinder the expansion of the euro?
Yes. When it comes to expanding the role of the euro, eurobonds en par with treasuries would be an advantage. But it's not about simply spending it, but about who the debtor is. In the USA the situation is clear, there is a state and a Treasury Department.
So do we need an EU finance ministry?
At first this is only an externality. I need a European financial policy. At least to the extent that Eurobonds can be issued.
Are you in favor of establishing an EU finance minister?
I would be for it. Of course, that does not mean that there are no longer any national finance ministers. But the segment of a common European bond market needs to be developed.
You can't do that through the back door. You have to sell that to people. What are the chances there?
We don't have to perpetuate the current mood forever.
In the end, will Brexit be a blessing for the eurozone because it strengthens the capital market?
Anything that weakens the unity of Europe is problematic. For me, Great Britain belongs to Europe and Brexit is therefore negative. Technically, London is still the largest financial center in Europe. Now it is undoubtedly weakening, but that means a period of uncertainty first. Not that Europe as a whole can benefit from it.
Does Russia belong to Europe for you?
Culturally yes, geographically in part and politically no. The concept of Europe should not be used too lightly.
Russia is a major exporter of raw materials. OMV is involved in the Russian Nord Stream 2 pipeline. Couldn't we just trade raw materials in euros with the Russians?
I don't think OMV and the banks that work with OMV would like to take the risk of provoking a conflict with the US. The pipeline is an economic project that needs some political backing. I believe it is right and that is why it is possible to build it.
We come to Austria. You warned that the government could disregard the independence of the central bank. Why?
In the government bill on the transfer of banking supervision, there were formulations that expressed a certain disregard for independence. There it was said "The central bank is commissioned" - something like that contradicts the concept of independence. In the meantime there have been good and constructive discussions with the finance minister.
Please explain where this independence exists at all if the head of the central bank is always filled according to the party membership.
The crucial point is that a central bank acts according to its own knowledge and belief within the scope of its mandate. It's not like the central bank can do what it wants. It has a set goal, in the case of the ECB that is to ensure price stability - and this goal must be pursued. You have to maintain independence from politics and the banking industry. As in any country in the world, filling the positions is a matter of politics, because those are the legitimate and elected decision-makers. But I have to choose people who are well qualified.
Your designated successor Robert Holzmann has this qualification?
I guess so. I know my colleague Holzmann from my academic days. He is a recognized economist who is sure to be able to perform this role well. But that is my judgment on the academic colleague. As far as the question of my successor is concerned, there are still no official measures.
In the coming year, ECB boss Mario Draghi will also step down. Here, too, there is no official successor. It should have been Bundesbank chief Jens Weidmann, but Angela Merkel shot him down. Does that annoy you?
I would think it would be a good thing if someone from Germany could head the ECB. Germany is the most important economy and it is important that there is a good connection between the top bank and the German public. I also believe that colleague Weidmann would be a very qualified candidate. From the point of view of the euro, it would be positive to see him as boss. But we shouldn't be conducting the discussion about Mario Draghi's successor so intensely just yet.
You will resign at the end of August 2019. What should the public remember when they think of Governor Nowotny?
About the fact that I helped overcome the biggest financial crisis since World War II in such a way that it did not develop into a global economic crisis.
The ECB has now ended the controversial bond purchases, when will interest rates come?
Ending bond purchases was the first step. A cautious rate hike would be the second. The markets are now expecting that in the second half of 2019. I am of the opinion that we should proceed more vigorously and faster with normalization than the markets are expecting. After the first interest rate hikes, we can let bonds expire and reduce total assets, which would also raise long-term interest rates.
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