Jean-Claude Trichet: Interview with the Financial Times and the Financial
Times Deutschland
Interview with Mr Jean-Claude Trichet, President of the European Central Bank, conducted on
14 May 2007 by Mr Lionel Barber, Financial Times editor, Mr Ralph Atkins, FT Frankfurt bureau chief,
and Mr Mark Schieritz, Financial Times Deutschland.
* * *
FT: It would be interesting to hear your thoughts about the German economy, because it was
the sick man of Europe, that's what everybody said, and nobody's saying that any more.
JCT: I never said that myself. I was struck by the fact that Germany seven, eight years ago, and
particularly at the moment of the setting up of the euro, was in the position of having lost a lot of cost
competitiveness, which was very easily understandable because of reunification. But then during the
first seven years of the euro you had, I would say, hard work being done, and certainly hard work
being done on unit labour costs and the cost competitiveness of the economy as a whole. So it seems
to me that the overall judgement that Germany was the sick man of Europe, for structural reasons,
was not exactly the right diagnosis. Germany had a lot of difficulty to grow again at a pace which
would be reasonable and encouraging, essentially because of the loss of cost competitiveness.
It remains true, of course, that Germany, as well as the full body of the euro area and probably the full
body of the European Union, has a lot of structural reforms to embark on, to implement. We all agree
on that. We are calling for that. We are repeatedly asking for those reforms to be implemented.
Germany was doing reform in a way which was not negligible, but was not necessarily extraordinarily
rapid. But the area where Germany did really a very, very good job was again this recovery of cost
competitiveness of the private sector, accompanied by restructuring, reshaping, internationalising,
actively. That last remark is also partially true for the rest of Europe, in my opinion. During the last
years, observers have had a tendency to underestimate the level of restructuring and reshaping of the
private sector in all the economies in Europe. That was not yet showing up in terms of macro figures,
and I often told colleagues here and there in various European or international fora, don't be misled.
Remember the US in the second part of the eighties - the macro figures were not necessarily
flattering, but a lot of good work was being done in terms of reshaping and restructuring the private
sector. And this is something which is happening in Europe in the present period, much more than you
suspect. So don't take it that nothing is being done. It's, of course, much truer in the private sector
than in the public sector.
FT: Are we underestimating potential growth right now, do you think?
JCT: No. Well, on this particular point, which is very important, I would stick myself to the previous
range that we had - 2 to 2.5 per cent would be the growth potential of the euro area. Say, 2.25 or 2.3
per cent would be an appropriate proxy. But we would not say at this stage - and this is the position of
the ECB's Governing Council - that we have substantiated and documented a real significant
structural increase in productivity, in total factor productivity, or in our growth potential. We consider
that what we have observed during the last year may be a pickup in productivity that is probably more
of a cyclical nature. This of course calls for more research, but again we think it would be premature to
conclude that we have a higher growth potential. It seems to me that other entities, particularly the
international institutions, are not saying something different from us, and they also have more or less
the same order of magnitudes for our growth potential. Something which is quite striking is if I compare
the US and Europe from 1980 to 1995 and from 1996 to 2004, we have more or less exchanged
labour productivity figures with the United States. We were registering or observing, labour productivity
at the level of 2.4 per cent during the 15 years from 1980 to 1995; they were at 1.2 per cent. We are
now during the last ten years at 1.1 per cent when they are at 2.3 per cent. They have multiplied by
two their average yearly labour productivity figure and we have divided ours by two.
FT: These changes that you alluded to were driven by the private sector almost in the absence
of clear efforts by the political class...
JCT: I wouldn't say "almost nothing". I mean undoubtedly there is an area where structural reforms
have been fostered by executive branches, -and by parliaments, where necessary - which has been
the transformation in the labour market, aiming at augmenting job creation in the unskilled labour
segment of the market. There, undoubtedly, significant structural reforms have been implemented. It
was overdue because we had a level of unemployment in the unskilled segment of the market which
was very, abnormal, very high. But I'm impressed to see that it has really played an important role in
permitting a significant creation of jobs and reduction in unemployment.
We have created, during the eight years after the setting up of the euro, more than 12 million jobs. We
had created less than three million in the eight year period before the euro was set up. The number of
jobs which have been created in Europe after the euro was set up, 1st January 1999, has been
superior in the euro area to what it has been in the US during the same period. That might surprise
because public opinion had not heard that before. And we are now at an unemployment level of 7.3
per cent, and you have to go back twenty-five years ago to find such a low level of unemployment.
Unfortunately, as you remember, after the first oil shock in 1973 unemployment increased massively
and remained at levels which were quite high. So we have had, as I said, active job creation during
those eight years. I don't pretend that it is the euro that made it, but at least those who were saying
that the euro is playing against job creation should look at the figures and reflect more. But, that being
said, it's clear that the structural reforms that were implemented in Italy, in Spain, in Germany, in
France, in the Netherlands and all over Europe, to facilitate job creation in, particularly, the unskilled
segment of the market, have been operative and have undoubtedly been a success. Now, in a number
of other areas, clearly, we still have a lot of homework to do and that homework is particularly visible, I
have to say, in the domain of the labour market in general. It's true that our labour market is less
flexible in the euro area than in most advanced industrials economies, including Commonwealth
countries. And Denmark demonstrates that it is possible to have a very flexible labour market together
with social protection.
FT: Before we talk about France in a minute, why would you be satisfied, though, with 2.5 or 2.3
per cent [economic growth]? Why not aspire to American growth rates, which are necessary,
really, to bring down unemployment further? Why not aim higher?
JCT: We certainly are aiming at that. The Governing Council of the ECB considers that our main
strategic goal is precisely to elevate the growth potential of the euro area. And we see no reason why
we would not have a total factor productivity which would be substantially higher, and why we couldn't
go back, after all, to the levels of the early labour productivity progress that we observed in the 15
years before 1995, 1996 and that the US economy is observing since 1996 as an average. So I fully
agree with you. Our main aim is to elevate growth potential and the way to obtain that seems to us
clearly to embark, across the board, on structural reforms. The single market is a structural reform of
the first importance. And the single market with a single currency is an extremely natural way of
fostering single market integration. You know that the main problem there is certainly services sector
integration, achieving the single market in the services sector. And I would say, to respond very clearly
to your question, we call for elevating the growth potential of Europe. The means to elevate the growth
potential of Europe is to resolutely embark into achieving the single market, and delivering the
socalled Lisbon agenda, which, again, has been considered as a major structural drive for Europe. We
all agree on that, all executive branches, the council, the commission. We encourage them all. The
problem is the delivery!
FT: But that structural reform does mean a more flexible labour market, doesn't it?
JCT: Yes, certainly.
FT: It does mean dismantling matters like the 35 hour working week in France, does it not? Or
do you think that, actually, in the private sector, employers found all sorts of ways around the
35 hour working week...?
JCT: Firstly, let's not forget that we are living in very vivid democracies. And that we are in the ECB
issuing the currency for all sensitivities in the euro area as a multi-partisan Institution. And that we
have full respect for the decisions of our democracies. The normal duration of a parliament or
government is four or five years, say five years. That means that on average, over a period of every
five years there are 13 elections of importance in the euro area. Since I was appointed ECB president,
just to give you an example, I remember the general election in Spain, changing the government, the
general election in Italy, changing the government, the general election in Germany, changing the
coalition, the general election in the Netherlands, the general election in France ... On 35 hours let me
say that there is an overwhelming consensus the world over to consider that it was a bad decision.
FT: You talked about a vivid democracy. Remember 1992-94. These were tough years for you,
as governor of the Banque de France, and you stayed with it despite all sorts of political
criticism. You must have thought that that period was over. And then suddenly the French
presidential election, and you're back in the firing line.
JCT: I had from time to time to explain tirelessly what we were doing, why we were doing it. You are
absolutely right to say that the public debate in those years was particularly vivid. What was
vindicating what we were doing was that we were very much backed by the people. Each survey that
we did in these years was really giving us around 70 per cent of the population, of our fellow citizens,
saying, "Okay, we back their activity to deliver price stability". And it is the way I am explaining myself
that that strategy came along and was not modified, even after several changes in power.
I can tell you that today the Governing Council has exactly the same sentiment. We embarked on a
survey, and I have made those figures public already, saying that 73 per cent of the fellow citizens of
the euro area approved the following sentence: "we approve the independence of the ECB from
executive branches to deliver price stability". And there is the same percentage exactly in France - 73
per cent. The same in France, the same in the euro area, the same for the 318 million people. The
sentiment of the people in a modern democracy is that it's good that there are guardians of the
currency that are given the mandate of ensuring price stability and are independent from executive
branches to do that.
FT: You've got a solid foundation and public support. So how are you going to deal, then, with
President-elect [Nicolas] Sarkozy?
JCT: As you know, President Sarkozy has said that he was not calling himself to change the
Maastricht Treaty. He was not calling to change the legal foundation for the ECB and I have noted that
as something which was, of course, very important.
FT: So what was he trying to do? Can you just ignore what he says, just as the campaign?
JCT: No. What he, and the French government will say will be examined very carefully through the
European institutions. We have 13 executive branches that are discussing together. They have
themselves their own organisation: the euro group of eurozone finance ministers is a meeting that
certainly is important. And you have the council at the level of heads of state and government
FT: The French said [in the run up to the euro], "when the euro enters force there will be a
serious political dialogue between the Eurogroup and the European Central Bank". But my
impression today is it's a bit sterile, it's a dialogue of the deaf. You want these structural
reforms, that's what you're putting on the table, and they want lower interest rates. Obviously
that's a crude formulation, it's simplification, but that's...
JCT: Yes, I would say it's an over-simplification. First of all, governments have an immense stake
themselves in us ensuring price stability. They have an immense stake themselves in us being
credible in delivering price stability. This is contributing to a financial environment which is, for most of
the countries of the euro area, exceptionally favourable, because it incorporates inflation expectations
- over five years, ten years, 20 years - that are in line with our definition of price stability. Several
countries are issuing securities, issuing bonds, of a duration of 50 years. It is because we are credible
over the next 50 years that they can obtain the favourable financing which corresponds to that. And
they know that. Don't forget, also, that all the national central banks that are now making up the
Eurosystem were made independent more or less early, but Banque de France, for instance, was
made independent by the will of the French democracy as early as 1st January 1994. It was on the
basis of a bipartisan accord between the left and the right. And it called for a very solemn moment in
this active democracy that I mentioned, and particularly it called for a change of the constitution of
General De Gaulle, the constitution of the Fifth Republic, to permit independence of the Central Bank.
And that was done five years before having the ECB itself being created. I would also like to mention,
because you mentioned the relationship between the executive branches and this institution, that we
have an organisation of meetings, of physical encounters which is probably the most well and
scrupulously established in the world. According to the Treaty I invite myself the president of the
Eurogroup, Jean-Claude Juncker, every fortnight to ECB's Governing Council meetings. He can
participate fully, listening to all our arguments, and make his point if he wishes to - of course, in full
respect of the independence. But the existence of these frequent meetings is important. I am invited
myself to the meetings of the Eurogroup, together with the Vice-President, and then again, this
meeting with all the ministers, and again the president of the Eurogroup, is organised once a month.
That makes three meeting every month. Of course it is also true with the Commission, with the
Commissioner Joaquin Almunia, the EU monetary affairs commissioner. So we have a scrupulous
organisation of very frequent meetings. And if there is any sentiment or message of the 13 eurozone
countries which they would wish to pass on to the ECB, they can do that. On top of that we also have
the very same scrupulous organisation of the dialogue with the European Parliament. I have meetings
with the European Parliament at least five times a year - de facto even more frequently because I can
participate once or twice a year in colloquiums including some which are organised with the MPs of
the national parliaments. So that makes, perhaps, five, six, meetings a year including - which does not
happen in the US - a hearing with the plenary session of the European Parliament.
FT: You mentioned the Banque de France. There's this rather interesting work being done,
which I think Christian Noyer, governor, has alluded to, on the monetary aggregates, and this
sort of suggestion that they may not be so useful in measuring inflation, or at least giving us a
guide to inflation. What's your view on that?
JCT: I really think that it's, again, an over-interpretation. The part of your remark on the fact that we
would be divided amongst us is not the reality. We have very much the same view in the Eurosystem.
What is to be mentioned is that here and there you have publications, with appropriate disclaimers,
and to the extent that this is a very, very interesting and stimulating issue, you have a lot of elaboration
on what is published here and there. I consider myself that we have to be as open and as candid as
possible in this domain, as we have been since the very beginning. We never said that we would have
a mechanistic approach to the instrumentation of the monetary pillar. We always said, and we
repeated it at the time of the clarification of our monetary policy strategy n 2003, that we were
considering the monetary pillar as giving very important information permitting the cross-checking of
the economic analysis within a medium to longer term perspective. We also said that we were working
a lot to broaden and deepen our analysis. And I would say that it is what we are doing. We consider
that we have to continue working to understand better the dynamics of the components of M3,
particularly in periods where the yield curve is flat, in a period where we have a lot of observations that
M1 on the one hand and M3 minus M1 have different dynamics. Equally important are the dynamics of
the counterparts. Each month when I mention the monetary analysis, on behalf of the Governing
Council, I often mention explicitly some of the counterparts of M3, for instance the non-financial
corporate increase in outstanding credit, the private sector credit, the outstanding loans to finance
housing etc. And this deep and broad analysis of components, counterparts, and sectorial breakdown
of M3 is fully part of the monetary pillar analysis - not in a mechanistic approach, but in an approach
that has served us very well. Myself and my colleagues of the Executive Board including Jürgen Stark
and Lucas Papademos we all underline these points. I can tell you that myself, I consider the
monetary pillar has been probably decisive when we decided to increase rates in December 2005,
against the advice of the OECD, of the IMF and a number of observers. That decision was due to the
fact that we had our two pillars and were incorporating and assessing the binocular vision that we had
of our situation. Today absolutely everybody is vindicating what we had done at the time. But
everybody has forgotten that a number of international institutions were against that move as well as
ten executive branches out of 12 [then eurozone members]. So all this just to mention that we are very
much attached to the monetary pillar. Let me finally add that Banque de France had a monetary pillar
which served it very well in the run-up to the euro. Christian Noyer underlined himself the success of
eliminating any remaining risk premia with the best other currencies that were in the exchange rate
mechanism no.1, the Deutschemark or the Guilder or others thanks to the monetary policy concept of
Banque de France. The judgement of the market is probably a very good judge.
FT: It's interesting you use this word "decisive" - that the monetary analysis was decisive in
December 2005. Could the monetary pillar be decisive in the coming months? When we have a
look at the other pillar, it seems to suggest everything's perfect - you have inflation exactly
within range; the economy's growing at or around potential. The only alarm signal we have is
the monetary pillar. Could the monetary pillar be decisive in the coming months when it comes
to interest rate setting?
JCT: As I said in Dublin on behalf of the Governing Council, we are in a mode of strong vigilance. As
you know, I did not want to elaborate in advance what we could do after June in the second half of the
year. I was very clear on that. As I said what is clear is that we will do what will be necessary to ensure
price stability in line with our definition. The monetary analysis, which, as I said, is permanently
enriched, will continue to play the same role in the future in our cross checking exercise. Note also that
we are never mechanistic in our decision-making process. As far as the economic analysis is
concerned we, for instance, do not underwrite our projections at the level of the Governing Council.
We consider that staff projections, whether ECB staff or Eurosystem staff, as an important input in our
decision-making process, but we also consider that we have to make our own judgement on the basis
of all information and analysis that are available and which we judge pertinent. And I am very happy to
see that a lot of colleagues are going closer to our own views on, I would say, a concept of
judgements and decisions enlightened by experience, and coming out of a collegial meditation as
comprehensive as possible as regards the inputs including money and credit. The governor of Bank of
England looking very carefully at some of the counterparts of the monetary aggregates and at credit in
particular is to be noted.
FT: You said that you're not mechanistic. Is there any chance of formally getting rid of [M3]
reference value, which of course is some kind of a mechanistic way to judge the figures?
JCT: At this stage we consider that it has served us very well, and we consider that what we have said
since the very beginning and in 2003 suffices, taking into account what I have said on the permanent
deepening and broadening of our analysis.
FT: As you know, the market expectations are for an interest rate increase in June, and maybe
another one by the end of the year. But the question in a lot of people's minds is, if we are
approaching a peak, and we might be at a period where rates are likely to stay at the same rate
for some period of time, would you ever give any indication that we were entering that sort of a
pause or have reached some sort of a plateau?
JCT: I have already said what I want to say as regards the second part of the year. As regards our
own past of course similar questions have been asked several times, for instance: "You are at the
level of 2 per cent. Will you remain at the level of 2% for a long period of time, a considerable period of
time, a short period of time, and so forth?" As you know we refused to respond to those questions. We
said, "We will do what will be deemed necessary to ensure price stability" and as a matter of fact we
remained at that level for around two years. But we always said that the market should be fully aware
of the fact that we could change our interest rates at any time. I called this posture "credible alertness",
and this was our constant mode. Other central banks could have at the time a different conception of
their medium term pre-commitment, saying that "we will stay at this level for a considerable period of
time", which was interpreted by the market as meaning something like more than six months, perhaps
one year. You also had some central banks embarking on some more or less automatic
instrumentation of their monetary policy, with periodic regular increases. We always refused to do that
because we trusted it was not appropriate in our case. We always said: we will do what is necessary
and we trust that we are sufficiently candid and transparent as regards our primary mandate, our
definition of price stability and our monetary policy concept, for this to function correctly. And the fact is
that we could function correctly with a correct understanding of the observers of the market.
FT: Are you concerned about the Spanish property market?
JCT: The Spanish property market, Irish property market...
FT: You were going to say the London property market, but we're not in the euro yet.
JCT: When you are in. [laughs] It's clearly an area where we have elements of buoyancy. It's an area
that my colleagues of the Executive Board and of the Governing Council and I have mentioned
regularly as calling for close monitoring. It's also an area where we have seen, and I said this in
Ireland, some signs of cooling down in terms of prices and in terms of outstanding credit, that are
observed in the household credit for financing housing. So, clearly, it is something which is important,
it is something which we have to look at very carefully. We mention it as one of the elements which
had been taken into account to justify our previous decisions, and we will continue to monitor very,
very carefully this "cooling down" which is starting to be observed in Spain in Ireland in particular, at a
moderate pace On the other hand, never forget that we are looking at a vast continental economy of
318 million people. As I said, in Dublin, from Dublin to Ljubljana and from Lisbon to Helsinki, it's an
impressive economy by its dimension and size. And what we expect as a likely evolution is that as you
have a cooling down in a number of economies, which would be a normal evolution, in the whole real
estate cycle, we could have some picking up from a very low level, in particular in Germany,
corresponding to the expansion of the German economy. And there we would have somewhat of a
balancing effect.
FT: Maybe just come back to France, actually, on that point. We talked about Mr Sarkozy and
possibly a confrontation, but do you also see, perhaps, a chance that France might now follow
in Germany's footsteps in implementing the sorts of reforms that are necessary to restore
international competitiveness?
JCT: I think that the ECB has always called all partners, whatever their sensitivity, to go along the way
which had been decided by Europe, by the European Council, unanimously, namely the Lisbon
agenda for reform and we have always said that we were fully supporting reform - all over Europe, all
over the euro area, as part of what was necessary to elevate our growth potential and I am supporting,
and all my colleagues on the Governing Council are supporting, the reformist drive anywhere in
Europe, and of course, in this particular moment, in France , certainly.
FT: But in a way, France hasn't paid a heavy price for not reforming as fast, say, as Germany.
There's been a general recovery and French growth has been a bit uninspiring, but it's been
okay. But there's been no price paid. So why reform if you can just sort of get along? It's a free
ride then.
JCT: First of all, I will not assess myself a hit parade of who is reforming the most rapidly. Again, what
Germany has done is to work very effectively on its unit labour costs, on regaining cost
competitiveness. Both in France and Germany and Italy, and a number of other countries, a lot of
homework remains to be done in the structural reforms. The price that the full body of Europe has had
to pay, and of course France in particular, is a growth potential too low, and unemployment too high
even if significant progress were made as I have said. In France, eight years after the euro, around
two million jobs were created. Eight years before the euro, around 500,000. So, progress was made
but the level of unemployment remains much too high all over Europe, and certainly also, of course, in
France. So a price was paid. If you would increase the rapidity with which you are reforming yourself,
you would be better off. Everybody would be better off and there would be more growth and more job
creation, and less unemployment. This is the reason why we support the reforms.
FT: Surely this is a new chance for France. You have a new political leader, who has talked
about a culture, maybe shifted back a bit, but he has talked the language of reform.
JCT: We support the language of reform, and we support the implementation of reform because we
trust it gives more growth and more job creation. That's absolutely clear. It's not new, but I repeat it.
FT: But just for a moment, if you could just be a Frenchman, rather than a European...
JCT: I am proud to be a Frenchman and proud to be a European...
FT: ...just for a few moments. Sarkozy has been described even as a possible Thatcherite; too
strong, perhaps, but do you expect some real changes in the first three, four months?
JCT: The French people have chosen. As I said this Institution issues the currency for 318 million
people of all sensitivities and my colleagues and I fully respect all of them. But I would say all that
goes in the direction of active reform, elevated growth potential, and in line with the drive that has
been decided in Lisbon is good and we fully support it.
FT: Within the eurozone there are divergencies. You've alluded to the hot periphery, you have a
laggard Italy, yes, things have looked a little better in the last 12 months or so, but how, from
your position as president, and your colleagues at the European Central Bank, how are you
managing these divergencies? And how concerned should we be about them?
JCT: Several observations. The first observation, we are running a 318 million people area. It's very
vast. It's the order of magnitude of the US. So we can compare diversity in the US and diversity in
Europe. We compare diversity in terms of growth and diversity in terms of inflation, only to give you
two examples. And I have to say we were impressed by the fact that the figures that you have when
you compute the standard deviations on a cross state or a cross country basis are more or less the
same. So it seems that it is a normal characteristic of a vast continental economy of the dimension of
300 million people to have on a state-to-state basis, or country-to-country basis the same magnitude
of diversity. I have had a number of occasions to elaborate on that.
FT: Yes....
JCT: And we all have a number of anecdotes on both sides of the Atlantic. You're in the US, the unit
labour costs, the levels of productivity are not the same in Massachusetts, South Carolina or
California. It's normal we find, in a very vast economy. Even in the UK diversity is present. If you are in
London or Edinburgh, you are not necessarily in exactly the same economic environment. So it's
normal. What is very important is that we central bankers, all call for as much cohesion as possible.
For us, it's important to have the various executive branches as lucid as possible, and as aware as
possible of what's going on, including, in terms of unit labour costs. The Commission has played, and
is playing an important role in making everybody aware of the various evolutions, for instance of unit
labour costs, in the various countries.
FT: It's benchmarking...
JCT: It's clear that we have the same diversity as is observed in the United States. We have also
perhaps more persistence in our diversity. So there is an element of transparency and lucidity at the
level of the eurogroup, the executive branches, which is certainly important. Another observation I
would like to make is that when looking at the United States, we are discovering, and that has been
done by research, in a very convincing way, that financial integration, and namely the credit channel
and the risk-sharing channel, are playing a very important role in absorbing asymmetric shocks.
Namely around 60 per cent of the asymmetric shocks would be absorbed by the financial integration
channel while perhaps, and that was a surprise, only an order of magnitude 15 per cent would be
absorbed by the fiscal channel through the mechanism of the federal budget. For us, the conclusion is
that financial integration is not only very important in terms of appropriate functioning of a single
currency area with a single monetary policy, not only important because a single market with a single
currency is part of the way you are getting higher growth potential, it is also important for the cohesion
of this area when you have asymmetric shocks. You have through financial integration an efficient way
to weather those asymmetric shocks. By the way, what is also pleasing is to see is that when our
research concentrates on better explaining the diversity in growth, on what is the business cycle
component, and what is the long term trend component, we see that the convergence of the business
cycles is more and more visible in the euro area.
FT: It's very interesting; you talked about financial integration down the credit channel. Does it
present any problems that the City of London, which obviously plays a very important part in
the clearing system, is actually outside the Euro Zone?
JCT: It's a very disputed question, of course. We would call ourselves - as you know, we don't hide
our position - for UK, to join in. We trust that the UK does not see the advantage of joining in because
it is be