Jean-Claude Trichet: Interview with Le Figaro, Frankfurter Allgemeine
Zeitung, Irish Times and Jornal de Negócios
Interview with Mr Jean-Claude Trichet, President of the European Central Bank, by Jean
Pierre Robin (Le Figaro), Benedikt Fehr (Frankfurter Allgemeine Zeitung), Paul Tansey (Irish
Times) and Rui Jorge (Jornal de Negócios),conducted on 11 July 2008 and published on
18 July 2008.
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1. Could you outline how you see the euro economy evolving over the short run and
the implications for euro interest rates?
I always said - on behalf of the Governing Council with all our colleagues, Vítor Constâncio,
John Hurley, Christian Noyer and Axel Weber - that in order to have clear indications on
what the euro area economy has been doing in the last months, we should take together the
first and second quarter of 2008. Whilst the first quarter was very dynamic, due to particular
circumstances including the weather and its impact on construction in Germany for instance,
the second quarter is likely to be weak. Our base line scenario is that we will have a trough in
the profile of growth in the euro area in the second and third quarters of this year and,
following this, a progressive return to ongoing moderate growth. I have also said clearly that
the risks for growth were on the downside. Amongst these risks are the influence of the
ongoing very significant financial market correction, the possible further increases in, oil and
commodity prices and the possible unwinding of global financial imbalances. As regards
interest rates, I have nothing to add or to withdraw from what I said before on behalf of the
Governing Council - that we trust that our decision to raise our key interest rate from 4.0% to
4.25% will contribute to achieving price stability in the medium term in line with our definition.
I also mentioned that we had no further indication for our future interest rates, that we are
never pre-committed and that we will do in the future what is appropriate to deliver price
stability in the medium-term and to be credible in doing so, since this is essential to
anchoring inflation expectations.
2. Central Banks, including the ECB, have been responsible for a lot of monetary
growth in the recent past. To what extent are central banks to blame for the present
inflation, in the euro area and elsewhere?
In the euro area we have certainly not been loose or lax! I trust that the ECB did well and
took the right decisions in the past. Let me give you an example: you know that when we
decided to increase rate in December 2005 (editors note: after almost two and a half years at
2.0%), we were advised by the IMF not to increase rates; we were advised by the OECD not
to increase rates; we were advised by a number of other eloquent voices not to increase
rates. We did it nonetheless, because our monetary analysis in particular strongly suggested
that we should. Today nobody suggests that we were wrong in our analysis and in our
decision, on the contrary.
3. Inflation in the United States is now around 4%. Would you say that the risks to
price stability are now greater in the euro area than in the US?
I certainly will not judge the policies that are pursued by other central banks. We all have our
own responsibilities in our economies and we have to face different challenges: the shocks
are not of the same nature and the same amplitude; the economies themselves exhibit
different structural features, including as regards their degree of flexibility. Those different
challenges are explaining why interest rates are different from country to country. Do you
know that interest rates in Britain as well as in Australia, New Zealand, Sweden and Norway
for example are higher than in the euro area? I trust that all central banks are doing what is
necessary to counter inflationary pressures and to be credible in the delivery of price stability
over time. To deliver price stability in the medium term is necessary for five reasons: first, it is
what the European democracies have asked us to do when they created the ECB; second, it
is what our fellow citizens are asking us to do in the present circumstances; third, it is
particularly necessary for the most vulnerable and the poorest segment of society; fourth, it is
a necessary precondition for sustainable growth and job creation and fifth it is particularly
important to solidly anchor inflation expectations in a period of financial market tensions and
volatility.
4. Why did the recent statement by the Governing Council lay so much emphasis on
the need to suppress second-round effects in order to quell inflationary expectations?
Indeed, our message is that we should avoid second-round effects. We cannot change today
the prices of oil and commodities. But we must avoid that prices that depend on us - for
instance prices of services or the wages and salaries - would augment abnormally as if the
present abnormal level of inflation would last. We are there to tell households as well as
enterprises, all social partners, that we will maintain price stability - less than 2%, close to
2% - in the medium term and that they have to take that into account when they are fixing
their own prices.
5. What do you mean by second-round effects?
I mean all the price increases that would be wrongly based on the hypothesis that the
inflation would remain as high as it is today in the years to come. Today price setters and
social partners must take into account that we will be back to price stability - in line with our
definition - say over 18 months.
6. In what way can ECB interest rate policy curb inflationary expectations? What are
the instruments?
The economists will tell you that the Central Banks are ensuring price stability through
different channels of transmission of their monetary policy decisions: the interest rate
channel, the credit channel, the risk taking channel...I will stress particularly the decisive
importance of the credibility of the central bank. If the Central Bank is credible in its handling
of monetary policy, then our fellow citizens as well as the corporate businesses will have
confidence that they can count on price stability in the years to come. The ECB is a credible
anchor of stability and confidence for 320 million citizens of the euro area. We are strongly
determined to preserve and reinforce confidence: it is our most precious asset. And it is good
for all, households, enterprises and governments: market interest rates on a five years, ten
years, twenty years basis are lower because the ECB is credible and inspires confidence.
Some governments are borrowing on a fifty years basis at an interest rate significantly
inferior to 5%: this is only possible because the ECB inspires confidence.
7. Core inflation in the euro area is now about 1.7%, so why should we be so worried
about inflation?
First, core inflation is higher than that and secondly, we do not consider core inflation as a
good predictor of future inflation. But let me give you an example of why we see signs that
justify our concerns. Unit Labour Costs are an important indicator of future inflation, because
they are a major cost in the euro area economy. In recent years, we have had an increase
rate in Unit Labour Costs of 1.0% in 2005; 0.9% in 2006; 1.5% in 2007; and 2.4% in the first
quarter of the present year. When you try to disentangle the factors behind this development,
about half of the increase is attributable to increases in wages and salaries and the other half
is due to a reduction of labour productivity. The overall result is that we have observed in the
last two years a significant rise of unit labour costs.
8. Are second-round effects then already at work in the euro area?
The recent rise in unit labour costs is an indication that we have to take into account. So
there are risks that we had to counter. I wouldn't say at all that second-round effects are a
generalised phenomenon at present but we see signs that we have to take seriously. From
that standpoint I am concerned about the schemes in which nominal wages are indexed to
consumer prices. They involve the risk of a wage-price spiral, very detrimental to
employment.
9. Is there a risk of euro area inflation exceeding 5%? Is a sharp economic slowdown
preferable to an inflationary spiral?
We are not pursuing two goals; we are pursuing one goal, which is price stability in the
medium-term. And price stability is a pre-condition to sustainable growth and employment
creation. There is no contradiction between price stability and sustainable growth. Since the
euro was established in 1999, it has delivered both. In its first nine years, annual inflation in
the euro area averaged 2.1% and over these nine years, the euro area has created 15.7
million jobs, almost three times more than in the previous nine years before the euro and one
million more jobs than were created in the United States over the same period. The
unemployment rate in the euro area last year was the lowest in 25 years. There is no
contradiction between price stability and growth: price stability is a prerequisite for
sustainable job creation.
10. Has the ECB any other responsibility other than price stability?
We have a primary objective, which is to maintain price stability. It is a precondition to
contribute to the achievements of the objectives of the European Union.
11. In order to achieve price stability, would the ECB raise interest rates consistently
to break inflationary expectations?
I have already said what I had to say on this.
12. At present, inflation in the euro area is well above your target. Is the ECB to blame
for this? Could we have avoided this surge in inflation?
We are responsible for price stability in the euro area over the medium-term. We have been
able to achieve this objective since the euro's inception. We know the sentiment of our fellow
citizens. The latest surveys suggest that inflation is now the major economic concern of
European citizens. They know of course that the Bank is not responsible for the increase in
the cost of oil, commodities or food. Our 320 million fellow citizens can count on us to deliver
price stability over the medium term, and we think particularly about the poorest and most
vulnerable that can do the least to protect themselves from rising inflation.
13. Should the ECB be concerned with asset price inflation as well as consumer price
inflation in its determination of price stability?
This is a very important question for all central banks. To sum up the sentiment of our own
institution, we do not think that it would be possible or advisable to have a definition of price
stability that would include in a single indicator not only consumer prices but also asset
prices. That being said, through the "wealth" effect asset prices have an influence on
demand and therefore on future consumer prices. So asset prices are indirectly taken into
account in the decisions of central banks. On top of that, in the case of the ECB, you know
that our monetary policy framework is based on two pillars: an economic pillar and a
monetary pillar. When we analyse the monetary situation we look also with great attention to
credit growth which might feed asset inflation.
14. Over the past year, the expansion of credit to non-financial corporates within the
euro area has been very high, while in the case of households, credit growth has been
very low. Is this a reflection of the "credit crunch" in Europe?
There has been a big difference in the credit expansion rates for non-financial corporates on
one hand and households on the other. Over the past twelve months, the growth in credit to
non-financial households has reached 14.2%, which is an impressive multiple of nominal
GDP growth. On the other hand credit extended to households has progressively slowed
down since we increased interest rates in December 2005. It is also true that we are told by
banks, through our bank surveys, that they are tightening their bank lending standards. We
will monitor these evolutions closely in the months ahead.
15. Can you explain the 14% growth in credit to non-financial corporates?
We are working on that. What is sure is that there is still a very dynamic growth in the overall
financing of the productive sector which is not offset by a diminution of stocks and bonds
issuance.
16. What is your feeling about the capital adequacy and the solvency of the euro
banking system at present?
I think that the process of accounting and of recapitalisation is a process that is taking place
both in Europe, the euro area and the USA. At the present moment, all the information we
have suggests that recapitalisation of banks in the euro area is in line with the amount of
losses displayed. That being said, we have to be constantly alert. There is no room at all for
complacency.
17. Is the worst behind us in this credit crisis?
My assessment is that we are experiencing, since the month of August last year an ongoing
very significant market correction with episodes of turbulence, episodes of a high level of
volatility and of hectic market behaviour. Again, it is an ongoing process.
18. Are conditions today comparable to the oil shock of the 1970s?
The situation is not identical. The structure of the global economy has changed with the
increasing influence of emerging economies. There have been major breakthroughs in
science and technology. Much progress has been made in energy saving technologies. But,
that being said, I trust that there are also important similarities. Today as in 1973-1974, there
is a major transfer of resources from oil consumers to oil producers. Trying to deny that there
is such a transfer of resources to oil producers is and would be a major mistake. Because
there are only two ways to isolate the households from this real transfer which is
unavoidable: either you ask the enterprises to pay for it and you weaken considerably the
productive sector; or you ask the budget to pay for it and you weaken dramatically the
situation of public finances; or you do both! But, this has been - on the occasion of the first
oil shock - and would be so in the present circumstances a recipe for high spiralling inflation,
high unemployment and stagnation. We must take into account the lessons from the past.
19. How do you protect productive sectors in the face of such external shocks?
As I said, avoid second-round effects.
20. Is it the role of the ECB to prevent a recurrence of the stagflation of the 1970s?
We have a very clear mandate: achieving price stability in the medium-term. It is totally in line
with the lessons of the first and second oil shocks of 1973 and 1980.
21. One of the challenges the ECB has to deal with is that the cycles in the
eurocountries are different. What can be said to those countries like Ireland, Spain and
Portugal who are in a difficult position now and for which the rate hikes are painful?
The ECB has to care for the superior interest of the euro area. My message to the fellow
citizens is that they share a common destiny with an entire continent as populated as the
United States of America. When we look at the differences in growth between states and
countries in the US and in Europe, we have approximately the same level of differences. A
large vast continental economy has necessarily to give breathing space to its components.
And our monetary policy must be optimal at the level of the whole euro area; exactly like the
Fed would not look what is in the interest of Missouri, California or Texas. That being said,
there are numerous aspects of economic policies which are under the responsibility of the
countries themselves: in particular the fiscal polices, the structural policies and the
surveillance of the evolution of unit labour costs.
22. Portugal, for instance, has quite a low level of inflation. When the rate rises, people
look at the ECB, but should they be looking at what their governments have done in
the past in order to put them in a better position to cope with the difficulties that arise
from the single monetary policy?
Firstly, in anchoring solidly inflationary expectations the ECB is preserving a financial
environment which is favourable for sustainable growth and job creation. Because all
medium and long term market rates are lower, all things being equal, if inflation expectations
are in line with our definition: less than 2% but close to 2%. Secondly, as I said governments,
parliaments and social partners have important responsibilities also because a lot of policies
are within the competence of national authorities.
23. You intend to go to Peking after the Olympic Games. What will be the message to
China?
We will see with our Chinese partners, for whom I have great esteem, whether we meet in
China or in Europe. As regards our message it is well formulated: as we said in the
communiqué of the last G-7 meeting, we appreciate the rise of the Yuan but we consider that
an acceleration of the appreciation will be in the interest of all parties concerned.
24. To what extent does the appreciation of the real euro exchange rate and the future
impact on euro area growth cause you disquiet?
I have said publicly that it is very important in my eyes that the President of the United
States, the Secretary of the Treasury and the Chairman of the Federal Reserve have said
that a strong dollar is in the interest of the United States of America.
25. The difference between the interest rates in Europe and the US makes it more
difficult to have a strong dollar compared to the euro. Would you expect some help in
that?
I have nothing to add to what I just said.
26. The European economy is hurting because the Chinese constantly intervene in the
currency market in order to promote their export. Shouldn't the ECB intervene itself
and try to push the euro down?
In my eyes, the acceleration of the appreciation of the Yuan would be in the interest of the
Chinese partners themselves, because it will help to diminish inflationary tensions in China. It
would also be part of a rebalancing between domestic consumption and exports, which are
an important element in the strategy of China, and it would be part of the modernisation of
the policy instruments available in the Chinese economy. But we have also always said that
this is the responsibility of the Chinese authorities. We will continue to discuss with our
partners, respecting their own responsibilities and explaining our own positions.
27. How worried are you by the performance and the behaviour of hedge funds and
their destabilising effects on the financial markets?
Firstly, I think it was very important that we could have an agreement at the level of the
international community on the 67 recommendations of the Financial Stability Forum. Work is
also being done by the private sector itself and I trust that it is always important to ask the
professionals themselves and the industry to reflect on best practices, to work out codes of
conduct and set up benchmark principles. This is work in progress in particular for highly
leveraged institutions and hedge funds. We will see if this work is satisfactory from the stand
point of financial stability. Should this not be the case, then there is always the possibility to
involve the public authorities. In any case transparency is of the essence.
28. Is it clear to you that we can no longer live in a world with such a huge shadow
banking system?
We have to draw all the lessons and not single out a particular element but rather try to be as
systematic as possible. It is clear that the "originate and distribute" model has to be reviewed
to be compatible with financial stability. A very important part of the Basel's committee work
is precisely to see how to improve the behaviour of commercial banks. In any case, much
more transparency of the institutions, the instruments and of the market will be necessary.
That is not only because when pertinent information is available, the economic agents can
make better decisions and engineer a better allocation of capital - but also because
transparency is an important protection against "herd behaviour" and the propagation of any
crisis. One of the lessons we learned from the Asian Crisis ten years ago was the strong
need to improve transparency in the emerging economies as regards in particular their
reserve assets and their monetary and fiscal policies. In the financial markets of the
industrialised world we have exactly the same lessons to be learned.
29. How healthy is the banking system in Europe? Some argue that some banks,
namely the Spanish ones, are too addicted to the ECB's lending and collateral policy,
a signal of little health?
Since the very beginning of the market turmoil we had a framework which proved to be more
adapted to the unforeseen new environment that was associated with the financial
turbulences. Our framework appeared as an interesting example for other central banks that
had to change their own framework. We are permanently examining and applying our rules
with great care. If it would be useful to refine elements in our scheme, as we did in the past,
two and four years ago, we would do it.
30. So you don't think the banks are too dependent on your instruments?
We have a framework that has proved to serve us well and we are caring continuously for it
to be correctly applied.
31. Do you think the Irish no to the Lisbon Treaty has any impact on the euro area or
on the ECB's behaviour?
As the President of the ECB, I would like to say that the Lisbon Treaty does not affect the
EMU framework and therefore the present difficulty of ratification does not affect in any
respect our work. We have a very clear policy objective - price stability in the medium term -
and a very inspiring road map: achieving the integration of the single market with a single
currency and progressively enlarging the euro area according to the criteria of the Treaty of
Maastricht. As a citizen, I hope very much, and I am confident, that we will find a way to
overcome the current difficulties.
32. You shelved plans for the ECB headquarters. Your budget was 500 million euro,
but the promoter wanted 1,2 billion. What are the plans ahead: will you increase the
budget - and who decides that - will you start a new plan or stay in the current
premises?
We are responsible for public money. The Governing Council is the body which decides on
the proposal made by the Executive Board. We are examining the situation in view of
optimizing the present situation without altering our cost estimates.
33. Would you be surprised and accept it if the political leaders decided to change the
ECB's mandate to a dual one, with price stability and growth?
That is a highly theoretical question. We have a primary mandate enshrined in a Treaty
which has been negotiated, signed and ratified - either by Parliaments or by the people - by
27 exemplary democracies, 25 without an opting-out clause. This is the mandate that was
given to us by our fellow citizens! The people of Europe gave us this mandate because they
rightly trust that price stability is a prerequisite for sustainable growth and job creation so that
there is no contradiction but complementarity between the two.
34. Given that mandate, do you think all the political leaders are helping you by
explaining exactly your mission to their fellow citizens? Would you expect more help
from some leaders?
We are fifteen countries today in the euro area and sixteen as soon as next year. One very
important message for our 320 million fellow citizens is: "We share a destiny in common!" I
see more and more political leaders and opinion leaders aware of the necessity of this
message.
35. What answer do you have to pressures for instance from Mr. Sarkozy or
Mr. Berlusconi?
Let me make three remarks. First, the ECB is fiercely independent. And the Treaty says, very
explicitly that governments shall not try to influence the Governing Council of the ECB. This
independence is key to our credibility, which is in turn essential for confidence in Europe.
And confidence is our most precious asset, as I said.
Second, the most vulnerable and poorest of my fellow citizens have the biggest stake in price
stability which is now the main concern of all according to the surveys.
Third, as regards the organisation of the relationship with authorities, whether government or
Parliament, we have probably the best organised and the most frequent relationships that
exist at the global level. This is not sufficiently known. I invite the president of the Eurogroup
Jean-Claude Juncker and the Commissioner Joaquin Almunia to all our meetings twice a
month. I am invited to all Eurogroup meetings once every month. That makes occasions of
contacts three times a month. As regards the Parliament, I am invited five times a year and
members of the Executive Board are invited on other issues as well. On top of these official
hearings I participate in a number of informal gatherings with members of European
Parliament. I attach great importance to these relationships with the European Parliament.