Jean-Claude Trichet: Interview in The Wall Street Journal
Interview with Mr Jean-Claude Trichet, President of the European Central Bank, in The Wall
Street Journal, conducted by Messrs Brian Blackstone and Marcus Walker on 19 January
2011.
* * *
WSJ: If 2008 and 2009 were years of crisis, and 2010 was a year of stabilization and
recovery. How do you see 2011? What should Davos participants be focused on this year?
TRICHET: Since the start of the recovery, in the third quarter of 2009, the real economy has
surprised up on the upside. This is encouraging. I see 2011 as a year of continuous hard
work, to make the financial sector more resilient and to improve the soundness of fiscal
policies. The crisis, which started in 2007 and intensified in September 2008 revealed the
fragility of the financial sector first and then the relative vulnerability of public finances in the
advanced economies.
WSJ: What worries you most?
Trichet: To consider that because we managed to avoid a depression and are now
experiencing the recovery, we could lose momentum in the reforms that are still urgently
needed. That is the main danger.
WSJ: This year austerity becomes pan-European. But a recent United Nations report said
austerity risks a renewed economic downturn. Do you agree?
TRICHET: No, we do not. I do not buy the very simple reasoning that would suggest that
pursuing sounder fiscal policy would hamper growth. On the contrary, I think that appropriate
fiscal retrenchment in countries that need it is part of growth enhancement, because
sustainable public finances makes a difference in terms of improving confidence of
households, enterprises, investors and savers, which is decisive to foster growth and job
creation.
WSJ: Does the U.S. have it wrong? It is engaging in even more fiscal stimulus.
TRICHET: It's not for me to give a lecture to other advanced economies. We have our own
responsibilities. In our own case we strongly believe that fiscal soundness is
confidenceenhancing and therefore part of a growth-enhancing strategy.
WSJ: In your recent ECB press conference you made repeated references to the July 2008
rate hike and said the ECB is never pre-committed not to move interest rates. Were your
remarks over-interpreted as hawkish?
TRICHET: I have nothing to add to what I have said last Thursday (ECB press conference on
13 January). You have to place my remarks in the context of the first 12 years of the euro,
during which we delivered price stability in line with our definition: less than 2%, close to 2%.
When you look at the yearly average since the setting up of the euro it is 1.97%, better than
had been done in any such period of time in the previous 50 years. You don't get this result
by chance. We are profoundly attached to our mandate. And that explains the solid the
anchoring of our inflation expectations, which we see as one of our major assets because it
helps avoiding second round effects when we have oil price increases in particular. Clearly,
in particular on the side of energy and commodity prices we have a number of developments
that we will continue to monitor closely.
WSJ: Tighter monetary policy would have the biggest impact on countries like Spain, Greece
and Ireland where private debt is linked to Euribor. Can you understand why those peripheral
countries are concerned about this hawkish shift?
TRICHET: I also said in my last press conference that the present interest rates were
appropriate. In any case all countries in the euro area have an immense stake in the solid
anchoring of inflation expectations because medium and long-term interest rates incorporate
future inflation expectations.
WSJ: Inflation is being driven by energy and commodity prices and higher value-added taxes
in some countries. Is the ECB's focus on headline inflation misplaced? Does the Fed have it
right by focusing more on core inflation?
TRICHET: In the U.S. the Fed considers that core inflation is a good predictor for future
headline inflation. In our case we consider that core inflation is not necessarily a good
predictor for future headline inflation. That being said all central banks, in periods like this
where you have inflationary threats that are coming from commodities, have to go through
the hump and be very careful that there are no second-round effects. This is what we are
doing.
WSJ: When you hiked rates in 2008 there were signs of those second-round effects. Do you
see evidence they are starting to take hold in Germany or elsewhere?
TRICHET: At this stage, we do not see this. And everybody knows we would not let
secondround effects materialize. We will continue to deliver price stability.
WSJ: Could the ECB raise interest rates while still maintaining nonstandard measures
including unlimited loans to banks?
TRICHET: It is our doctrine since the beginning of the turbulence that interest rates on the
one hand and non-standard measures on the other hand are decoupled. We design the
monetary policy stance; we decide interest rates to deliver price stability in the medium term.
Non-standard measures are there to help restoring a better functioning of monetary policy
transmission. We are disconnecting both measures. We can move interest rates on the one
hand, and we can move non-standard measures on the other hand independently.
WSJ: Euro member states are working on comprehensive measures to address the debt
crisis. What elements should be in that package?
TRICHET: These decisions are the responsibility of governments. We have in particular a
very strong message, which is that we need a "quantum leap" in the strengthening of
governance of economic and fiscal policies.
WSJ: When you spoke of a quantum leap last year, you referred to quasi-automatic
sanctions on excessive deficits. Governments so far haven't come along. What makes you
optimistic that you can still get your point of view adopted by governments?
TRICHET: There are a number of elements that are important: the reinforcement of
sanctions; the reinforcement of the independent diagnosis that would be made by
Commission. It's a set of quantum leaps, including the quasi-automaticity of the start of the
corrective procedures and of the sanctions, which in our view is extremely important.
Governance is now discussed by the European Council and the European Parliament. The
Parliament has in the past always demonstrated a remarkable capacity to capture what is
essential for Europe. So, the involvement of the Parliament is very important.
WSJ: Last year, governments made a watery compromise on sanctions, weaker than the
European Commission's proposals. Should governments rethink that compromise?
TRICHET: Even the initial proposals from the Commission seemed to us too timid. Our
position has not changed.
WSJ: You have called for maximum flexibility for the European Financial Stability Facility.
There is discussion whether EFSF should take over all or part of the bond buying program
from the ECB. If that were to happen, would you be relieved?
TRICHET: As I said, they have to improve the stabilization fund in both quality and quantity.
By quality I mean having a tool that is as flexible as possible.
WSJ: You have said bond purchases are meant to ensure the transmission of monetary
policy. If EFSF buys bonds, wouldn't that take a monetary function away from the ECB and
give it to a fiscal authority?
TRICHET: As all our non-standard measures, the securities purchase is indeed meant to
help restoring a better transmission mechanism of our monetary policy. It is clear that if
markets are functioning better more generally then we have less problems in the
transmission of monetary policy. In any case, the main tool to improve the situation is to
restore the credibility of individual governments themselves.
WSJ: Should countries be able to borrow money from the EFSF for bank recapitalization
without having to apply for a full bailout?
TRICHET: These are the responsibilities of the governments. We are asking to demonstrate
full responsibility for economic and financial stability through a quantum leap as regards the
economic governance in the euro area, a quantum leap in conditionality and greater flexibility
in their utilization of the mechanism.
WSJ: You have said there is a sense of urgency to improve the EFSF. Governments appear
to have put off any changes until March at the earliest. Do you think leaders are showing a
sufficient sense of urgency?
TRICHET: Since the beginning of the turbulence, I have said we needed to demonstrate - all
of us, all authorities - a solid sense of direction, a sense of responsibility and the awareness
of the necessity to be ahead of the curve and not behind the curve. I maintain that.
WSJ: What do you think the risk is that this wrenching process will cause the breakup of the
euro or its membership?
TRICHET: Of course the euro is there and will be there in the future. I do not comment on
what I consider absurd hypotheses. I am used to such questions from the very beginning of
the euro. The paradox is that, years ago, the question was about Germany supposed to be at
that time the "sick man of Europe". I was responding that Germany was doing hard work that
its economy was catching up on competitiveness. Now the same hard work has to be done
by those that were growing rapidly over the past years but at the same time had lost their
competitiveness. One has to accept that within a vast economy that has the size of the euro
area, with 331 million people, there are economic differences. For instance when I look on
both sides of the Atlantic I see that the differences between the fastest and slowest-growing
U.S. states, it is more or less of the same order of magnitude as between countries in the
euro area, for instance between Oklahoma and Nevada, 13 % differences in growth in 2009;
between Slovakia and Ireland more than 9 % in growth in 2008.
WSJ: The U.S. copes with these differences through labor mobility and a federal budget.
Does the euro zone ultimately need a big federal budget?
TRICHET: The quantum leap we are asking for in surveillance of fiscal policy has to be the
equivalent, in our own institutional framework, of what a federation could do. And we should
not overestimate labor mobility in the U.S. and underestimate it in Europe. If I take the U.S.
state with the highest unemployment and the state with the lowest, I am not that far from
what we observe in the euro area, for instance in 2009 between 18% and Spain, 3,7 % in
Netherlands, and between 13,6 % in Michigan, and 4,3 % in North Dakota, 4.3%.
WSJ: Should senior bondholders of bank debt be forced to accept haircuts in the event of a
bailout, as proposed by the European Commission?
TRICHET: This is not a European concept. This is a global concept, which is discussed in
particular at the level of the Financial Stability Board and of the Basel Committee It is
particularly important for so-called systemic financial institutions. Very careful analysis is
required on the various possible options - additional capital buffers, contingent capital,
bailing in financial instruments, etc. I would say for us it is still a work in progress. In any case
I don't imagine we could have a different solution in Europe than in other advanced
economies.
WSJ: What can be done to improve the euro zone's growth potential?
TRICHET: The growth potential of Europe and the euro area could be significantly higher if
all European countries had implemented the structural reforms of the so-called Lisbon
Agenda. Now the Europeans are again committed to bold structural reforms. Two avenues
seem particularly decisive amongst many others. I would insist on the full opening of a real
single market in services. When we created the single market we were an industrialized
economy and services were not particularly dominant. Now we are an advanced economy
and services are playing a dominant part, and we still have resistance to a real single market
in services. This could give a boost to European growth potential. The second point is labor
market reform where we need significantly more flexibility in a number of economies.
WSJ: This is your last year as ECB president. How important is it that the choosing of your
successor by governments be a smooth process?
TRICHET: I have very hard work until the end of October and I expect to exert, with all my
colleagues, my impressive, inspiring and profound responsibilities until the last day. As
regards my succession I have full confidence in the heads of state and government. It is their
responsibility.
WSJ: What has surprised you, both good and bad, over the last 12 years of the euro? What
do you think the euro zone will look like in 2015?
TRICHET: I will not say that I was myself surprised because I have been deeply involved in
the negotiation of the Maastricht Treaty and the setting up of the euro. But I guess that a
number of external observers are very positively surprised to see that price stability with the
euro has been, over 12 years, better than with the previous national currencies and that as
many as 17 countries and 331 million peoples are in the euro area since the beginning of
2011. But this is not time for complacency. As all of the advanced economies we have to
draw - without any complacency - all the lessons from the present global crisis, in particular
in terms of governance.
WSJ: The Fed is doing more quantitative easing, while the ECB warns of inflation risks even
though both regions are recovering in a broadly similar fashion. Are Fed and ECB policies
diverging, and does it pose a risk to global financial stability?
TRICHET: On both sides of the Atlantic we have each of us our responsibilities that are very
important. We are placed in different economies, particularly in terms of the financing of the
economy, and of the nature of the shocks we have to cope with. But we are united in
purpose: to deliver price stability in medium term and to solidly anchor inflation expectations.