"Attacking the President is not correct"

Transcription

1 Interview with Jean-Claude Trichet, President of the European Central Bank (ECB) from 2003 to 2011 "Attacking the President is not correct" Mister Trichet, are you happy that you are no longer President of the European Central Bank (ECB) and therefore no longer have to decide on very controversial measures such as the massive purchase of sovereign debt (Quantitative Easing, QE) and negative interest rates, just as your successor Mario Draghi has to do? In my view, the eight-year term is right and it is good that it is not renewable. But I would not say at all that I m happy about being no longer the President of the ECB. Of course it is a demanding job and you have to take complex and difficult decisions. The ECB has all the responsibilities of the US central bank, the Fed, and of the other major central banks and on top of that, the ECB is at the heart of European history in the making. Being President is extraordinarily inspiring, with the conviction, shared by the Governing Council and the staff of the ECB, that you are contributing to a remarkable historical endeavour. After the last meeting of the ECB s Governing Council Mario Draghi has quoted you as saying I would have done the same as Mario did. Is that really the case? Indeed I said: I would have done the same as Mario did, together with the Governing Council, because all decisions are collegial, taken by the Governing Council. Attacking the President is not correct. But don t you think that the ECB has overstretched or even overstepped its mandate, for example with the decision for the OMT program (Outright Monetary Transactions), meaning the selective purchase of sovereign debt in case it is needed?

2 No, the ECB has certainly not overstretched its mandate. The primary mandate is clear: price stability, defined as an inflation rate of below, but close to 2%, over the medium-term. Since the start of the Euro the ECB has delivered that much better than most of the observers had expected. I personally was very proud of that. At the present moment all advanced economies face a new unusual, grave threat: a very low inflation for a very long period in time, bearing the risk of deflation. What the ECB s Governing Council is doing now is fully appropriate in this absolutely exceptional period. At the same time, one also has to stress that the central bank is not and cannot be the only game in town. In other words the ECB is not and mustn t be the only actor able to act. Yes, the ECB cannot solve all the problems and there are many. The most important problem is the low growth potential of the euro area. It is also because of that that there is a risk of a de-anchoring of inflation expectations. But it is not in the hands of the central bank to embark resolutely on structural reforms to increase the growth potential; it is totally in the hands of the governments, parliaments and social partners. But if the ECB is doing so much there is a decreasing incentive for reforms, isn t it? This is a permanent danger in all advanced economies. That is the reason why the ECB s message, in particular through the voice of Mario Draghi, is loud and clear today as it was in the past. Take for example the Stability and Growth Pact: as ECB President, I have warned timely, when Germany and France, under the presidency of Italy, were violating the pact in 2003 and 2004 for the first time. As a consequence, we had very bad fiscal management in a lot of countries. This breach of the fiscal rules caused a crisis and today we are still paying a very high price for that in terms of growth and jobs. As ECB President, I also have warned since 2005 against the ongoing persistent divergences between national labour costs and national costcompetitiveness. This was not under control and was also at the heart of the sovereign risk crisis. But if you look back why are you optimistic that politicians this time will hear the message? I want to be neither optimistic nor pessimistic, but realistic. I note that it is the responsibility of the European Commission not of the ECB to supervise the compliance with the rules. The ECB has the duty to send messages if it believes that there are problems which need to be tackled. From time to time, this is a very delicate balancing act. In the dramatic times of the crisis in August 2011 I went, as President of the ECB, so far as to send letters directly to the Prime Ministers of Italy and Spain. The ECB cannot order anything, but it can and must say what it is observing. Is the European Commission too weak or too political? The treaty gives the European Commission full independence. This is absolutely fundamental for the success of our bold historical endeavour. We had a severe crisis,

3 but all the other advanced economies also had their own crises. What is important now is to reflect on the lessons learned. One important lesson is that the Stability and Growth Pact had to be reinforced. Now it must be fully respected. Another important lesson was the setting up of the new Macroeconomic Imbalance Procedure. This fundamental procedure is there to avoid new national domestic and external persistent divergences which would bring again huge problems. And we have the banking union. But we have to go further: we need a Finance minister to reinforce the executive branch of the euro area, and more democratic accountability which calls for more involvement of the European Parliament. Let us get back to that, but stick to monetary policy for the moment: Most recently there have been harsh attacks from politicians in Berlin against the ECB and Draghi personally. How worried are you about such a conflict between the biggest Euro area member state and the ECB? If I m not misled some of these attacks have been withdrawn. They were totally unacceptable. From my point of view the ECB s Governing Council, under the presidency of Mario Draghi, is doing what is appropriate in these exceptional circumstances, where there might be a materialization of the risk of deflation. In my time, we also had to take exceptional measures to face up with threats of another nature, in 2010 and These decisions also created uneasiness in several countries, including in Germany. You are talking about the purchase of Greek, Irish and Portuguese and later of Italian and Spanish government debt. It was necessary to help restore a better functioning of monetary policy transmission in the whole of the euro area. At the same time, the countries concerned and the euro area as a whole had to resolutely improve their economic and fiscal policies and governance. In any case in our vivid democracies, it is normal that there is a debate. If there are questions, the ECB has to explain again and again why exceptional decisions were and are legitimate and necessary, which it does. Speaking of the present situation, one has also to see that all major central banks of advanced economies are in a similar situation. So you are saying that the recent criticism of the ECB is nothing special? But isn t it a new quality of criticism if the German Finance Minister accuses the ECB of being responsible for the rise of populist, euro-sceptic movements and parties such as the AfD? Wolfgang Schaüble is the most pro-european leader in Berlin. He is respected by all. I am convinced that he did not say what the press reported. But it is true, there are extra tensions. When that is the case you have to explain your policy even more tirelessly and convincingly as Mario Draghi is doing. I also appreciated a lot that the President of the Bundesbank, Jens Weidmann, fiercely defended the ECB s independence in that discussion. Do you think that the independence is at risk?

4 No, I don t see that. Firstly, the Germans have always been very fierce defenders of the ECB s independence and they are also totally committed to price stability. Secondly, everybody can see that low inflation and therefore very low interest rates are also due to absence of resolute action by all governments, first in the countries that have problems of course, but also in successful countries. To give an example at the moment I am speaking, harmonized national inflation in Germany is - 0,1%! To the extent that it is the most competitive country, inflation in Germany is a kind of ceiling for all other economies! How can we get out of that very low inflation situation if all countries, including Germany, do not help? And I am a bit disappointed that the success of the ECB as regards price stability is not often recognized as it should, including in Germany. What are you talking about exactly? During the last 40 years of the D-Mark before the setting up of the euro, the average inflation was 2,9%. Since the introduction of the Euro yearly inflation in Germany is half of it, at around 1,4-1,5%. That means that the ECB so far has ensured more stable prices than the Bundesbank did during its time, in particular during the 60 s, 70 s, 80 s and 90 s. But there is hardly any article in Germany saying that the ECB has done a fantastic job! The other thing is that the other members of the euro area have to regain cost competitiveness to catch up with their previous losses. That is why their costs and national inflation have to be below the German ones; Then how should the ECB fulfil its 2% target, if Germany s inflation is at - 0,1%? Germany needs a more buoyant economy, more investment and more consumption, which is nothing but the normal functioning of a market economy which is highly competitive, with a very important current account surplus. A couple of international observers, including the International Monetary Fund (IMF), call for higher wages in Germany. Is that really the solution to the inflation problem? Many experts call for more fiscal spending in Germany. Actually Germany will spend more for dealing with immigration and that is not bad. But more fiscal spending and deficits again will not solve the issue of the enormous current account surplus and it seems to me that it does not meet the sentiment of the people. The private sector has the main responsibility in that respect. There is a clear need for more investment by companies and more consumption, also as a consequence of higher wages indeed. Does that mean that Finance Minister Wolfgang Schäuble is right in defending the balanced budget, the so-called schwarze Null? A lot economists argue that this is not appropriate in times of zero and negative interest rates and that the state should invest more. I understand that many economists are saying that. And as an economist, I would incline to share that view. But as a close observer of the German society, I have a preference for the private sector channel, private investment and consumption. Wolfgang Schäuble has one argument, on top of his personal undeniable success: the 60% threshold of the Treaty. But in my eyes, the crucial point is that the German private market economy has to work correctly: if you are very highly competitive and

5 if you are accumulating profits and extra-savings, there needs to be a macroeconomic correction. I do not call immediately for core inflation rates such as during the times of D-Mark! But around 2%, and on the upper side, in the medium run would be not only reasonable but necessary. The other countries would have some margin to catch up and the average inflation rate in the Euro area would be closer to the medium term definition of stability, namely close to 2%, but below 2%. Do you think there may be a need to rethink the 2% target? Especially in Germany some people argue that price stability finally means 0% inflation. Certainly not! During my time there were some in the IMF telling us that an inflation target of 4% would be much better. If central banks change their inflation target depending of the mood of the time, they would be totally lost. Central banks are there to be an anchor of stability in the medium and long run. The 2% target has become a very important global benchmark. We have fought against the 4% suggestion and central banks have to fight against the 0% suggestion. This proposal is also economically incorrect. There are many good reasons to have a modest but significantly above zero level of inflation in the medium run. It facilitates relative prices adjustment and helps diminishing progressively the debt outstanding hangover. The criticism of the ECB s policy in Germany has intensified sharply with the debate about helicopter money, meaning potential cash gifts by the ECB to enterprises, households or the governments. Do you think that this instrument would be within the ECB s mandate? This is a very good example of the fact I was discussing when a central bank clearly would have to say: your job! The last crisis has shown that anything can happen, so central banks have to be permanently alert. But even if the situation would be absolutely dramatic and there would be reasons to give money to the people for free, it would certainly not be the task of the ECB. In such a situation, governments would have to decide if they want to use their budget and distribute helicopter purchasing power. This is absolutely nothing that falls within the remit of the central bank. And Mario Draghi said very clearly that the ECB s Governing Council did not envisage that any time! You are a committed European. How worried are you about the current condition of Europe and the Euro area looking at the dispute on Greece, the handling of refugee crises, the Brexit discussion? In my view, Europe is perhaps the boldest historical project since the construction of the United States of America in the 18th and 19th centuries. What has been achieved during the last 70 years is amazingly impressive. This is especially true for the single currency area. Moreover we have gone through the worst financial crisis since World War II, and we resisted. The Euro has never been put in question as a credible currency. This is an incredible success. But internationally, there remains a bias vis à vis Europe. Take the euro area: one speaks only of the difficulties of Greece. They are real. But the sequence of facts is the following: 1) worst crisis since 70 years started September 2008; 2) almost everybody across the Atlantic expects the dismantling of the euro area; 3) 15 countries are members of the euro area at that

6 time; 4) today the 15 countries are still there (including Greece); 5) but we are not only 15; we are 19: four new countries joined in during the crisis: Slovakia and the three Baltic States. I call that resilience. Do you fear a resurgence of the old nation-state mentality in Europe? Frankly, the decisions which have been taken during and since the crisis, do not go in that direction: The new Macroeconomic Imbalance Procedure, the banking union, the European Stability Mechanism (ESM) all this doesn t go in the direction of renationalization. As regards the sentiment of the European fellow citizens, I am convinced that they are altogether much more European than is frequently suggested. This is not to deny that there is a populist sensitivity in all advanced economies, in the US as well as in Europe. It conveys the frustration of many in our societies and it is a serious issue that our democracies have to take seriously. But who knows that in the last Eurobarometer the European semi-annual survey the European Commission captures significantly more of the trust of the European people than the national governments, and the European Parliament significantly more trust than the national Parliaments? I do not accept permanent European bashing. But I call for going further as regards governance and democratic accountability. And if we don t get this the Euro will finally fail? To argue that way would mean to go into the camp of the anti-europeans which always claim that Europe will fail. In the end our people will decide. But I m convinced that today there are even more reasons to unite Europe than it was the case after World War II. Today, we have to take into account not only the US but the constellation of the very large emerging countries, China, India, Brazil, Mexico, etc. Coming back to monetary policy: Zero and negative interest rates, massive asset purchases, Forward Guidance etc. is that the new normal for monetary policy? I don t think that this is the permanent new normal. If the advanced economies correct decisively their structural weaknesses, which is of the essence, central banks will progressively exit from their present extraordinarily accommodating policies. But in Japan we have zero and negative interest rates for years now, and the Fed find it difficult to increase its interest rates marginally and it has not yet started to reduce its bloated balance sheet. Do you really think that interest rates of 3, 4 or 5% are realistic in the future? If the central banks make big mistakes, then we could have very high inflation rates and then interest rates will also be very high! But I do not expect that. We will progressively get out of the low and negative interest rates when all other partners (governments, parliaments, private sector) live up to their responsibility. One of the points which also worries me is that a large majority of economists, in all advanced countries (US, Japan, Europe) are now simultaneously recommending lower exchange rates vis à vis other major currencies. The European business cycle being late on the US, it is normal for the European monetary policy to be more

7 accommodating and therefore for the euro to be pushed somewhat down. But that should not reverberate in calls for the FED itself to maintain accommodative policies. Central banks are right to resist these calls. If they would follow such recommendations in what is an obvious zero sum game, they might be trapped in useless beggar thy neighbour policies. Does that mean that there is a need to rethink the international monetary system? I think there would be good reasons to do so. We are at a turning point. On the one hand the Chinese Renminbi is becoming part of the SDR currency basket. This basket is really at the core of the global monetary system, and it is the first enlargement with an emerging market currency. On the other hand, as I have said, the perception of tolerable exchange rate fluctuations has somewhat changed, after the crisis, in the advanced economies. We have to draw lessons from that. What do you suggest? One possible idea would be for the IMF and the issuers of the SDR basket currencies to signal to market participants medium term equilibrium exchange rates for the major currency pairs. A return to a Bretton Woods type system with fixed exchange rates would not be appropriate and strict exchange rate ranges would permanently invite speculators to test the limits. But to display the medium term equilibrium cross rates between major floating currencies as seen by interested parties, with the stamp of the IMF, could help stabilizing the whole system. It would be also in line with the fact that all major advanced economies currencies (Fed, ECB, Bank of Japan, Bank of England) are now sharing the same global nominal inflation anchor 2% which I consider personally a major global lesson drawn from the crisis. The interview was conducted by Mark Schrörs. Börsen-Zeitung,