Press release: Introductory statement by the President at the press conference for DNB's 2017 Annual Report
The global economy is flourishing. With growth figures of 3.7% for the world economy, 2.4% for the euro area and 3.2% for the Netherlands, it does not get much better than this. At first glance, there is very little trace of the financial crisis that erupted ten years ago. However, the favourable climate cannot hide the fact that policymakers still struggle with the aftermath of the crisis. In this respect, the top priority is to normalise monetary policy and strengthen the economic and monetary union. For the Netherlands to shake off its cyclical shackles, this is a prime opportunity.
The economic recovery has leant heavily on a cocktail of unconventional stimuli provided by central banks. Following the US example, the time has come to gradually phase out these measures in Europe as well. This is now a widely-shared realisation, certainly also in the financial markets. The current inflationary environment does not pose a threat to price stability. Postponing the necessary monetary tightening is no free lunch. Current policy encourages excessive debt accumulation, sustains zombie companies, and thereby undermines productivity growth.
The transition must be navigated with great care. Unwinding a unique combination of bloated central bank balance sheets and negative interest rates, in an environment where debt remains persistently high, is precarious. An adjustment that is too abrupt can threaten financial stability. The timing, sequence and predictability of the measures to be taken are therefore crucial. The return to more normalised conditions must start by ending the asset purchase programme after September, following a short taper, if needed. The existing stock of purchases will be maintained by reinvesting the proceeds from maturing bonds. The policy rate can then be increased gradually, as is currently the case in the United States.
Expansionary monetary policy has offered Member States a window of opportunity to reform their economies. The ECB was able to buy time for governments, but that time is now running out. The ECB has in recent years been forced to assume the role of crisis manager. The Eurosystem took on the related risks but cannot continue to do so, which is why the foundations of the EMU must be strengthened.
In doing so, we need to strive for a better balance between risk sharing and risk reduction. The creation of the European Stability Mechanism (ESM) and the banking union has led to taxpayers in Member States sharing more risks. To prevent this from transforming into a transfer union, it is essential that governments and banks address residual risks. Reducing the stocks of non-performing loans and ending the preferential treatment of sovereign debt on bank balance sheets are crucial. The latter will also clear the way for the introduction of a European deposit guarantee scheme, which would reinforce the banking union.
The European initiative for a capital markets union deserves equal support. This includes stimulating market financing to reduce risks for banks. Moreover, public risk sharing should be streamlined. Member States should only have recourse to the ESM under strict conditionality, for instance on the sustainability of public finances.
The Dutch economy is also thriving. Growth is at a ten-year high, and the Netherlands is outperforming many of its European peers. Unfortunately, this distinction is also notable in under adverse economic conditions, when our economy tends to underperform others. The Dutch economy is relatively sensitive to financial shocks and developments in the housing market. The stronger the cyclical swings, the greater the likelihood of producing advantaged and disadvantaged generations. Limiting household mortgage debt is one way to tackle this trend. This requires a better mix of housing, in order to strengthen the supply in the mid-priced rental sector.
Pension reform can also contribute to a more stable economy. This is for example the case when pension benefits are defined more towards the end of the accrual stage. The Netherlands is privileged to have set aside such a unique reserve for old-age. But maintaining the current pension contract means that also in the coming years indexation cannot – or not fully – be applied. Neither can direct pension cuts be ruled out. There is in any case a gap in expectations, a redistribution of the average contribution rate from lower to higher-educated individuals, an intergenerational dispute about actuarial neutrality, while many of the self-employed are voting with their feet. Therefore, substantial changes must be made in order to restore trust among the different stakeholders.
The financial sector faces many challenges, illustrated by the many new terms that have recently drifted into everyday use, such as blockchain, crypto, PSD2 and climate stress tests. Digitisation and sustainability have set the trend to which the sector must respond. Not all parts of the sector have emerged equally well from the crisis. While insurers and pension funds still struggle with low interest rates, the banking sector, which was hit hardest, is once again in a strong position. Capital buffers have been replenished. The recent Basel 3.5 accord complements the reform agenda for improved supervision. Monetary policy still needs to fall into line. Only once monetary conditions have normalised can the financial crisis be consigned to the history books.