Jörg Asmussen: Building trust in a world of unknown unknowns -
central bank communication between markets and politics in the crisis
Speech by Mr Jörg Asmussen, Member of the Executive Board of the European Central
Bank, at the European Communication Summit 2012, Brussels, 6 July 2012.
* * *
Ladies and Gentlemen,
It has been said that "there have been three great inventions since the beginning of time: fire,
the wheel, and central banking"1. Central banking has become my business since January
this year, but I feel I am getting my fair share of the other two as well: being behind the
steering wheel of the ECB during this crisis turned out to be in the line of fire.
You invited a central banker to speak at this year's European Communication Summit. Thank
you for giving me the opportunity to share some thoughts with you on a very relevant topic:
central bank communication in the crisis.
Communication is an essential and powerful policy tool of central banks. This is because the
physical "product" of a modern central bank is something with little intrinsic worth. The euros
in our pockets are, after all, only pieces of printed paper. Their value lies in the shared
conviction that this so-called fiat money can be used as a means of exchange, as a unit of
account and above all as a store of value. "All money is a matter of belief "2.
This belief stands and falls with the credibility and trustworthiness of the central bank. This, in
turn, rests on its words and deeds.
Maintaining this trust is an enormous responsibility. Consistent communication and policy
action can create confidence and popular support. By contrast, miscommunication and policy
mistakes can create excessive volatility in markets. In extreme cases, the currency itself may
be at risk. And with it the value of the peoples' savings.
It was not always obvious that central banks and communication should be mentioned in the
same sentence. Central banks used to be secretive places. They used to surprise the
markets with their policy moves. They used a language that made the oracle of Delphi
appear positively accessible: Alan Greenspan is on record as saying: "If I seem unduly clear
to you, you must have misunderstood what I said "3.
Those days are over. Central bank communication has become a very dynamic discipline. By
deliberately steering expectations in financial markets with their communication, central
banks let the markets do part of the job of transmitting their policy signals.
The crisis was a game-changer in the communication of central banks, and of economic
policy makers more generally. In this world of unknown unknowns, and rapid shifts market
sentiment, our task has become much more complex. The new challenges can be captured
by the following three themes, or fault lines:
•
First: market communication versus political communication;
•
Second: transmitting the message versus facing the discourse
• versus
Third: arguing with counterfactuals and navigating the short the long term
I will address each of those in turn.
1. Market communication vs political communication
In the "old" days, central bank communication was focused on a specific target audience:
financial markets, specialised financial media, interested academic circles. It was an
"insiders' community", speaking an expert language.
Anyone who listened to speeches of central bankers on the economic outlook and the course
of monetary policy knows what I mean: they were deliberately unexciting, technical and
repetitive. But this type of communication inspired confidence: there was a consistent
message and a steady hand at the tiller.
The importance of the consistency of the messages across time, countries and media outlets
remains. But the context has changed fundamentally. During this crisis, central bankers and
policy-makers are faced with a potentially explosive interplay between markets and politics.
Messages that are necessary and legitimate in public debates can be completely unsuited for
market communication and exacerbate tensions.
Let me explain. In spring 2010, Angela Merkel addressed the German Bundestag to
persuade lawmakers to approve the financial assistance programme for Greece. She had to
engage in a profoundly political discourse. She employed all tools of rhetoric. And she
justified her appeal by declaring that "the future of the euro is at stake". This was legitimate.
However, in financial markets across the globe, that very same message popped up on
traders' screens as a one-liner: "Merkel questions survival of single currency". If you were a
trader, what would you do? The rest is history.
One and the same message is received very differently by different audiences. But those
audiences cannot be separated easily. "Political" communication and the processing of this
information in nervous and fragile markets has been a major factor that exacerbated and
propagated the crisis.
We still do not have an answer how best to bridge this gap: on the one hand, we must not
suffocate open debate in our democracies. We cannot muzzle the public discourse to impose
conformity with the needs of nervous markets. At the same time, undisciplined and
irresponsible communication has real, costs.
Maybe one way forward would be to emphasise that markets should listen to the right kind of
statements. If it concerns the euro area as a whole, it is the voices of the supranational level
that should count.
Markets should also concentrate on what is actually being said by policy-makers, rather than
how this is being interpreted by analysts, commentators and the media. The constant
extrapolation of what current policy decisions "could" or "are likely" to imply under extreme
scenarios sows the seeds of volatility. The focus on what might happen in case of
catastrophic tail-events diverts attention from already achieved or agreed policy action.
A second aspect of the "brave new world" of communication is the urgent need to
communicate beyond the specialist "insider's circle". Central banks have to actively
communicate with the broader public, for three reasons:
• First, what used to be obscure and complex issue for monetary policy specialists are
now mainstream news. Two years ago, few people had heard of central bank
operations or intra-Eurosystem payment flows. These days, television talk shows
debate the ECB's long-term refinancing operations or TARGET2-balances. The
people have a legitimate interest and a right to get information and explanation
directly from us, rather than via intermediaries.
•
Second, in all of this, we are faced with the inevitable tendency to reduce complexity
and simplify the message. This is what the media are supposed to do: "First simplify,
then exaggerate! "4. Simplification is, of course, legitimate - and also needed. But
exaggeration is not. It risks skewing perceptions and distorting the true picture of the
situation. Take, for instance, the situation in Ireland or Portugal. This requires
comprehensive and in-depth understanding - an analyst's two-pager often cannot
do justice to this complexity. By sharing and explaining its own assessment, the
central bank can contribute to a more balanced debate.
•
Third, during the crisis, the ECB has undertaken extraordinary measures. It has
provided 1 trillion euro in liquidity to the banking system. It contributes to the design
of adjustment programmes for countries receiving EU-IMF assistance. It is part of
the Troika going on country missions. It offers advice on the future evolution of
Europe. Some criticise us for this, some claim that we go beyond our mandate.
Those criticisms must not go unanswered.
Adding complexity to an already complex situation is the fact that the ECB communicates in
a multi-lingual, multicultural context. One and the same message, even if translated perfectly
into the 23 official EU languages, may cause very different public and market reactions.
But extraordinary actions call for extraordinary efforts to explain them. This brings me to my
second point:
2. Transmitting the message versus facing the discourse
In the past, central bank communication was mainly a one-way street. The central bank
transmits its messages. As independent institutions, they were - and continue to be -
prohibited from yielding to outside influence. And rightfully so. The first President of the ECB,
Wim Duisenberg, summed it up very neatly: "I hear, but I do not listen "5. The academic
debate about central bank communication focused on transparency: Whether central banks
were too closed and provided too little information.
The globalisation of information, the rise of the internet and the new "prominence" of central
bank action create a new context: whatever the central bank does is subject to a worldwide
market assessment and media commentary.
In blogs and internet comments, via Twitter, on TV channels and in traditional print media,
central banks are faced with a barrage of outside opinion that has a powerful impact on
public discourse. Professors, Nobel Prize winners, analysts, chief economists, innumerable
experts, any individual posting comments on the internet: they all present their analysis and
opinion.
In many cases, there is thoughtful analysis. In some cases, opinionated polemics. But in
almost all cases, they know better. The concepts they use, the solutions they propose and
the policy actions they call for - all this shapes the public discourse, and one way or another
also influences policy-makers.
The difference is that commentators do not need to assume the responsibility for the
recommended actions. Policy-makers have to.
Let me give you an example: last year, a debate was raging about the size of the European
financial assistance facilities, the so-called "Eurozone firewall". None of the very substantial
amounts seemed to be enough: the 500 billion euro that were already on the table, and used
to only a very small extent, were decried as insufficient. One trillion euro at least, if not two
trillion or more, were seen as necessary.
One idea pushed forcefully by the "international expert opinion" was to "leverage" existing
funds, by offering incentives to private and public entities to provide additional funds. And
indeed, throngs of European officials worked night and day to devise and agree on two
options to leverage the European Financial Stability Facility (EFSF). Today the two
instruments are there. They could work. Will they ever be used? The caravan of the
"commentariat" had already moved on. No-one speaks about leveraging the EFSF anymore.
In fact, the actual investors in EFSF bonds were put off by the leveraging options, because it
made the EFSF structure more risky and less understandable.
The searchlight of attention of the markets and the commentary shifts fast. Yesterday it was
the firewalls. Then it was growth. Today it is Spain. For sure, all of these issues require
action. But designing and agreeing on responses takes time. No wonder that policy-makers
are criticised for constantly being "behind the curve".
Markets want to see immediate and forceful action from Europe's politicians. And their
criticism of the slowness of the European crisis response is in part justified. But democratic
politics takes time. It is open, noisy, and messy. We cannot do "crisis management by
Politburo". We need effective communication and a proper public debate. This is especially
true for the envisaged next steps towards deeper integration in Eurozone.
Why am I telling you this? Because it sheds light on the nexus between a new class of
opinion formers, financial markets and policy outcomes.
For the euro area and the ECB, the situation is even more peculiar, because the influential
"commentariat" comes predominantly from outside the euro area. The big English-language
newspapers, the news agencies and wire services that shape opinions in the economic and
financial sphere on the Continent are all writing from outside the euro area. There is, of
course, nothing wrong with friendly outside advice. And I certainly do not wish to come
across as whining and complaining.
But it simply remains a fact: the analysis, discourse and policy prescriptions that are
propagated come from the outside. Maybe inevitably, they come with a certain disinterested
detachment. As if the outside "spectators" are not affected by what is happening.
And they come with a dangerously narrow and exclusive perspective on the economics of
the monetary union. But if the profound political commitment of Eurozone countries to the
historical project of "ever closer union" is neglected, the assessment remains superficial and
partial. And the suggested policy responses may be biased or naïve.
Why does it matter? Because the discourse influences some of the most important financial
markets for the Eurozone. If expectations that have been built up are not fulfilled, if alleged
certainties do not materialise, if actions from politicians or central bankers are not
forthcoming as anticipated by the "market consensus", the reaction can be grave: volatility,
contagion, all the way to complete market dysfunction. The systemic impact can be major,
driving financial institutions, as well as sovereign borrowers into real difficulties.
The result is a situation where policy-makers - including the central bank - may feel
compelled to react to market developments with ever more powerful responses, in order to
contain the a systemic risk and avoid a meltdown.
What is the lesson? Central banks have to face up to the public and market discourse -
especially because they are independent. We have to participate in this debate. We have to
take on the critics, understand their points, and argue our case. We have to listen, explain,
and convince.
Naturally, we will ultimately do what we judge to be the correct cause of action, in full
independence and in line with our mandate. Actions speak louder than words. Especially
when they are timely, measured and effective. This is what creates confidence.
Precisely for that reason, financial markets, as well as politicians, have been looking to the
ECB as a kind of "saviour of last resort". This creates maybe an even bigger communication
challenge: we must explain what the limits of our powers and mandate are. The ECB cannot
compensate for what others - notably political authorities - fail to do. There is no substitute
for good policies. Saying this is not always popular. But "to be trusted is a greater
compliment than being loved "6.
When market pundits forecast the "inevitable", they insinuate a degree of certainty about the
future which is simply not there. This brings me to my last point - how to deal with
uncertainty, with a world of unknown unknowns. And how to communicate when everyone
asks "what if".
3. Arguing with counterfactuals and navigating the short versus the long term
During this crisis, the ECB has taken a number of non-standard measures. They were, by
definition, out of the ordinary. But they were motivated by the need to prevent a catastrophe.
What we did, we justified with respect to an intangible counter-factual. With respect to history
that did not happen. Doing so can be extraordinarily difficult.
Let me give you an example. Back in November 2011, we were faced with acute tensions in
financial markets; entire market segments had become dysfunctional. The danger of a credit
crunch was real. There was an anticipation of an inevitable catastrophe. You may remember
the headlines: "The euro has a 50% chance of making it to Christmas"7, or "Ten days to save
the eurozone"8.
The announcement of our long-term refinancing operations was a sentiment changer. The
feared severe credit crunch has not materialised. The euro is still here - and here to stay.
But the question "what if the ECB had not acted" remains unanswered. There is no evidence
what would have happened in such a counterfactual. This makes justifying our action with
reference to such a counterfactual an uphill struggle.
The uncertainty embedded in the "what if" question is exacerbated by the discontinuity
between the short term and the longer term in the interaction between markets and
policymakers. Let me explain.
Markets mainly focus on the immediate future; on the emergency measures to fight the crisis:
here, a central bank can be very effective. The ECB can change the market situation within
minutes, by adjusting its interest rate, market interventions if needed, adapting its collateral
rules, or simply communicating its assessment. This creates certainty, for now.
However, for the longer-term, considerable uncertainty remains: short-term fixes do not
change the structural features of European economies and markets. Those depend on the
countries' economic policies, which take time to design and implement. Firm commitments
from governments can help reduce this uncertainty, but can never eliminate it.
The trade-off between the short term and the long term creates a fundamental
communication challenge for the ECB. If short-term crisis fighting is successful, for instance
through ECB actions, some of the longer term challenges might never be addressed. The
immediate pressure subsides, and incentives for governments weaken. More than once did
we witness this during this crisis.
By contrast, if the fire-fighting in the short-term does not succeed, there may not be a longer
term to think about.
Our communication is walking a tightrope: markets need reassurance that the ECB will do
what is within its power and mandate to guarantee that the euro will not to fail. At the same
time, governments need to have the right incentives to tackle the longer-term challenges.
Conclusion
Ladies and Gentlemen
The crisis was a game changer in the communication of central banks. Navigating between
markets and politics has shifted the goalposts of the ECB's communication. We are facing up
to this new environment and its challenges. We are engaging more. We are explaining more.
The changed environment, including the spread of new media, might actually be an
opportunity in this respect. That said, I would not expect every member of the ECB
Governing Council to open a twitter account soon or to accept you as friends on Facebook.
Let me close with a word of caution. The ECB has gained stature during this crisis. The
people and the markets look to the ECB for solutions. But there should be no illusion that the
ECB can single-handedly ensure a plain sailing for our economies and the markets. There
banks do not have divine wisdom.
are limits of what we can do, and what we know. "Central
They try to do the best analysis they can and must be prepared to stand or fall by the quality
of that analysis"9.
Rest assured that we will continue to do this, and to fulfil our mandate. Not least to make
sure that central banking remains up there in the list of the three greatest inventions.
Thank you very much for your attention.