EU Policies

We Need A United Digital Europe

22. Handelsblatt Jahrestagung Banken im Umbruch
The ECB's bond buying should go this far and no further. Source: Marc-Steffen Unger for HB

In a wide ranging interview with Handelsblatt’s publisher, Gabor Steingart, the chairman of the board of directors of Swiss bank, UBS, expressed his distaste for the European Central Bank’s ultra-loose monetary policy. Alex Weber also spoke about why he thinks Germany’s digital transformation is taking so long and where the country could do better. The one thing the former president of Deutsche Bundesbank, Germany’s central bank, from 2004 to 2011, would not be drawn on though, is who he thinks would make a good replacement for the ECB’s current head, Mario Draghi, when Mr. Draghi’s term ends in 2019.

Mr. Weber, the global stock markets are performing well. Are they doing too well?

Naturally, the massive support from very expansionary monetary policy has boosted stock markets. One of the side effects of quantitative easing in the US was that the US stock market grew by 30 percent per year over three years. And if the American Federal Reserve now reduces its balance sheet – which it must and should do – it will reverse exactly this policy.

What do you think the consequences will be?

The real economy is certainly providing a tailwind for the stock market. But any about-turn in central bank policy will put a damper on the market.

The economy has picked up, but nowhere near as much as the markets. The S&P 500 has risen 250 percent since the Lehman Brothers collapse. The real economy and the financial markets have to a certain extent decoupled. Are share prices now set to plunge?

I don’t think there will be an immediate reversal, but I think there will be significant headwinds. Company takeovers continue to offer inspiration to the markets, particularly in the US. Many banks will also be able to keep their share prices up for a certain period, thanks to their good capital resources and share buybacks. But I think we have seen most of the dynamism on the stock markets for now. That’s why at UBS we currently regard diversified portfolios as more attractive than pure stock portfolios. But we don’t believe that a crash is imminent.

So we’re in a very risky phase. Central banks are gradually switching from buying up financial securities to selling them; central banks need to clean up their balance sheets, which means shrinking them. Do we need a different type of person at the helm of the Fed?

Janet Yellen has done a good job. There has been speculation in the US that Gary Cohn stands a good chance of succeeding Janet Yellen. I know him well. He was the second-in-command at Goldman Sachs and has an extremely good understanding of the markets. In a phase where the Fed is reducing its balance sheet, and we’re talking about what that means for the markets and the real economy, it could make a lot of sense for a market expert to play a role in American policy. Whether that’s as head of the Fed remains to be seen.

Europe’s central bank chief, Mario Draghi, has turned 70. Did you send him your best wishes on his birthday?

Yes, I send him my best wishes every year. I also see him occasionally – we’re both members of the “Group of 30,” a grouping of central bankers, economists and top bankers.

What did you write to him?

As always, I expressed my best wishes and wished him luck. I am firmly convinced that the next two years will demand the ECB president’s full attention.

I am firmly convinced that the next two years will demand the ECB president's full attention.

The attention of the ECB president, or of this ECB president? Or, to be more precise, are we not also entering a new phase of monetary policy in which a) someone aged over 70 should no longer be leading the ECB, and b) a different personality must initiate the phase-out of expansionary monetary policy?

Age isn’t really the issue. Think of Jean-Claude Trichet, who was already over 60 when he took office. Seventy is the new 60. But if you’re running a company, you don’t start to discuss top management roles when you’re in the middle of a difficult phase. The ECB should now concentrate on what is on its agenda now, and that’s the normalization of monetary policy. It’s the wrong time for any discussion about appointments. We should be talking about policy, not people.

But in reality, the strategy can’t be separated from the person. The best idea is no use if it’s implemented by the wrong people. Shouldn’t Germany’s next government make it clear that we have our own, competent people in monetary policy?

As with any corporate succession, you need to talk to the decision-makers behind the scenes to lay the ground for a change like that to take place. I don’t think it’s a good idea to do this publicly. The best management changes are the ones that only become public with the announcement that the new boss is taking his post. I think Germany is in a position to signal what the government’s expectations are.

But that’s exactly what hasn’t happened so far.

But Germany is already represented in many areas. Think of Werner Hoyer at the European Investment Bank, or Klaus Regling at the European Stability Mechanism. The ECB president’s term runs for eight years. So this is a discussion we shouldn’t be having until 2019. It would be counterproductive to put any of our cards on the table before then.

But can we agree on one statement: Bundesbank president Jens Weidmann is a good man and perhaps even the best we have in monetary policy?

I have known Jens Weidmann since he was a student, and I can fully vouch for the fact that he has a good understanding of the complexity of the markets and of the challenges involved in monetary policy.

Let’s go back to policy. Everyone is calling for a turnaround in monetary policy, including you. But that’s easier said than done. The markets have been driven by liquidity for years. And with countries like Italy, we don’t know exactly who will actually buy its government bonds if the ECB stops doing so. So how do we proceed with the phase-out of a loose monetary stance?

The question of who buys Italian government bonds should be of concern to the markets and the Italian government, but not monetary policy. In my opinion, monetary policy has reached a point at which something has to be done: Europe is growing well above its potential – the labor market has recovered substantially, and the economy is growing at a rate that is likely to trigger wage and price increases in the foreseeable future.

I can fully vouch for the fact that Jens Weidmann has a good understanding of the challenges involved in monetary policy.

But again, how can the phase-out of loose monetary policy succeed without causing turmoil on the financial markets or harming entire states?

I think we have to put an end to two unusual facets of current monetary policy. One is the massive expansion of the central-bank balance sheet here in Europe through government bonds, shares and other types of bonds. These purchases need to be reduced and then stopped. The US has provided a good example of how to do this, through gradually cutting back purchases over a certain period of time, or “tapering,” as it’s known. That’s what the European Central Bank has to do now.

And what’s the second component?

Negative interest rates. The ECB needs to end those as well. It has said relatively clearly that it is planning to adjust first its bond purchases and then interest rates. I don’t think it is necessarily mandatory to do it in that order. When Mario Draghi looks at monetary policy at the end of his term in office, in November 2019, we’ll hopefully be at a point where the ECB has reduced its balance sheet and its interest rates are positive again.

A side effect of this policy is that we are very preoccupied with the past, and that we’re scrutinizing monetary effects. That’s distracting us from the question of whether the real economy is actually thriving as a result of digital transformation. Share prices may actually not reflect the true, real-economy competitiveness of car makers and other sectors of German industry.

That’s entirely possible. If you look at the leading US index, the S&P 500, for example, the top 10 companies 10 years ago were still those making industrial products. Today the “top 10” comprises mainly technology companies like Google, Apple and Amazon. The DAX, on the other hand, is still led by industrial companies. This shows we haven’t yet made the digital transformation in Germany.

If you only looked at the biggest German blue-chip stocks, you’d be forgiven for thinking the internet hasn’t been introduced yet in Germany. There’s not a single internet company there.

Mr. Schäuble said on Wednesday at this very banking conference that “Germany is not a leader in digital transformation.” He’s right. But the question is how we get there. Both the public and the private sector have a part to play. On the one hand, our corporations need more digital transformation. But we also first need the infrastructure. That means we have to invest big time in digital broadband networks in Europe, particularly in rural areas.

On the campaign trail in the run up to the national election on September 24, Chancellor Angela Merkel has also said Germany isn’t digital enough, and has pointed the finger at German business. Do you think this is a way of deflecting blame, given that we don’t have the physical infrastructure, and aren’t using schools to create the mental infrastructure in children?

Words have to be followed by deeds. Both private and public players have a responsibility here. Let’s take the example that EU Commissioner Günther Oettinger recently discussed: You’re on a train from Germany to Brussels, and it takes so long for your cell phone to log in to ever-changing mobile networks that you’re unable to make any calls at all. Alongside a physical Europe, we also need a digital Europe. And to create this digital Europe, Germany and the European Union have to think and act much more digitally. The Benelux countries and other smaller countries like Estonia have already made huge progress in upgrading their technology.

So how digital are you? Which services of what tech companies do you use? Airbnb for overnight accommodation? Uber taxis for traveling to the airport?

We do use Uber taxis, particularly in the United States. When I’m at the IMF Annual Meeting each fall in Washington D.C., and I want to leave a friend’s house near Capitol Hill at 10 p.m., you’ve no chance of getting a normal taxi. We adapt to the local conditions.

Do you use Spotify when you’re listening to music?

No, but I use Shazam. If, for example, I hear a song I don’t know, I use Shazam. And if I then like the song, I’ll buy it.

At the same time, you and many other banks are still operating branches. Why? There aren’t any record stores any more…

There are fewer bank branches today, that’s true. And they look completely different, too. At UBS, we have redesigned from scratch all our branches in Switzerland. If you come into a branch of UBS today, it’s more like walking into an Apple Store. We have young employees who ask as you enter how they can help, and then guide you to the right service. We have largely abandoned the old concept of counters.

But is that radical enough? Do we actually still need private bankers in a time when machines can calculate a lot of things more accurately?

Wherever we can use artificial intelligence to make our business faster and better, we will of course use it. There are functions in the banking industry that are being replaced by artificial intelligence. But it won’t replace asset managers and personal advisors in customer relations.

What do you do to keep yourself personally fit for the future?

I regularly visit our digital laboratories, and I sometimes get trainees to tell me what they expect from the bank. If I’m visiting, for example, the US or Asia I visit innovative companies and try to understand them better.

Give me an example.

I met the founders of WeWork, who offer flexible offices – they’ll rent you whole floors or just a cubicle. They have built a multi-billion-dollar company from nothing. I find that fascinating. You have to ask yourself, do we have that kind of visionary talent?

And what is your honest answer?

On one hand, after meetings like that, I often feel older than I. On the other hand, I find them enriching, and they spur me on. I’ve come around to the idea that it’s better to fail now, and in the face of ambitious targets, than not to try at all.

Mr. Weber, thank you for the interview.

Gabor Steingart publishes Handelsblatt and Handelsblatt Global. This interview was condensed for Handelsblatt Global. To contact the author: steingart@handelsblatt.com

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