Jean-Claude Trichet: Macroeconomic policies, imbalances and the need
to avoid going back to the status quo ante
Address by Mr Jean-Claude Trichet, President of the European Central Bank, at the Annual
Joint Parliamentary Meeting, European Parliament, Brussels, 16 February 2009.
* * *
Monsieur le Président du Parlement européen,
Monsieur le Président du Sénat de la République Tchèque,
Monsieur le Président de la Chambre des Députés de la République Tchèque,
Mesdames et Messieurs les parlementaires européens et les parlementaires nationaux,
Je me réjouis beaucoup de participer à cette réunion interparlementaire à Bruxelles. Alors
que nous ne sommes qu'à la mi-février, c'est déjà ma troisième rencontre cette année avec
le Parlement européen. Cela montre encore une fois à quel point le dialogue entre la Banque
Centrale Européenne et le parlement est étroit.
Auch heute steht unser Austausch im Zeichen der außergewöhnlichen wirtschaftlichen Lage.
Die Weltwirtschaft erfährt einen starken konjunkturellen Abschwung. Dieser hat mittlerweile
auch die EU erfasst. Regierungen, Parlamente und Zentralbanken haben rasch und
entschlossen reagiert. Ich möchte heute auf einen Aspekt hinweisen, der mir besonders
wichtig erscheint; nämlich, dass wir bei all unserer Entschlossenheit nicht die notwendige
mittelfristige Orientierung unserer Entscheidungen aus den Augen verlieren. Diesen Aspekt
möchte ich Ihnen erläutern.
Our primary and most immediate task as policy-makers is to help resolve this crisis, in
cooperation with the private sector. We need to address the fundamental causes underlying
the crisis: in the international financial system, in the international setting of macroeconomic
policies and in the international financial architecture. And yet, we also need to make sure
that our decisions today do not lay the ground for similar disorder in the future. We can only
do so - and this is my main proposition today - if we design policies in such a way that we
do not go back to the status quo ante and instead firmly enshrine in our policies the
appropriate focus on ensuring stability over the medium term.
I would like to explain what I mean by this.
The global economy was - and, to a significant extent, still is - imbalanced. It is imbalanced
in three domains: in its financial system, in its macroeconomic configurations, and in the
governance of the financial architecture. The present crisis does not just offer us an
opportunity to rebalance, it provides an obligation to rebalance these three intertwined
domains of the global economy. These are the key challenges we must not fail to address,
no matter how difficult the related work agenda.
The root causes of the crisis
Let me outline where I see these challenges more specifically, starting from the root cause of
the crisis.
Clearly, the root cause of the crisis was a massive underestimation of risk in the financial
sectors of virtually all advanced economies. Risks were blurred owing to financial innovation
that had produced highly intransparent financial products. These allowed for a generalised
deterioration in lending standards. The drop in virtually all credit spreads and the asset price
booms were particularly important in spurring households and firms to increase consumption
or accumulate debt at a rapid pace. Much of this boom was based on the erroneous
assumptions that house prices and asset prices would continue to increase indefinitely, and
that macroeconomic cycles had been eliminated. In 2007 market participants began to notice
that these assumptions were unrealistic. Asset and house prices fell, financial institutions
were caught with excessive leverage, and households and firms quickly became
overindebted.
As a second factor, we need to recognise that economic policies also played an important
role. Macroeconomic policies in several economies were not sufficiently focused on
mediumterm stability and sustainability, which would have helped prevent macroeconomic
imbalances from accumulating. This was mainly due to the erroneous belief that in a
globalised economy, it would be optimal for some countries to borrow from the rest of the
world, or accumulate claims on other countries, indefinitely. This belief was initially
encouraged by years of rapid global growth. But ultimately it proved mistaken. The financial
crisis led investors to shun risk. They became less willing to allow households, firms and
entire economies to accumulate debt.
As a third factor, we have observed clear imbalances in global governance. Still at the
current juncture we must be aware of the shortcomings in the international financial
architecture. Here, it is not necessarily the analysis that was the problem: the rising risks in
the global financial system were identified in the process of international cooperation. The
IMF coordinated a multilateral consultation in 2006-07 to address global imbalances. The G7
and the G20 regularly flagged concerns related to imbalances in their communiqués. Policy
recommendations were developed, but not appropriately enforced during this period. Also,
the dangers of a sharp and abrupt correction were not generally perceived as grave and
quasi-immediate. I have to say that in this respect it is in the constituency of central banks
that we can find the clearest public statements on the need for the private sector to prepare
for a very serious market correction. This was the sentiment of the Global Economy Meeting
of Central Banks Governors in Basel as early as 2006 and the beginning of 2007. And the
Bank for International Settlements itself in its own research had been the most lucid of the
international institutions.
The course of action to be undertaken
Looking ahead, what actions should be undertaken to redress imbalances in the global
financial system, in macroeconomic policies and in international governance?
For the financial system, there is a need for more stringent regulation. Such regulation needs
to prevent a recurrence of the excesses witnessed in financial markets and must impose a
much more stability-oriented perspective. The Financial Stability Forum has already identified
the key avenues for reform. These include three policy areas where change is particularly
warranted, in my view:
•
first, introducing incentives and rules to prevent the financial sector from focussing
excessively on short-term returns;
•
second, improving transparency as regards risks to the financial system, as well as
regarding institutions, instruments and markets that are currently unregulated or
insufficiently regulated; and
•
third, eliminating, wherever possible, the elements that amplify the tendency of the
financial system to accumulate excessive risks and leverage in good times, and to
shed risks hastily in bad times - i.e. dampening pro-cyclical tendencies.
I have dwelled upon these three issues on other occasions. These points are also reflected
in the G7 communiqué issued last Saturday, and I will not elaborate on them further.
What I would like to emphasise today is the overall setting of macroeconomic policies looking
ahead. While it is imperative, in the short term, that the current situation be stabilised, we
should not lose sight of the need to maintain a medium-term orientation, to anchor
expectations, and to stabilise economic conditions both domestically and globally.
Looking at the immediate future, monetary and fiscal measures have been and are being
implemented swiftly and on a large scale. Indeed, the ECB was one of the first authorities to
react through appropriate monitoring of the money market when the first signs of turmoil
emerged in the summer of 2007. As regards monetary policy, our guiding principle has been
and continues to be to ensure price stability in the euro area in the medium term, in line with
our definition: below 2%, but close to 2%. This solid anchoring of price stability is the best
contribution we can make to safeguarding the overall stability of the euro area.
At the global level, it is equally important that policies do not steer the global economy back
to the global imbalances experienced in the status quo ante, since this was the starting point
of the current problems. It is of the utmost importance that policy-makers do not merely focus
on short-term solutions and instead adopt a longer-term perspective, with the objective of
ensuring a sustained recovery. Wise policy actions therefore include two central elements:
•
first, credible exit strategies must be planned and promptly implemented once
macroeconomic measures have had their desired effects; and
•
second, policies must aim not only to stimulate domestic demand over the short run,
but also to foster longer-term structural adjustments.
Needless to say, these elements are fully valid also for Europe. Stability-oriented policies
have become, if I may say so, a European trademark. The current crisis underscores the not
only the value but the necessity of such stability-oriented policies. We should be proud of this
European trademark and not abandon it at the current juncture.
As regards the global financial architecture, international organisations and fora should play
an important role in convincing countries to adopt stability-oriented policies and ensure
necessary corrective measures where required. And international institutions should, in turn,
also adapt. Let me stress that the central banking community has adapted in a decisive
manner, through unprecedented international cooperation, with global cooperation by central
banks mirroring the globalisation of finance.
In particular, the connection between macroeconomic and financial stability needs to be
more comprehensively addressed than has been the case thus far. This implies that we need
to have an even better understanding of the link between macroeconomic and financial
surveillance. Closer collaboration between global institutions such as the International
Monetary Fund and the informal grouping that is the Financial Stability Forum would be
helpful.
In addition, the IMF needs to improve its surveillance, including financial surveillance,
especially as regards systemically important countries. We have for a long time concentrated
on the surveillance of developing and emerging economies, while industrial economies
considered themselves to be largely immune to international advice. The crisis provides the
painful lesson that industrial economies also need surveillance - indeed, rigorous
surveillance. All international institutions and fora should reflect on how to strengthen their
surveillance and its effectiveness in fostering policy adjustment.
This is clearly a long and difficult agenda, and we may still not have all the answers yet. But
Europe can play a leading role. We need to continue pursuing stability-oriented policies with
a medium to long-term orientation within Europe. And we can foster international cooperation
with the aim of having such policies pursued also at the global level and thereby prevent a
return to the status quo ante. Again, the current crisis is an obligation to correct the
fundamental causes of persisting imbalances, in the global financial system as well as in the
setting of macroeconomic policies. The focus on sustainability and medium-term stability is a
useful guidepost in this context.
Thank you for your attention.