Interview with Green European Journal
Green European Journal published an interview with me in which I elaborate on the perspective of Positive Money Europe on the monetary policy debate, the evolving role of central banks for climate change, and the prospects for Eurozone reforms.
Green European Journal: The financial crisis that began in 2008 drove many people to find out about how not only banks but money itself works. Positive Money emerged as part of that effort. What is Positive Money and why was it created?
Stanislas Jourdan: Positive Money is a non-profit organisation which was founded in London in 2010, soon after the subprime crisis and the financial crash. At the time, very few people knew how the monetary system functioned – namely that money is created by banks by creating debt. Positive Money was created out of the realisation that the way money is created was one of the main causes of the financial crisis, but could also be the solution.
Could you explain how money is created?
Under the current system, to borrow money to buy an apartment, you need to get a loan from a bank. Let’s imagine that the banker decides to lend you 100 000 euros. At the moment you and the banker sign the mortgage contract, that money does not yet exist; only when the bank credits your account with the 100 000 euros is the money created. In other words, and contrary to what most people think, banks do not use savings from other customers to lend you money.
Normally, around 97 per cent of the money we use is created in this way. The remaining 3 per cent are coins and bank notes, which are created by the State. So the vast majority of the money supply is created by banks, which has many consequences for inequality and financial stability.
Since the 2008 crisis began, one of the steps taken by the European Central Bank (ECB), along with central banks in other major economies such as the UK, the United States, and Japan, has been quantitative easing. What is quantitative easing and why was it introduced?
Quantitative easing is just an obfuscated way of saying “money creation”. Central banks realised that, in order to respond to the crisis, they needed to inject more money into circulation to keep the system afloat. With quantitative easing, the central bank creates money and uses it to buy financial assets from banks and investors. In the Eurozone, the ECB has injected 2600 billion euros so far into the financial system through this mechanism.
How did quantitative easing come about in Europe?
The ECB was late in the game. The US Federal Reserve and the Bank of England began quantitative easing in 2008-2009. To some extent, this policy was necessary, because it provided a strong response to stabilise the market in a moment of crisis. Through quantitative easing, central banks can tell the market: “Don’t worry about a crash, we are here to support the system.” However, outside of those acute moments of crisis, quantitative easing does not help to really stimulate the economy, because the money does not enter the real economy but just stays in the financial system.
the vast majority of the money supply is created by banks, which has many consequences for inequality and financial stability.
When the ECB began quantitative easing in 2015, it was probably too late. The total amount injected through quantitative easing over three years for the Eurozone is equivalent to 20 per cent of the Eurozone’s GDP – massive. What is puzzling is how little effect it had. Five years ago when the European Central Bank was discussing this policy, many people, especially in Northern Europe, were concerned that it would drive hyperinflation. Today, inflation is stable at less than 2 per cent, which is probably too low.
So the idea was to give money to banks and hope that they would lend money to businesses who would then employ workers, and that way the whole economy would pick up…
That is the theory. By purchasing lots of safe assets from the financial sector and giving cash in exchange, central banks think that financial investors will be pushed to lend more into the economy. This is a nice fairy tale, but in practice it has not worked that way. Actually, what we have seen is rising asset prices and no big increases in lending.
What does that lack of impact tell us about our economy as a whole?
First, it underlines that pumping more money into the financial sector does not help the real economy. It also shows us that central banks across the world are confused because their theories about how the economy works no longer hold true. Quantitative easing and cutting interest rates closer to zero were unthinkable 10 years ago, but inflation is still not picking up.
The question of why central bank models no longer work is a major subject of academic debate. My personal view is that the traditional monetary policy approach does not work anymore because the surrounding economic environment has changed, in at least three ways. First, globalisation means that workers compete across the whole world and therefore wage growth is no longer a source of inflation. Second, although around 10 million jobs have been created since 2015 (as ECB officials keep telling us), the quality of jobs has worsened: precarious, low paid, often part-time. This means people are less likely to bargain for better wages. Lastly, technological change is driving prices down. Take smartphones: they replace your phone, your calendar, your notebook – all goods and services that you would have needed to buy 15 years ago at greater expense than today. This “technological deflation” phenomenon is underestimated and not well understood by central banks.
Central banks may be reliant on old models but they have also been very bold. What oversight exists for the actions of central banks?
Central banks are special institutions because they are independent from the political system. The control of who can create money and how much is deemed too important to be left to politicians. But independence prompts the question: how can we make sure that central bankers do not go off-track?
The ECB is, at least by law, accountable to the European Parliament. In practice, that means the President of the European Central Bank, currently Mario Draghi, visits the European Parliament four times a year and MEPs can ask him questions. The ECB also responds to written questions. Every year, the European Parliament adopts an annual report on the activities and performance of the ECB.
How responsive is the bank to questions and evaluation?
The ECB is quite responsive. When MEPs ask embarrassing questions, the ECB finds a way to dodge them, but it is a game and every institution does that. Actually, based on our experience, the European Parliament as an institution could do a much better job of scrutinising the European Central Bank, despite the thorough work of some MEPs. Too often a question is raised, not answered, and the matter is forgotten. Parliamentarians need to be fully informed about the different problems at stake and to make sure that there is continuity in the exercise of accountability. Positive Money’s latest report advances some proposals for improving the role of the European Parliament in this process.
One of the campaign areas that Positive Money has been working on is “greening” the ECB. What is that about?
Greening the ECB is a good example of how accountability channels can be properly used. This work began from the realisation that if the ECB can create two trillion euros, then it could also create money to fight climate change by financing renewables and energy efficiency. This basic idea was coined “green quantitative easing” in a report by British Green MEP Molly Scott-Cato in 2015. Positive Money decided to launch a campaign around it.
There might not be trillions of euros for climate change just yet, but the culture in central banks is changing.
While green quantitative easing is a nice idea, the reality is that the ECB is currently doing brown quantitative easing: it invests significant amounts in fossil fuel companies such as Shell and Total through its corporate bond purchases. Since our campaign, Mario Draghi has recognised that the ECB is bound by the Paris Agreement and the bank has increasingly begun to consider the climate impact of its own monetary policy. The Network for Greening the Financial System, a network of central banks, has been created and includes the ECB, Banque de France, the Dutch National Bank, and the Bank of England. The conversation is moving slowly. There might not be trillions of euros for climate change just yet, but the culture in central banks is changing.
The ECB seems to have been slowly reinterpreting its mandate, but is it sufficient? Couldn’t more be done to make central banking accountable?
Central banks need to serve the needs of society. The ECB has shown that it can reinterpret its mandate and existing accountability channels can be used more effectively, but in the long term we might need to revise its mandate. The main objective of the ECB is price stability. But the EU treaties also state that, if price stability is achieved, then the ECB can also support the general policy of the European Union. The question then is which? That is where political consensus has to be built. In our view, if there is only one secondary objective for the ECB right now, it should be climate change.
In Europe, central banks have been injecting money into the system through quantitative easing, but at the same time, austerity policies have restricted public spending and lowered wages. Aren’t Europe’s big economic policy levers working in opposite directions?
It is a shocking paradox that the ECB injected trillions of euros into the financial sector at the same time as people were being told to tighten their belts. Quantitative easing could have stimulated the economy, had governments been allowed to run larger deficits. Quantitative easing has reduced borrowing costs for governments, but they are not taking advantage of it. Germany is borrowing on negative interest, and France is borrowing at an extremely low interest rate. When borrowing is basically free, you should invest. But the way Maastricht rules and the Stability and Growth Pact are implemented prevents Eurozone governments from doing so. Public opinion has been shaped to think of public spending as bad, when, from an economic point of view, it is currently the solution. The irony is that central banks contributed to this public perception, but now they are also trying to fight the deficit phobia because they realise that they need fiscal policy to achieve their objectives.
How do you explain this inconsistency?
The ECB is independent but nevertheless it is the most powerful institution in the economy, because it has the ability to create money. When the crisis burst, the ECB had no choice but act to save the system, even though injecting vast amounts of money contradicted the fundamental ordoliberal principle behind the setup of the ECB. Now, the ECB has broken the taboo it did not want to break and the genie is out of the bottle. And to that you can add that central banks tend to be socially homogenous institutions that suffer from groupthink.
Looking ahead, central banks are facing a major dilemma: either they radically change their approach or they need a strong narrative to justify why they can use money creation to keep the financial system afloat but not to support society’s objectives.
Politicians such as Emmanuel Macron have tried to put Eurozone reform on the agenda without much success. With an eye on the upcoming European elections, where do you see the future of the euro and the Eurozone?
The obvious way forward is more solidarity. I’m aware of the significant aversion to a transfer union, but what is the point of a political and monetary union if not for sharing resources? The de facto transfer union has been from south to north so far. Solidarity should be the next political frontier and we need to win that cultural battle. You cannot pretend to be pro-European and still oppose financial solidarity. Solidarity of values or talk about peace is not enough; the journey of the European Union should bring us much further.
The fiscal union and monetary policy debates are linked. With a Eurozone budget, it would be much easier for the ECB to financially support the European Union. The problem today is that the ECB does not want to finance governments because it would be contentious. It would be much easier and politically acceptable for the ECB to purchase bonds for a Eurozone budget as opposed to subsidising Italy or Germany.
That being said, ‘Eurobonds’ already exist through the European Investment Bank. The European Investment Bank is guaranteed by all member states of the EU and it issues bonds. These are effectively a form of Eurobonds and the ECB is already buying them. So, the idea of Yanis Varoufakis and a number of Green parties in Europe for a Green New Deal financed through the European Investment Bank is completely feasible, technically and financially. The problem is whether a political majority will support it.
Quantitative easing stopped in December 2018. That decision and other factors such as Brexit and growing protectionism has caused some analysts to worry about a new financial crisis. Is the Eurozone better prepared than last time?
In fact, the ECB has not really stopped quantitative easing. ‘Paused’ is a better word to describe it. The ECB is not increasing the amount of money that it injects each month, but it is not decreasing it either. In 2019, about 180 billion euros of debt purchased during quantitative easing will be repaid to the ECB. The money received from debt repayments will still be reinvested in asset purchases.
On the risks, I am not going to predict when the next financial crisis will be but, basically, the economy is not much safer than in 2008. We have more debt than before and private debt is particularly high. What we must realise is that the conventional tools for coping with crisis, namely interest rates and quantitative easing, have been pushed to their limit. Policy-makers in the ECB and elsewhere need to be prepared to think radically, namely about the restructuring of private and public debt, and helicopter money.
What is helicopter money?
Simply put, helicopter money means the ECB would distribute money straight into people’s bank accounts. It may sound silly, but plenty of renowned economists have talked about it, as did Draghi in 2016. The whole problem with quantitative easing is that the money does not trickle down into the economy. Obviously, there are logistical challenges to its implementation, but helicopter money would be the most direct and effective way of stimulating the economy. If a new crisis hits, these ideas should be on the table.
This goes for debt restructuring too. As a result of quantitative easing, the ECB owns 20 per cent of public debt. What if the ECB simply cancelled those debts and all Eurozone governments –not just Italy– no longer had to repay them? What would happen? Nothing. It would be just fine, and it would automatically reduce all Eurozone debt by 20 per cent.
Money as an institution in itself is increasingly under question in politics and societies around the world. People are even creating their own currencies. What are the implications of this debate for the future?
We live in a time where many institutions within our democratic system are being questioned. Democratic representation, the gilets jaunes in France, the internet and the media – so many institutions in our society are being disrupted. Money is just another part of the social contract but one that, until now, was implicit. Like other institutions, money is being challenged and questioned.
the social contract behind the current monetary system is no longer clear or fully accepted by the people
Money is a protocol for society to exchange. What language is for ideas, money is for goods, services, and time. While I am sympathetic to what some people say about the need for a diversity of currencies to coexist from a philosophical perspective, there is a practical question about network effect. The network effect means that it is more efficient for everyone to use the same language, which is why English dominates. Money is the same. What the trend of cryptocurrencies and local currencies does underline though, it is that the social contract behind the current monetary system is no longer clear or fully accepted by the people.
One of the many things that undermines the social contract is climate change, because it puts the very future of our society at risk in a way that previous generations have not had to deal with.
There is an interesting paradox around the problem of climate change and the problem of money. All those years, central banks and society thought of money as scarce and natural resources as abundant. However, money is something we can just create. It is not scarce; it is by nature abundant. Natural resources are scarce – more cannot just be extracted from the ground. Society needs to understand that the lack of money is not the problem, and that changing the way we think about money might even be the solution. And it could happen. Mario Draghi said, “The ECB will do whatever it takes to save the euro.” Well, why not say, “The ECB will do whatever it takes to save the climate”?