Italy is once again under the stoplight worldwide. A Lega an 5SM government is running the country, and this is unprecedented. Markets are very tense. How does JP Morgan look at Italy now? And from you point of view, speaking as one of the biggest and most influential financial player in the world, how is the global business looking at Italy nowadays?
J.P. Morgan has been in Italy for the past 100 years and we will continue to be there for the next 100 years to come. Our business in the country is expanding and we will move to bigger offices in Milan in 2019: we are doing this to better serve our clients.
So this means that Italy continues to be an attractive market…
All countries, all democracies go through different phases. All governments want to prompt more growth and jobs for their people. They look for the right policies to help growth but sometimes their policies have unintended consequences. Of course we are conscious of local politics but also believe it is up to the Italian people to decide what they want to do with themselves, it is not up to JPM. We continue to do the best we can for our clients. We continue to be completely committed to Italy, its governments, its companies, its banks, its communities. Our commitment in Italy is total and it is going to stay that way.
What about the recent volatility on Italy's country risk and the sharp rise of Italy's spread? Just to make an example, the news on the existence of a draft programme by the new Italian government aiming at asking the ECB to freeze €250 bn Italian government bonds sent jitters around the markets and the world.
We help companies in the world that want to go to Italy, and Italian corporates that do business around the world. We are devoted to all of this. We do not react to the news that we read in the papers every day, in the sense that we do not react to what happens in the short term, because this is not the way to build relationships that have to last for the long term.
So JPM is not expanding in Italy just purely because of Brexit?
I do think that, because of Brexit, some businesses across the financial and manufacturing sectors will be relocating from the UK to other parts of Europe, including Italy. Companies want to continue to conduct their business in Europe after Brexit because they want to continue to export into Europe. Looking at the big picture, while some international firms may decide to relocate part of their operations to Italy, I do not think Brexit will dramatically help Italian businesses. It will not be a game changer in that way. We still do not fully understand what Brexit is, its economic effects and how its effects will play out: these are huge question marks that will stay for a long time. I think Brexit could turn out to be tough for the British people because of its impact on British growth: if there is going to be less growth in the UK, this will have an impact on global growth, and so Brexit could hurt everybody a bit.
Europe is worried about Brexit most of all because it's an exit from the European Union. And just lately in Italy there is once again a wave of debates on the pros and cons of Italy leaving the euro. What do you think about this?
Because of the way it has been designed, the European Monetary Union would be hard to reverse without causing catastrophic events. This does not mean that Europe should not fix itself; there are many regulatory issues that remain to be solved, and the fact that Brexit happened should make the dialogue between European countries easier.
In its Summit in Brussels at the end of June, the European Council could not agree to adopt a wide set of reforms to enhance financial integration, such as Banking Union and an European monetary fund: how do you think Europe should speed up the integration process?
Europe has one of the largest combined GDP in the world; it competes with the US and China and we should never discount that. A political union has proven to be very good for Europeans: let's not forget it has brought peace for a long time. The single common market in Europe is a big achievement too. Europeans are better off with the European Union and the Banking Union: this is what some leaders are promoting and this is the way to go for Europe, in my opinion. Yet also in Europe it is hard (to make the argument for more integration) because people complain, for example, against the excessive bureaucracy coming from Brussels. Unemployment is still too high in some areas in Europe, in Italy in particular unemployment has been high for generation after generation, and this must be fixed. I do hope Europe will solve its problems because European citizens and businesses are better off with a more integrated Europe. JP Morgan is here and will be here in the future to help European and Italian companies.
More integration is needed to make the Eurozone more resilient to future crises. The Ecb is shutting down its QE programme, it's withdrawing, and its monetary policy will become less accommodative. The European central bank is also seen receding from its role of solving crises in the euro area and there are worries about the post-QE era: how is the end of QE affecting the euro area?
I would not say that the ECB is withdrawing. I would say that the extraordinary support that it provided up until now is not needed anymore. And it is right (to end the asset purchase programme) - it is reversing because of growth. The US is doing quite well, growing at 3%, so we in the US do not need QE anymore: the economy is growing and there is no need for QE. Citizens will be better off thanks to that growth because people ultimately want jobs, they want income. The fact that the world is growing is far more important than the reversal of QE. I do understand you mentioning the worries about this process of ending QE though: as we never had QE before, we do not completely know what happens when there is the reversal of QE. There might be unintended consequences but this (QE reversal) is done for good reasons. And anyway, central banks still have extraordinary tools at their disposal to face any crisis.
What about the European banking system: is there more to be fixed?
What is very important for Europe is to build Pan-European banks, by this I mean bigger, stronger, more diversified banks. If you want a healthy, well-functioning economic system you need a healthy, well-functioning banking system. The banking system and the economic system go hand in hand. So Europe has to fix its banking system, but in order to have truly Pan-European banks you need to change the regulatory environment and have common banking rules. Europe has not been moving fast enough towards this objective. We had the Crisis, banks shared part of the blame and new rules were introduced in Europe year after year. But 8-10 years after the crisis outbreak, the regulatory framework here is not yet definitive. One day we will look back at the implications of what was done, and we will realise that it caused a slowdown in lending to the economy and so the economy slowed down overall.
Indeed, just now the US with the Trump Administration is moving towards banking deregulation: European banks fear an increase in competition from the US rivals, due to this.
In the US, banking regulation is currently much tougher when compared to the European rules. We have more capital requirements, more liquidity requirements. If the US were to relax its banking rules it would get us closer to the European system and we will be even more competitive. Look at it the other way around: we are here to support the European banks. Looking back, I can say that the US moved quicker than Europe to come out of the crisis. But the point is: do regulators want us to lend? A lot of the rules on capital requirements that make banks raise more capital were set to protect banks but had the unintended consequence of not raising bank lending.
On the top of banking deregulation, Europe fears the Trump Administration protectionism and tariff threats that could lead the world into a trade war. What is your opinion about this?
We at JPMorgan strongly believe in free and fair trade. And if there are legitimate complaints - and let me say that some of the complaints are legitimate and are not negligible - I do not believe that threats using tariffs are a good way to go about it. Countries should have dialogue with their counterparties, and talk about their complaints. Threat with tariffs might lead to unintended consequences, to more uncertainty, and this can create a bad outcome because when uncertainty grows, confidence goes down and investments go down. But there is no reason to think that this is what will happen over time. At the moment, consumer and business confidence is still very high; it is going down a little but not by much. If it continues this way, tariffs can eventually have a potential bad outcome. This is why we do not like them. President Trump has been warned about this by the business community in the US. The impact of tariffs on trade can offset the benefits that US growth is having from tax reform, but we do not yet know to what extent.
Talking about threats, do you think that fintech, blockchain, Artificial Intelligence are threats to the traditional banking industry, unless banks adapt fast to this technological revolution?
Of course banks can adapt. And will adapt. New technologies must be used to better serve our clients, on the wholesale and retail side to the benefit of consumers, families and corporates: for example, to make payments more efficient and to increase data protection. It is true that this technological change is happening faster than we thought, and an agile management is needed within banks to enable the positives that come with it. We use blockchain and AI.I expect tough competition in the banking sector. There will always be new players who will try to take our business, and it is my job not to allow them to do it.
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