Jean-Claude Trichet: Interview with Corriere della Sera
Interview by Mr Jean-Claude Trichet, President of the European Central Bank, conducted on
23 September 2009 by Ms Marika de Feo, Corriere della Sera.
* * *
Is the improvement in the financial markets in line with the new data coming out of the
economy?
"There is a significant improvement in the functioning of the financial markets in comparison
with a year ago. This was what we were aiming at, when we had to take very bold decisions
after mid-September 08 (when Lehman collapsed), in order to permit the markets to function
again. Back then, there was a systemic solvency issue, not only a systemic liquidity issue.
And it is not surprising, taking into account what has been done by the central banks as well
as by the Governments, that now we observe this improvement in the markets. There are
other factors as well that are playing a positive role. In any case we monitor with great
attention at this stage the interaction between the financial sphere and the real economy."
Will growth be positive again earlier than in mid of 2010?
"Our staff told us this month that the real economy could be a little bit better, in average, in
2009 and 2010 than what had been projected three months ago - 0.5% higher for each year.
But is means that 2009 will remain very negative and 2010 perhaps only very slightly
positive, as an average. I don't exclude that we could observe positive growth, quarter on
quarter, at the level of the euro area as a whole, before mid 2010. But this doesn't change
our main message. Namely, that we have a bumpy road ahead and that the level of
uncertainty remains exceptionally high and therefore that prudence and caution are of
essence. Now much depend on us, on our capacity to reintroduce confidence in the financial
and real economy decision making processes, in the households as well as in the corporate
sector. It is what the ECB and the Eurosystem want to do: preserve confidence, inspire
confidence, remain a solid anchor of confidence. "
Can we conclude that you still fear a double-dip?
"I said that we have to be prepared for a bumpy road ahead. We are in a situation where
uncertainty remains: we could have, quarter on quarter, at times, positive figures, without
excluding at times negative figures".
Now the G20 will replace the G8. Which is your opinion?
"I think it is important that we have a progressive improvement in the global governance. The
G20 should be given credit for being the place where global governance could be effective.
The G20 is called to be essential, appropriately enlightened by the IMF, because we need to
have both as good analytical presentations and diagnosis and the peer pressure of the G20.
The G20 has to address the issues of the domestic large imbalances between savings and
investments, and of the set of unsustainable external imbalances. We know that these
imbalances have been at the roots of the present difficulties. If we don't correct them, we'll
have the recipe for the next major crisis. And this of course would be totally unacceptable."
Could it be dangerous for the recovery, if governments would withdraw their support
to the economy?
"One thing is sure. When time comes, systemic economies are not credible in going back to
sustainable fiscal policy in the mid to long run. We won't have the recovery which we are
hoping for. Because Governments would not inspire confidence to households and corporate
business. It is the evaporation of confidence that created this dramatic turmoil. Now we have
to do everything to rebuild confidence."
When is the timing for a fiscal exit strategy?
"The position of the Governing Council of the ECB is that the fiscal adjustment process
should start, in any case, not later than the economic recovery and that the consolidated
effort should be stepped up in 2011. This is the position for the euro area as a whole.
Naturally some countries have more problems than others and they have to take into account
their particular situation."
In Germany and Italy there is a debate for cutting taxes - would it be a right way to
support growth?
"The rule which is the best in terms of running a fiscal policy is: first, to be careful that the
level of deficits in the mid-long term is in line with the Stability and Growth Pact; that the
fiscal strategy is sustainable and inspire confidence. Second: to go to this position you need
to reduce public expenditure. And third, if it is not enough, you have to increase taxes. Only
in the case your reduction of spending is big enough to give you additional room you can
embark on tax reductions. There is no other way to proceed. I'm not responding for Italy, or
for a particular country, it is simple arithmetic."
How can a high ratio of debt be reduced, especially in countries with low growth, like
Italy?
"Italy is not the only country with a high ratio. The reduction of the debt is a matter of
appropriate decisions. It is true that, when global growth is relatively low, it make things more
complicated. But a high level of national debt is hampering growth. So, regaining control of
the debt dynamics and reducing the debt outstanding as a proportion of GDP is good for
growth and foster medium- and long-term prosperity."
The Governing Council will be in Venice in ten days. Can you suggest how Italy can
regain its diminished competitiveness?
"My responsibility - the responsibility of the Executive Board together with Lorenzo Bini
Smaghi and Governing Council together with Mario Draghi - is for the euro area as a whole,
for our 330 million fellow citizens. For the Italian diagnosis I rely very much on the analysis of
Banca d'Italia and of Mario Draghi. I will say that for all countries permanent monitoring of the
competitiveness indicators is absolutely of the essence. And that includes in particular a
close monitoring of the unit labour costs and all appropriate efforts to develop and reinforce
creativity, innovation and entrepreneurial spirit in the economy as a whole."
Which assets does Italy have?
"I think that the potential of Italy is considerable, because it possesses a human resource
which is of exceptional quality. The country has an entrepreneurial spirit which is quasi
unique in the euro area, together with a capacity - including at very small enterprise level - to
innovate which you don't see in all countries. I trust that Italy as an economy has a lot of
assets, which suggest, that its growth potential should be higher than what has been
observed in the past years."
And which are the priorities?
"Amongst many others an attentive monitoring of the unit labour costs is essential which
suggests taking into account the productivity progress when you are augmenting salaries.
Italy has in particular to regain competitiveness in comparison with the average of the euro
area. This is very important."
Why was the banking system in some European countries, like Italy and France, more
resilient than in others?
"Several countries had resilient banking systems, it is not necessary to single out Italy and
France. There are a number of combinations of factors, which might have played a role. The
structure of the banking sector, the importance of retail banking are probably important
factors in this resilience together with the quality of banking surveillance by the central
banks."
Some experts say that structural reforms cannot be introduced in this moment of the
crisis. What do you think about that?
"I do not think it is true. Structural reforms are more important than ever. Part of the
insufficient resilience of the various economies in the world as well as in the euro area is
probably due to the insufficient structural reforms made in the past. It is also clear that the big
challenges that we have for the future in term of fiscal policies will be solved only if we
embark in structural reforms, because in a large number of domains it would be the only way
to reduce public spending."
Is the window of opportunity for introducing reforms of the financial system
shrinking?
"With the improvement observed in the financial markets some institutions and market
participants might think that there is no need for the reforms designed at global level. It would
be plain wrong to think that. The improvements observed are observed in particular because
there have been bold decisions taken by central banks and by governments. They could not
be repeated several times! We have to be fully aware of that. More than ever it is extremely
important to introduce the necessary reforms in the financial system, in order to strengthen
its resilience and avoid excessive booms and busts."
Is there a possibility, that increasing capital ratios of banks after the recovery could
induce financial institutions to reduce lending in advance, slowing down growth?
"We have to find out at a global level the appropriate balance between two considerations: in
the long run we need capital requirements that are fully taking into account the long-term
risks that exist in the financial sphere. At the same time, today we have to cope with an
exceptional crisis situation and we have to be careful not to aggravate this situation by
encouraging a deleveraging process which is adverse from the stand point of the recovery."
Did the Basel Committee and the FSB terms of reference found a balance between the
long-term and the short-term consideration?
"Yes. I think we captured this correct balance when we said, after the meeting of the
governance body of the Basel Committee, on September 7th that we were requiring banks to
move expeditiously to raise the level and quality of their capital to the new standards (which
will be calibrated by end 2010) but in a manner that promotes the stability of national banking
systems and the broader economy. That being said there are today ways for banks in
Europe that need more capital to get it. For instance the recapitalisation option that has been
set up by Governments is only utilised at the level of 55 %. The Governing Council calls on
banks to take appropriate measures, where necessary, to strengthen further their capital
bases and take full advantage of Government measures to support the financial sector."
Are you satisfied with the improvement going on?
"It is a process which goes on, but that we strongly encourage."
"The ECB has financed the banks with around 600 billion euro. But they are not
forwarding the funds to the real economy. What can be done to encourage lending?
"We are practising, in particular, moral suasion with banks, telling them that what the ECB is
doing is not for the sake of being kind, but because we need them to finance the real
economy. It is also true, that the demand for new credit is more modest than before the
crisis, because of the recession. So when we are asking the mid-sized enterprises whether
they had a positive response from banks to their request for new finance, a large majority,
77%, are responding yes whilst a minority of 12 % said no."
In which measure the present monetary policy, very expansionary on both sides of the
Atlantic, is supporting the creation of a new bubble in the financial markets?
"You know to which extent we are, in the ECB, in the Eurosystem attentive to do what is
necessary at any time to ensure price stability in the medium- and long-term, in line with our
definition - below 2 %, but close to 2% -. I trust that we are credible in this promise to be
faithful to our mandate and that is the reason why we are solidly anchoring inflation
expectations. And I take it that we are united in purpose - in delivering credibly price stability
- on both sides of the Atlantic as well as on both sides of the Channel."
Which risks do you see for the exit strategy, especially if it is not going to be
coordinated between both sides of the Atlantic? Is there a risk that the dollar could
suffer of this?
"As I just said we are united within the community of central banks: we want to deliver price
stability. We don't take the same decisions, because we are in different situations, dealing
with different economies, facing different shocks, different levels of flexibility, different
structures. As regards the floating currencies, I consider very important for the stability of the
exchange rates and the prosperity of the global economy that Chairman Ben Bernanke,
Treasury Secretary Tim Geithner and President Obama underline "that a strong dollar is in
the interest of the US". I trust that it is not only true but that it is also very important for the
global economic stability."
Which limitation to boni do you favour?
"I'm in agreement with the FSB terms of reference which seems to me very appropriate.
Seen from a central bank perspective, what is decisive is that the boni should not create
incentives for taking absurdly high levels of risks that would materialise in a crisis of the type
we are experiencing. The main problem, seen from our perspective is to be sure that the
structure of remunerations is conducting to sound and wise decisions justified in the medium
and long-term."
Are you satisfied with the Commission's proposal for the European surveillance
system?
"The Commission has now presented its proposals to the Council, which is under the
Swedish Presidency. As regards the ECB and its General Council we stand ready to do all
what we can for the European Systemic Risk Board to fulfil its very important systemic
responsibilities in the best fashion possible to the service of the European financial stability."
Are you satisfied with the outcome of the G20 meeting in Pittsburgh?
"As this stage I would only make three short observations:
First, we central banks appreciated that it is said that "a sense of normalcy should not lead to
complacency."
Second, I noted that it is also in the preamble that "we will prepare our exit strategies and,
when the time is right, withdraw our extraordinary policy support (....), maintaining a
commitment to fiscal responsibility."
Third, it is particularly important that the G20 is designed to be the premier forum for
international economic cooperation; that the IMF is asked to play a key role in the multilateral
surveillance, that the Financial Stability Board includes major systemic economies, and that
the communiqué welcomes the key measures agreed by the oversight body of the Basel
Committee."