Jean-Claude Trichet: Interview with Der Standard, De Standaard, La Tribune,
Süddeutsche Zeitung and L'Echo
An interview with Mr Jean-Claude Trichet, President of the European Central Bank, conducted by
Ms Birgit Baumann (Der Standard), Mr Luc Coppens (De Standaard), Ms Isabelle Croizard (La
Tribune), Ms Helga Einecke (Süddeutsche Zeitung) and Ms Catherine Mommaerts (L'Echo), published
on 15 March 2006.
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After the second ECB rate hike, you repeated that monetary policy was still accommodating. At
what level do interest rates become neutral, i.e. when they neither stimulate nor brake
economic activity.
When I reported on the decision of the ECB's Governing Council to raise the interest rates I said that
our decision reflected our assessment at that time. It is still our assessment. Our assessment is clear.
We did not decide ex ante a series of monthly increases of rates as has been done by other central
banks. The Governing Council assesses the risks to price stability and does what is necessary to
counter these risks when they increase. We do not refer to the notion of a theoretical "neutral rate".
We refer to our mandate, which is to deliver price stability and be credible in delivering price stability
over time. It is what the Treaty calls on us to do and what the people of Europe are very clearly asking
us to do. By doing so, we are also contributing to a financial environment which is very favourable to
growth and job creation in the euro area. When I say that our monetary policy stance is
accommodating, it can be confirmed by a number of observations: we have real short-term interest
rates which are very close to zero; nominal short-term interest rates are the lowest in the euro area
since the Second World War, for example the German Bundesbank never went lower than 2.5%; there
is abundant liquidity in the euro area with monetary aggregates growing twice as fast as the growth in
GDP.
Businessmen complain that the ECB's rate hikes came too early and might put the economic
recovery of the euro area at risk. How can the ECB cope with that criticism?
What we are doing is what our mandate commands us to do. But our mandate is not at all in
contradiction with growth and job creation. I will tell you why: in order to preserve a level of medium
and long-term market interest rates that is exceptionally favourable to growth and job creation, we
have to solidly anchor inflation expectations at a level that is fully in line with our definition of price
stability. We do that precisely by demonstrating to observers, investors, savers and our 313 million
fellow citizens of the euro area that we do whatever is necessary to deliver price stability. If we were
not credible in doing so, all our medium and long-term market interest rates would be much higher.
This is well understood by European and global observers. By delivering price stability we also
contribute to reinforcing consumer confidence. We are telling consumers: "look, we are protecting and
preserving your present and future purchasing power''. To sum up, what we are doing, i.e. being
faithful to our mandate, allows the present euro area recovery to be sustainable in the medium and
long run.
The growth rate of Europe now seems unable to reach its potential. Should the ECB therefore
become more than a financial watchdog?
Our present assessment is that the current trend in the growth rate in the euro area is around its
potential growth rate, taking into account some volatility in the quarterly figures. We will see whether
economic growth will accelerate, or whether we will have to cope with other, new shocks. We are
constantly assessing the situation in a pragmatic way, based on the facts and the new information that
we receive. Let me add something which is important: a good monetary policy is a necessary condition
for growth and job creation, but is not sufficient in itself. We also need a sound fiscal policy, bold
structural reforms and appropriate monitoring of competitive indicators. This is the responsibility of all
the other stakeholders which have a part in the overall result.
The political leaders gave a very sharp reaction to your first rate hike in December, but not to
the second in March. Did you convince them in the meantime or how do you explain that?
The ECB is totally and fiercely independent, as you can read in the Treaty on European Union. Its
credibility is based upon this independence. That credibility is our most precious asset and permits us
today to have exceptionally favourable medium and long-term interest rates. I trust that this is
increasingly well understood by all our partners in the euro area.
Did the recovery in Germany help the ECB Governing Council to decide on the last rate hike?
As you know, we look at the situation of the euro area as a whole. The significantly positive signals in
various German surveys are important, because Germany is the largest national economy of the euro
area. We will see how the present period of recovery develops. We have quite a number of good
signals. These signals are encouraging for the euro area and confirm a trend for the recovery that is
likely to be around our growth potential. That said, we are very pragmatic. We look at all the facts,
figures and data, and stand ready to incorporate them in our future assessment.
What risks to price stability do you see, with the exception of oil prices?
We see a number of risks. Some of them are associated with the increasing prices of oil and
commodities. These increases are progressively incorporated in the prices of other goods and
services that are energy intensive. We have another set of risks, which are associated with indirect
taxes and increases in administered prices. Furthermore, we have the risk of "second round" effects.
This means that economic agents may incorporate in their price setting the wrong assumption that the
higher headline inflation due to oil price increases will last in the medium and long run. These risks of
"second round" effects are particularly significant as regards wages and salaries. We are there
precisely to ensure price stability in the medium term. To date, we have not seen these risks
materialise, but we have to prevent them. Once the second round effects materialise, it is too late.
Signals for risks in the medium to long term can be deducted from our monetary analysis. For
example, loans to the private sector are growing quite rapidly.
You said you are not committed to a series of rate hikes, but two hikes do not make a cycle.
Can we expect a scenario similar to that from 1999 to 2000, with seven rate hikes in a row?
We have not decided ex ante a series of rate hikes. It is important to convey this message, because
otherwise observers might think that we have decided to raise rates at every meeting, as has been
done by another important central bank. At the same time, I said that we never embark on any
precommitment - we will do what is necessary to counter the risks that we identify. That is why we
increased rates in December, why we did not in January and February, and why we did increase rates
in March. I don't want to say anything else. One thing is for sure: all observers have understood that
we did not decide a priori to increase rates and that we will do what is necessary to ensure price
stability. And they trust us. This trust is perhaps our most precious asset.
Can we today speak of a housing market bubble in the euro area?
The development of loans for financing housing forms part of the information which we receive from
the monetary analysis and which we monitor closely. If you take the full body of the whole euro area
you have a level of outstanding credit for housing which is very dynamic, exceeding 11% growth on a
yearly basis. That figure is posted despite the fact that the German real estate market remains
depressed. That means that, in part of the euro area, there is an even more rapid development of the
situation. So it calls for very close monitoring. At this stage, I will sum up our present understanding of
the situation: it is something that is important to monitor closely. It was naturally part of the information
we took into account when we decided to increase rates during our last meeting. But I would also add
that, at the level of the euro area as a whole, all economies taken into account, I wouldn't say that we
are presently alarmed, diagnosing the immediate danger of a bubble. I would say that we have
information that calls for very close monitoring and we will continue to follow these developments very
carefully.
But you have some differences between countries. How can you cope with that?
Again, at the level of the Governing Council of the ECB we have only one instrument, which is the
single monetary policy. If there are situations that are different from country to country, as is the case,
other instruments, in particular at national levels, are in the hands of the governments, the parliaments
and, in some cases, the national central banks of the countries concerned. However, it is clear that, as
far as we are concerned, in that domain, as well as in others, we only have the single monetary policy
as an instrument.
What is your appraisal of the seven years since the euro was launched? When do you think it
best played its role as a monetary shield?
The euro has been an incredible success. Human nature is such that when you have a big success,
you tend to forget it. The success has been such that we have been able to deliver to 313 million
people the level of monetary confidence, of monetary credibility, of low medium and long-term market
interest rates that previously were the privilege of only part of the euro area. All that was considered by
many impossible "ex ante". I have participated in the run up to the euro and I have a very vivid
memory of what many observers believed even in 1997 or 1998: the fact that we could succeed in
benchmarking the euro on the most credible currencies of the euro area was considered as a quasi
impossible endeavour. We succeeded and we met the promise which was made by all the authorities,
including central banks, to the people that the euro could be as good, as solid and as credible a
currency as their previous national currencies. I am proud, as was my predecessor Wim Duisenberg,
to be able to go to all the countries in the euro area and tell people: "you have a currency which has
fulfilled the promise that was made".
The launch of the euro was supposed to accelerate the process of economic union and fiscal
harmonisation. How do you explain the lack of progress and, worse, the apparent rejection of
the euro by many of the larger new Member States of the European Union?
Let me remind you of some figures. Today, 25 countries are members of the EU and, quite soon, there
will be 27. Of these 25 countries, only two have an "opt out" clause as regards the euro. In the future,
25 out of the 27 countries will not have an "opt out" clause. And out of the two economies that have an
opt out clause - the UK and Denmark - Denmark follows very closely the monetary policy of the euro
area. Now let me give you some figures on the Exchange Rate Mechanism 2. When I first arrived at
the head of the ECB, there was just one participating currency, the Danish krone. Now, the number of
participating currencies is eight. I do not observe a frozen situation, quite the contrary. The euro has
facilitated the completion of the single market and is also pushing in the direction of structural reforms
that are a major endeavour for Europeans in general. It does not mean that we are fully satisfied with
the present situation. It is clear that in the domain of structural reforms, we have to do more, much
more. We gave our strong backing to the initiatives taken recently by the European Commission,
under the leadership of Mr Barroso, to re-launch the Lisbon Agenda.
If you look at those countries that have implemented well and fully their structural reforms, you see
that they are success stories. Ireland, in particular, is a remarkable success story, as regards full
employment and GDP per capita. Denmark, which is de facto in the euro area, has made structural
reforms in the labour market, which have proved very efficient. We are fully backing this trend of
reforms. It is very important to communicate as efficiently as possible and to convince public opinion
that this is a successful way to fight unemployment and promote growth.
Part of the needed structural reforms are sector-based and imply cross-border mergers and
acquisitions. Are you completely discouraged, for example, by the French government's recent
attitude in the Suez-Gaz de France case and Dominique de Villepin's call for economic
patriotism?
The ECB's Governing Council didn't discuss any particular dossier relating to cross-border mergers
and acquisitions. In the past, the Governing Council always referred to the full completion of the
European single market. As a matter of principle, the Governing Council thinks that there is an
opportunity cost associated with the non-completion of the single market. Let's not forget that it is not a
new endeavour. The Single Act launched the endeavour for a single market in the mid-1980s. In 1958,
when the Treaty of Rome was ratified, the idea was to produce a common market of the size of the
USA to benefit from economies of scale. The ambition was already clear 50 years ago: free circulation
of men and women, goods and services and capital in the European Union.
Austrian Finance Minister Karl-Heinz Grasser, who is chair of ECOFIN during the first half of
2006, claims that all EU Member States should achieve balanced budgets by 2010, what do you
think about that?
It is a good goal. We have always called for the rigorous implementation of the Stability and Growth
Pact. You will remember that there were calls to drastically change the rules in this domain, and even
by some to abandon the pact. We have always said that the Pact is a crucial element in the EMU. The
Stability and Growth Pact is very much the "E'' in EMU. We have no federal government, we have no
federal budget, but we have a single currency. In order to be coherent, the EMU needs a stability and
growth pact. The three percent threshold, which I am proud of having introduced myself in the
negotiations, is not only mentioned in the Stability and Growth Pact but is also referred to in the
Treaty. I often have to answer the question, whether more than three percent would not be opportune
in difficult situations where an economy could use that extra push. That would be the Keynesian
argument: the more you spend, the more you activate the economy. But besides that argument, there
is what economists call the "Ricardian effect''. David Ricardo rightly stated that the greater the deficit
becomes, the more investors and consumers alike start to realise that such a deficit is not sustainable
in the longer run. Somebody will have to pay for it, either through higher market interest rates or
through tax increases. Entrepreneurs become nervous and slow down their investments, consumers
start saving more and spending less. So the economy slows down and jobs are lost. The more the
budget goes into the red, the stronger this Ricardian effect becomes, and the more it outweighs the
Keynesian arguments for deficit spending. That is why the stability pact is also a growth pact.
Slovenia is the only new EU Member State that is ready for the euro. Do you think it can join in
2007 as expected?
We will see. I don't want to anticipate the result of the reports that the ECB and the Commission will
publish in May. We have to check whether the criteria stipulated in the Maastricht Treaty are fulfilled
on a sustainable basis.
After seven years, do you have any arguments left to convince the British to join the euro ?
It is up to the British people to decide. As you know, in the past, the British Prime Minister said very
clearly that it is in the interest of Britain to join when the time comes. I'm also convinced of this. When
you compare Britain and Ireland, you can see that there are good arguments. However, even without
the UK, we number 313 million people in the euro area.
With Otmar Issing's departure, the last pioneer of the first ECB-Management is leaving. What
has been done in your institution in the last eight years and what challenges lie ahead of you?
Otmar Issing has been and is a marvellous member of the Executive Board. Our institution, the ECB,
has been designed to be credible over time irrespective of staff changes. The ECB is credible
according to all the information we extract from observers, market participants and the financial
sphere. The successive members of the Executive Board are themselves part of the continuity of the
institution. I am confident that this trust is solidly based.
Do you think Lucas Papademos would be a marvellous successor to Otmar Issing as Chief
Economist?
We will take together, the six of us, the decision for the responsibilities in the Executive Board, when
time comes, with our new colleague.
The Federal Reserve System has a new Chairman, Ben Bernanke. What kind of man is he and
do you expect to have the same relationship with him as you had with his predecessor, Alan
Greenspan?
It is very important that we have a very close relationship with the Federal Reserve System. It has
been the case consistently over the past years. At the time of the terrorist attacks in the United States
on 11 September 2001, I mentioned several times that we had an exceptional and confident real-time
dialogue with the Federal Reserve System, which permitted us to take the appropriate decisions as
regards the potential liquidity risks that existed in both the euro and the dollar on our side of the
Atlantic. That kind of immediate decision on the very afternoon of the terrorist attacks was possible
only because the degree of mutual confidence and companionship between us is very high. I had a
very good relationship with Alan Greenspan. We met very often because the various "G's" (G10, G7,
G20) meet regularly. We have a special brotherhood of central banks which is important. I have myself
the privilege of presently being Chairman of the G10 and I am the direct witness of this very close and
confident relationship between central bankers. Ben Bernanke's appointment has been extraordinarily
well received by the global community, all observers and market participants. I have full confidence
that we'll continue to have the very same, very close and friendly relationship with the Federal Reserve
System.
Do you think that the Federal Reserve System and Congress are ready to seriously discuss the
opportunity of having an inflation target?
The fact that the question has been mentioned with the main argument that it could help to anchor
inflation expectations is an idea that we like, as you know. But I don't want to comment in any respect
on decisions that are of the responsibility of the Federal Reserve System's Open Market Committee
and of its Chairman, Ben Bernanke.