What 25 years in central banking teach you – In Conversation with Boris Vujčić

I saw the inflation rate of 1,000%. Uh so I saw what it does to the to the households to people. Actually I wanted to uh study uh to become a film director. Uh financial stability is something which is usually not uh to to what people are not very attentive when everything is okay. But uh once it's gone, it's everybody's problem and everybody pays lots of attention. He spent more than two decades at the heart of central banking, helped lead Croatia into the Euro area and now is at the European Central Bank [music] as vice president. I'm talking about Boris Buch, our guest in today's episode of Euro Matters, a podcast by the European Central Bank. My name is Stefania Seola. Boris, welcome to the podcast. >> Pleasure to be here, Stephania. >> After two decades at the helm of the Croatian Central Bank, you moved now to and sit on the European Central Bank executive board. What has been the biggest adjustment? Well, the job is pretty much the same as one that I had before. I'm as you said 25 years in the central banking at the management level. But uh on one hand I was more previously focused on Croatia although of course also as a member of the governing council on the European uh affairs and the Euro area goals but I had also much more focus uh nationally and also on my own bank which is much smaller than the ECB. So on one hand the uh focus has changed now it's exclusively Euro area and uh on the other hand the scope has changed because it's much bigger institution and the u international linkages and uh issues that are discussed are much broader than was the case before. So there's the main changes >> and any big surprise when you arrived here and you thought ah this as a I don't know governing council member I hadn't seen and now I see it. Well, I would say it's a surprise. Uh, as you said, the the job I know, I know the ECB. I knew the ECB before, but now I know better ECB. And from what I got uh over the last 3 months that I'm here [laughter] is uh that there are there are very good people. uh the quality of people uh has I wouldn't say surprised me but uh to some extent I'm positively surprised that uh there are so many good people that are very much dedicated to what they are doing and that's a that's a nice thing >> good to know and um when you were at the creation central banks let's go back a bit in time you really uh shepherd the bank into many milestones and uh including not joining the euro uh apart from joining the euro which probably is one of the biggest achievements which other achievements really you are very proud of >> well as you said they've been there for a very long time so many things have happened >> uh on one hand I think it was a great achievement to keep the price stability and in the case of small open economy always exchange rate stability >> uh over this more than uh quarter of decade going through all kinds of challenges like the great financial crisis euros debt crisis uh then the covid the Russian aggression in Ukraine and finally now I'm in the euro zone when next shock happens but all these shocks I was uh running the the the central bank which was out of the euro zone and we managed to do that uh all uh very successfully and that's I think a good achievement the other on the other hand there were many challenges es in terms of the financial stability >> because as a supervisor I went through also all kinds of challenges uh from the crisis of the small and mediumsiz banks at the beginning of 2000s uh through the failure of the systemic bank uh bank being brought down by a rock trader like a bearings case uh and then resolving that issue. Yeah, you had quite some uh interesting moments. [laughter] >> It was it was not boring for sure. >> Um and Croatia joined in 2023 the euro and this is a bit less than 10 years since the US session. So relatively short period of time. So from this experience, your experience, what would you say could be useful for other countries on a similar path? >> I would say adopting the euro is not just changing the currency. It's uh everything that precedes that. Uh meaning uh having a strong institutions, good policies and making sure that uh you're in a shape when you're joining of withstanding shocks once you're inside and being resilient within the Euro zone. Euro zone helps you with that. But there are other policies that also have to go hand in hand once you join in the Euro zone and before you join the Euro zone. So I think that's that's important thing to have in mind. Of course the benefits of joining are obvious. Uh and I would say I cannot think of the country which would not benefit in some way of joining the the Euro zone European uh ones. >> Oh very good. And from a personal point of view, any of those lessons that you think is already shaping a bit uh your role currently even going forward, what do you think your past experience really is going to do to you as vice president of the European Central Bank? >> I think that experience helps a lot. Once you see uh things, you know how to deal with them. uh it doesn't mean that you don't get surprised by the new events because things change and the types of the challenges that we will have in the future might not be exactly the same ones >> uh that I had through my career but many things are similar many many things tend to repeat itself so once you saw them you know 20 years later you know how they look like and most of the times It helps a lot. >> And talking about stuff you've seen, you've you've lived through a period of very high inflation in the '9s and how's that experience shaped you and also your um attitudes towards inflation and what it does to people's lives? >> Yeah, that was I think important that I really saw the high inflation. I saw the inflation rate of 1,000%. Uh so I saw what it does to the to the households to people particularly those who are poor with uh low savings also and also saw what it does to the companies which then uh start to basically financial engineer rather than do their core businesses. >> Uh many households uh do very poorly in the times of a very high inflation and the whole economy suffers. So that's uh something that uh I've seen and I've seen the dynamics of the inflation how it grows from relatively low levels to very higher levels and that's also an experience that definitely stays with me and that uh helps me I think to uh uh have deep conviction that we have to fulfill our goal of uh keeping the inflation at our medium-term target because other options are definitely not good. >> So you're convinced? >> Absolutely. And then uh we mentioned before when we talked this uh uh seminar actually inauguration at which I was yesterday of uh Michael Weber who has spent his time looking at the uh inflation expectations. >> Mhm. And some of the research actually shows that people who have went through the high inflation uh have different attitude towards inflation. They dislike inflation more. >> Mm. >> Uh and this is even so [snorts] in Germany where you see that in areas where the inflation was higher in the past. So generation ago, >> yes, >> you still have more dislike than in the areas where it was not that >> absolutely >> that high. So the inflation experience also shapes the attitude towards the inflation later on. >> And uh maybe um we refer to a speech you had in Berlin and for our listeners, we're going to put it in the show notes so that people can refer to that. And there you said how important it is to understand the beliefs and the um formation of expectations by households by people normal people. And why is this so important? Well, households are majority of economic agents in the economy and how they form their beliefs if it and it does affect their behavior is very important for the policy makers to understand because we can then tailor the policies better and we can have better macroeconomic models, better forecasts and better policies based on that. And that's why we actually invest so much in understanding how the households form their expectations, what their attitudes are. That's why the ECB has launched its own consumer's expectation survey in 2020 >> which is a very useful uh uh set of data that we use in policym. >> Yeah. uh in analysis and uh this has proven to be important ingredient of what we overall do. >> Absolutely. And you also very often mention how important it is financial literacy and not just of those who are in the financial environment of course but everybody everybody being able to have I don't know emergency funds think about their future and how to put aside enough money to cope with situations. So what why for a central banker is this so important? >> Well, there are different reasons why financial literacy is important. Uh one is as you suggested it's very important for the people themselves because they can make better decisions >> for their financial uh present and and future. >> Yeah. uh for policy makers on the other hand it's very important because people who have better financial literacy better understand what we are doing >> and have better assessment of for example inflation >> better perception and better expectations yes >> about the future of the inflation for us this is important because it enables [clears throat] us to better anchor the inflation expectations which is very important for what we what we do on our side It's also very important from communication perspective to be able to reach those who have lower financial literacy >> with simple messages with which we can explain what we are doing and therefore influence the way how they form their expectations and their attitudes towards what we do. >> Absolutely. And going a bit forward, going a bit ahead on your role, um which challenges do you see Europe has to tackle in the future? I think at the moment uh as we uh often repeat uh the key for Europe is to increase its competitiveness, productivity and uh main thing that it has to do at the moment is to uh push further with completing the job which it has already been doing creating a real single market also for financial services, banking union, service and investing union, capital markets and uh this is something that we will have to do if we want to keep the growth, productivity uh competitiveness in today's world. uh the way we should do it I think is we should try to push uh many things in parallel because we've been trying to do one by one over the last uh 10 or so years and it didn't really work. Uh I think in the end we will have to have a a package of things on which everybody in Europe can agree. Uh because everybody wins in the end. Yes. Although sometimes you lose a little bit but if it's a real package from which everybody gains something then I'm sure we can we can push it and that will allow the uh scalability in the European market uh uh so both for the companies and the financial institutions banks who we observe much more and which falls within our uh uh responsibility uh to scale up to to have higher productivity to become more competitive >> which eventually ultimately supports every European in Europe not >> absolutely absolutely >> this is the final final [clears throat] goal >> that's the idea it brings benefits benefits in the end to everyone exactly in in in Europe >> and uh let's zoom in on your role which are your top priorities as vice president of European Central Bank >> first and foremost one is our main goal that's the price stability that goes without saying uh the other is connected also with what we have been just saying. I would like to be uh during my mandate a part of this solution of the European problem of not having integrated uh financial markets uh of uh solving the problem of the fragmentation by creating both a genuine banking union and and the financial markets savings and investment capital markets union however you want to call it. uh and I'll do whatever I can to to help uh that uh uh uh happen. Uh apart from that of course the the important thing is financial stability. >> Mhm. Uh financial stability is something which is usually not uh to to what people are not very attentive when everything is okay >> because when [clears throat] everything is okay it's >> but uh once it's gone it's everybody's problem and everybody pays a lots of attention in order to ensure that uh it stays with us and that it's been with us now for since the euros and debt crisis uh and it's been with us because we change the way we do things. We change the regulation. We change the implementation of the regulation. We change the the architecture of Euro zone uh for better and that's why it is with us. So we have to make sure that it stays with us in the future and that it changes to adopt the changes which happen in the environment let's say uh in the payment system with stable coins with the digital currency tokenization in the AI >> which creates new risks that we haven't had before but also new opportunities so we have to we have to make sure that all that in a a helps financial stability rather than endanger it. >> Yes. And when we speak about your role, one of your uh clear tasks is you are the guardian of financial stability. And in this role, what kind of risks do you see the financial system is really facing today and potentially going forward? I know it's forecasting is very difficult not for what you said, but what do you see? Well, there are always uh uh set of risks which are which are uh more problematic than than other ones. Today as the world has changed, we always uh mention geopolitical risks which are here which have not been to that extent here few years ago but can uh rapidly change the the the prices uh the markets attitudes uh and therefore endanger the the financial stability. On the other hand, you have the very high valuations in the equity markets uh connected primarily with the uh AI. Uh this is something which we have also not seen uh or have not seen for a long time. This kind of price earnings, price to forward earnings ratios. They might in the end uh end up being justified. >> Mhm. >> But they might not. And the exposure is large and increasing. So we have to be very careful monitor that because with such large exposure so many investments going uh there it creates definitely a risk for the repricing of the of the equity markets. Then we have a fiscal problems which >> uh are nothing new. But uh we see again that uh in some countries have uh rising debts and unsustainable fiscal positions in the long run. And we have learned in the past know when something is unsustainable it's unsustainable. And uh better we address sooner we address these problems the better it is. uh and this is something that we have to also monitor very close closely because it's also possible to see the repricing in in those markets which can be relatively rapid >> and then there are also uh uh private credit uh markets uh connection between the banks and NBFIs which are which are increasing but u I would say there we are not in a situation that we worry too much. However, uh if there is some severe scenario of stress in the markets, they they can also become amplifiers of the of the shock. >> Yes. And one of the reasons why the financial system in Europe in your area has um withstand so many no difficult moments is because we had strong regulation and strong supervision especially for banks. But recently many say no this also might hinder competitiveness. Um what's your position in this uh debate? I think that the competitiveness uh of banks uh is not so much uh function of the regulation. Uh regulation can be simplified and should be simplified. We have if you ask me too much regulation uh thousands of pages of regulation. I don't think we need that. Uh I think we can simplify and I think we will simplify uh we will simplify uh uh regulation requirements towards the banks. Uh but this is not the core issue of the competitiveness. uh core issue of the competitiveness is again going back to what we discussed the fragmentation of the markets in in in Europe and the fact that the banks are not European but national >> they like scale to compete u in the create markets I mean they're very national there's not that much competition but trading if you look at the trading post trading that's where the size matters >> and is this uh because why US and for example Asia, China and so on have a better starting points. >> Exactly. Exactly. That's that's where you have the really scale which allows you to be more competitive when it comes to the trading and and and post trading and without you know scaling up having a true European banks now big enough it's difficult to to to compete with the with the US uh on that front. So we have to make sure that uh while we simplify regulation which we need to do uh we do not deregulate in a sense that we reduce the capital requirements for the banks uh which has served us very well through the last uh shocks. Banks were actually absorbers of the shocks rather than the amplifiers as before. Why? because they had enough capital, enough liquidity. We have to keep it there.