The ECB’s Former Vice-President Explains The Historic Step That Europe Just Took

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:16)

And I'm Tracy Alloway.

Joe Weisenthal (0:18)

Tracy, I was thinking, we don't really talk that much about Europe these days.

Tracy Alloway (0:23)

I mean, I guess not in relation to the heady days of the Eurozone debt crisis. No, we don't.

Joe Weisenthal (0:31)

But also I feel like in this particular crisis, at least from some of our episodes, obviously we talk a lot in the Fed context, the US context, and of course, we've talked plenty about Hong Kong and Asia and Asian supply chains and China and so forth. Feels like we focus a little bit less on how this current crisis is playing out in the European context.

Tracy Alloway (0:55)

Yeah, I think that's right. I guess the implication is that maybe this has been unfair in some respects because there has actually been something very, very interesting going on in Europe at the moment.

Joe Weisenthal (1:06)

Yeah, I mean, for one thing, there's a good argument to be made that Europe, at least relative to the US, if not necessarily Asian countries, has done a pretty decent job overall of suppressing the virus itself.

And for years during the euro area crisis, there were always people like fiscal policy, fiscal policy, that's what's missing. You've got to spend more, got to get the Germans to spend more. And maybe this time it looks like they're actually doing.

Tracy Alloway (1:34)

Yeah, that's exactly what I was thinking. So we had the announcement of a big deal, 750 billion euros worth by the EU to fund a sort of long-term recovery fund for the eurozone. And that's a big deal because as you point out, everyone's been talking about fiscal stimulus, but it looks like the eurozone is finally going ahead and doing it.

Joe Weisenthal (1:58)

Right. And so this of course raises questions. And it's a theme that we've definitely had a lot on our podcast, which is does this auger something bigger for the post-crisis period? So of course, it's well known that there's a lot of money being spent by governments all around the world, including the US. But the question mark is, okay, when the acute crisis phase is over, do governments just retrench or does this become a sort of new macroeconomic stabilization model?

That's a theme that we've hit dozens of times, but it's particularly important in the European context, I think, because people have sort of identified the lack of fiscal burden sharing as sort of a basic architectural tension or flaw within the euro system.

Tracy Alloway (2:43)

Yeah, I think that's exactly right. How does the...

I don't want to say the intrusion of fiscal stimulus, but how does the arrival of fiscal stimulus on the scene actually reshape the way that monetary policy works? And I guess we should also mention that the ECB is also in the midst of another really important project, which is rethinking how it targets inflation. So we have all of this going on simultaneously, real existential questions for the role of the European Central Bank.

Joe Weisenthal (3:16)

Absolutely. Well, I'm very excited. We have a fantastic guest to talk about all of this. We are going to be talking with Vitor Constancio. He is the former vice president of the European Central Bank from 2010 through May 2018 He is now a professor at Navarro University in Madrid.

The perfect guest to discuss all of this. So without further ado, let's bring him in. Vitor, thank you very much for joining us. So are you happy to not be a policymaker in this time or do you miss being at the ECB during such an extraordinary moment?

Vítor Constâncio (3:54)

Well, it's always difficult to get out of, you know, executive responsibilities and I miss them, of course. I could not say that I am happy to be out.

For unfortunate circumstances of the COVID shock, we are again in a very important period of policymaking, but fortunately Europe has been doing well, I think, in this episode better than in the previous episode of 2010 to 2012

Tracy Alloway (4:30)

Just to start out with, walk us through the significance of the deal that was agreed, the 700 billion euros. You tweeted about it. Clearly you think it's important.

What's the significance?

Vítor Constâncio (4:44)

Well, it establishes four precedents that are very meaningful. In the first place, it involves a decision to issue common European debt. The Commission will issue 750 billion of debt to fund this program. And that's a first.

The second point is that this is going to be distributed in the form of budget transfers and not loans to the countries.