Jean-Claude Trichet: The US economy, the euro area economy, and their
central banks
Speech delivered by Mr Jean-Claude Trichet, President of the European Central Bank, at the
award ceremony on the occasion of the "6. Karl Klasen Journalistenpreis", Hamburg,
7 December 2007.
* * *
Sehr geehrte Damen und Herren,
ich freue mich, heute Abend gemeinsam mit Ihnen diese festliche Atmosphäre genießen zu
dürfen, und es ist mir eine Ehre, der Hauptredner der Verleihung dieses Journalistenpreises
zu sein. Ich danke Ihnen, Herrn Kai-Jacob Klasen, herzlich für die Einladung und finde es
bewegend, heute Abend im Rahmen dieser Veranstaltung Dr. Karl Klasen zu gedenken.
Die Stiftung, die diese Preisverleihung ausrichtet, hat sich das lobenswerte Ziel gesetzt,
Journalisten zu Arbeiten über die deutsch-amerikanischen Beziehungen zu inspirieren, und
zeichnet diejenigen aus, die sich durch ihre Beiträge um die Festigung der Bindungen
zwischen Deutschland und den USA verdient gemacht haben. Was die Geldpolitik
anbelangt, so stehen die transatlantischen Beziehungen nun im breiteren Kontext der
Interaktionen zwischen dem Eurosystem und dem Federal Reserve System. In meiner
Funktion als Präsident der Europäischen Zentralbank habe ich mich stets darum bemüht, die
engen und freundschaftlichen Verbindungen zu unseren US amerikanischen Kollegen zu
pflegen und zu stärken.
[Ladies and Gentlemen,
It is a pleasure for me to be here today in this festive atmosphere, and an honour to be the
main speaker at this journalist award ceremony. I am very grateful, Mr Kai-Jacob Klasen, for
your invitation, and I am moved to pay tribute tonight to the memory of Dr Karl Klasen.
The foundation hosting this ceremony has the commendable purpose of inspiring and
rewarding journalists' works that strengthen German-American relationships. In the area of
monetary policy, transatlantic relations are now written in the broader context of the
interactions between the Eurosystem and the Federal Reserve System, and it has always
been my aim, as President of the European Central Bank, to preserve and foster close and
friendly relationships with our American counterpart.]
The goal of my talk today is to show that it is worth pursuing and extending this relationship.
The euro area and the United States share some common external and internal experiences
that justify the increasing cooperation that exists both at the policy and institutional levels. To
convince you of this, I will first show that the United States and the euro area face a similar
external environment and that their economic and financial connections have been reinforced
in the context of globalisation. I will then argue that the monetary authorities of the United
States and the euro area face common features due to a certain degree of internal diversity
within such large economic areas. This is why sharing our thoughts and experiences always
proves invaluable in our duty to ensure efficient monetary policy. In the last section of my
talk, I will demonstrate how this interaction is facilitated by institutional cooperation and the
development of personal contacts with our American colleagues.
Trade and financial integration: a shared external environment
The euro area and the United States are the largest economies in the world, hosting more
than 600 million inhabitants and responsible for around 40% of world production. The
preponderance of these two regions and their similar size naturally calls for parallels to be
made. Viewed from outside, these two regions are large economic blocs that have led
globalisation and the surge in world trade, financial flows and innovative ideas that has been
getting stronger during the last few decades.
Trade openness
The euro area is the largest exporter in the world. Its extra-area exports amounted to €1.9
trillion last year, while US exports reached €1.1 trillion. Together, these two economies
account for almost a third of world trade.
The euro area is a significantly open economy for its size. Its exports and imports of goods
reached 33% of its own GDP in 2006, a figure to add to the rising importance of trade in
services - around 10% of GDP. In 1998, euro area exports and imports only accounted for
24% of GDP, and trade in services for 8%. Trade openness of the euro area has therefore
been reinforced since the advent of the euro. The United States is slightly less open, with
trade in goods representing 22% of GDP and trade in services 6% of GDP. However, among
euro area trade partners, the United States plays a central role. Indeed, around 15% of euro
exports in goods goes to the United States. Looking at the other side of the Atlantic,
American exports represent around 10% of our imports of goods. On balance, over the last
few years, we have recorded a large trade surplus with the United States. Our goods exports
exceeded our imports from the United States by more than USD 80 billion. In the services
sector, where trade has been growing and continues to grow, our connection with the United
States is even more important. 22% of our services exports goes to the United States and a
quarter of our imports come from the United States. In particular, the export performance of
our travel and transportation services is always outstanding.
Nevertheless, most euro area trade occurs with our European neighbours, and with Japan
and China. This could suggest that the linkages between the United States and the euro area
are of a secondary importance. However, this would underestimate the significance of the
US economy because there are also indirect transmission channels. Indeed, the United
States plays a broader role in the world economy, and there can be second-round effects
that are not captured by the crude figures I have just presented.
These second-round effects include trade linkages, but also financial and confidence
linkages. After the financial turmoil experienced this summer, it is becoming increasingly
important to understand them.
The importance of financial openness
The United States, where the recent financial troubles originated, and the euro area are very
open to financial flows. US external assets and liabilities exceeded USD 13 trillion in 2005,
and the figure for the euro area is very similar. In percentage of GDP, US external assets
represented 90 % of US GDP and US external liabilities amounted to 110 % of GDP in 2005.
As regards the euro area in 2005 as well, external assets represented 124 % of euro area
GDP and external liabilities reached 137 % of euro area GDP ; therefore, in relative terms,
the euro area is financially more open that the United States.
European investors are also central players in American markets. As an example, the euro
area stock of direct investment in the United States reached more than €600 billion at the
end of 2006. Some industries are particularly present in the United States: the trade and the
financial sector, of course, but also the chemical industries of France, Germany and the
Netherlands have large investments at stake in the United States. The situation is fairly
similar in the other direction, with around €630 billion from US firms being invested in the
euro area, principally in the services industries of Belgium, Luxembourg and the Netherlands.
The current levels of FDI flows show that these bilateral links will continue to strengthen in
the future. Portfolio investments from the euro area to the United States are also of an
impressive magnitude. The stock of US portfolio assets held by the euro area reached
almost €1.5 trillion last year, this being about a third of European holdings worldwide. The
euro and the US dollar are also the currencies of denomination of the majority of portfolio
assets traded. More than three-quarters of portfolio assets worldwide are denominated in
euro and in dollars, according to the available data.1
All in all, the United States and the euro area are large trade and financial partners.
Arguably, the United States seems to have a greater impact on world business cycles,
probably mainly because of the growing importance of financial channels in the transmission
of macroeconomic shocks.
For both the United States and the euro area, trade and financial channels have, of course,
direct consequences for monetary policy. For instance, the increase in imports from low-cost
countries has ensured that import price inflation has remained contained. Import prices
declined in the period 2001-2003 in the euro area and remained stable throughout the
following years. However, commodity prices experienced higher levels of inflation as a result
of the strong growth of emerging economies such as India and China. Globalisation can
therefore have mixed effects on inflation. Finally, it has also been argued that both the United
States and the euro area witnessed a loosening of the link between inflation and activity
because of increased openness. This has important implications for monetary policy.
Diversity within large economic blocs - a common challenge for monetary policy
Although we have seen that the environment outside the euro area and the United States
has gained importance, the internal economic situation remains a major focus of attention
within central banks. Almost nine years after the euro changeover, euro area macroeconomic
developments continue to mask some diversity across the euro area countries. Nonetheless,
this diversity in terms of inflation and output growth is currently of approximately the same
scale as in the United States.
More specifically, euro area inflation differentials have exhibited a strong decline in recent
decades. Starting from an unweighted standard deviation of around 6 percentage points at
the beginning of the 1990s, inflation dispersion has fallen to around only half a percentage
point so far in 2007. More specifically, this year there has been an overall decline in inflation
rates among traditional high-inflation countries compared with last year. However, since
August, inflation rates in all countries have risen, probably as a result of higher oil and food
prices. This implies that dispersion in the euro area is currently somewhat below inflation
dispersion among the 14 US Metropolitan Statistical Areas, where it has fluctuated around 1
percentage point over the last two decades.
The dispersion in real GDP growth rates, measured in terms of the unweighted standard
deviation, has been moving around a level of 2 percentage points over the past few decades,
with no apparent upward or downward trend. This is similar to the dispersion witnessed in
output growth across regions within the United States.
The persistence of macroeconomic developments in the euro area
A key feature of the observed economic diversity is the persistence of macroeconomic
developments across euro area countries. For example, the difference in the cumulated
growth of real GDP between the two euro area countries with the largest and the smallest
output increases, respectively, was more than 50 percentage points in the period 1998-2006.
The situation was similar across US states. Furthermore, the equivalent accumulated spread
between the two euro area countries with the lowest and highest inflation rates was almost
20 percentage points and in unit labour costs for the total economy between 20 and 25
percentage points over the same period. In the United States, the spread in CPI inflation
between the two Metropolitan Areas with the lowest and highest inflation rates was slightly
lower, at around 18% for the same period.
In the euro area, in addition to the decline in dispersion of inflation, activity and labour cost
developments, another key feature is that business cycles are converging and output gap
fluctuations are becoming more similar across countries. This feature is not apparent in the
United States, where the dispersion of cycles and of trend GDP growth, seem to explain
roughly equal parts of growth dispersion between states. For instance, last year, the
acceleration in activity and the rebound in the euro area's real GDP growth was a widely
shared phenomenon across the various euro area member countries. Hence, registered
growth dispersion across the euro area countries seems to be mainly explained by
differences in trend output growth, rather than cyclical developments, a feature I would like to
reflect more on.
Differences in trend output growth in the euro area
The differences in trend output growth in the euro area might reveal structural factors that are
a normal feature in a monetary union. Differences in trend output growth may, for instance,
reflect diverse initial conditions and catching-up processes in some countries. For example,
in recent years, per capita income in Ireland has risen from a level well below that of the euro
area in the early 1990s to a level well above. In the early 1990s the GDP per capita of Ireland
represented 75 % of the average of what were to become the first 12 euro area countries.
Last year, the level in Ireland was about 30% above the euro area level. Moreover, a country
may experience an equilibrating adjustment process following a shock. Diversity stemming
from these factors is also economically justified, needed and observed within other currency
areas. In an environment of high adjustment capacity, such divergences can be interpreted
as a desirable equilibrating mechanism, contributing to sustainable convergence among euro
area countries.
However, in some cases, persistent macroeconomic differentials may reflect inappropriate
national policies, structural inefficiencies and rigidities or a malfunctioning adjustment
mechanism in individual euro area countries. Differentials resulting from such factors may be
detrimental to the dynamics of economic activity and employment. These are sources of
macroeconomic differentials that policy-makers should be concerned about and where
measures should be taken at the national level in order to increase economic flexibility.
The importance of the functioning of product, labour and financial markets
Starting with monetary policy, the single monetary policy with a uniform policy interest rate
for the euro area countries cannot, as you know, directly influence diversity in output growth
or inflation across the euro area countries. This emphasises the importance of only those
countries that have reached sustainable convergence - as prescribed in the Maastricht
criteria - participating in the euro area.
Well-designed structural policies - undertaken at the national level - should be implemented
to enhance flexibility in product and labour markets and thereby increase the adjustment
capacity of economies. Such reforms should aim to enhance productivity growth and labour
utilisation while maintaining stable macroeconomnic conditions. In this context, the Lisbon
strategy is a fundamental and ambitious programme to draw our attention to the urgency of
such structural reforms. The United States, where cross-state labour is higher, could also be
considered to be a role model for Europe.
Speaking to an audience of journalists and business executives, I am well aware of the hard
task you are confronted with - that of conveying the message about the beneficial effects of
reforms in growth and job creation. In this context, it is essential to understand and
communicate that the medium to long-term benefits of structural reforms will significantly
reward the initial investment. I can only encourage all responsible parties in these
communication efforts.
More specifically, on the labour market, economic flexibility can be promoted by removing the
institutional barriers to flexible wage and price-setting mechanisms. Let me stress that social
partners share responsibility for ensuring that wage determination appropriately takes into
account productivity and labour market conditions at the industrial, sectoral and regional level
and does not jeopardise competitiveness or employment. And one should also take into
account the fact that wage setting in the public sector often serves as a role model for the
private sector. In addition, early retirement policies have a significant negative impact on
labour supply and, hence, on the participation and employment rate. In the context of wage
setting, sufficient wage differentiation is needed to improve employment opportunities for
less-skilled workers and in regions or sectors with high unemployment.
Reforms are also needed in product markets. Let me stress the importance of fully
completing the Single Market, particularly in services and network industries. A deeper
integration of markets would stimulate price flexibility by fostering competition and open
product markets. This requires that existing barriers to labour and capital mobility within the
euro area be removed. Greater cross-border competition and the integration of markets
across the euro area countries would contribute to lower prices, an area in which Europe
may again find an interesting benchmark in the United States. These reforms could also
enhance adjustment processes in individual countries in the event of asymmetric shocks or
differing cyclical developments.
National authorities can make a substantial contribution, not only by implementing sound
structural policies, but also by ensuring a proper functioning of adjustment mechanisms
within the euro area and by implementing well-designed fiscal policies. Here, I would like to
repeat that the best contribution fiscal policy can make to the proper functioning of the euro
area is to be sustainable and medium-term oriented, fully in line with the orientations
provided by the Stability and Growth Pact. Moreover, fiscal policy can and should also focus
on increasing effectiveness and efficiency of the public sector itself through "high quality"
expenditure and tax policies. Large and inefficient public sectors can put the brakes on
economic activity by imposing a high tax burden on the economy and channelling resources
into unproductive uses. There, speaking in Germany, I have to mention that Germany itself
has been exemplary in containing overall public spending as a proportion of GDP over the
last years despite many challenges and a difficult environment. In 2007 the Commission
estimates that public spendings will represent 43.8 % of GDP, which is 4.3 percentage points
less than in 1999.
Cooperation between the two major monetary authorities
I hope I have by now convinced you that the monetary authorities in the United States and
the euro area face challenges that are similar. Internally, diversity in these large areas is of
the same magnitude, although possibly not of the same nature. Externally, both regions
count on a large external sector, with significant bilateral linkages. Similar experiences
naturally call for close working relations. This interaction has become particularly intense
since the advent of the euro and the setting up of the European Central Bank and of the
Eurosystem, but at the same time builds on a long-standing history of central bank
multilateral cooperation in various international institutions and fora, including the Bank for
International Settlements since the 1930s, the International Monetary Fund since the
mid1940s, the G10 since the 1960s, the G7 since the mid-1970s and, more recently, the
Financial Stability Forum and the Group of Twenty.
Contacts with the Federal Reserve
These international organisations provide an excellent opportunity for the Federal Reserve
Chairman and myself, for the members of the Boards as well as for the staff of both the Fed
and the ECB/Eurosystem, to meet very regularly. To give you some idea of the level of
contact we have, I can say that Ben and I meet, through the G7, the G10, the G20, the IMF
and BIS meetings, probably a little more than once a month on average. In addition, Mr
Bernanke and I jointly participate in a number of international conferences.
Indeed, through our regular meetings, Ben and I have built up a very close working
relationship, a climate of mutual trust, and a platform for direct and quick contact in special
circumstances that would require urgent communication.
Why is this important? The purpose of our contact is not the coordination of our monetary
policies. This would be incompatible with the orientation of our policies towards our
respective domestic objectives. Rather, the benefit of our close contact lies in the in-depth
exchange of information and views on recent economic developments, on the monetary,
financial and economic outlook in our respective economies, and on the policy challenges
ahead. This includes, as I discussed before, trade and financial linkages between our two
economies, directly or via other economies. Sharing first-hand knowledge on the world
outlook and on how we see our respective domestic economies influencing and being
influenced by the global outlook is extremely important in today's globalised economy.
On very rare occasions in the past, our close working relationship has also permitted to work
out swift action. A prime example of this is the decision the ECB took in the very afternoon of
the day of the terrorist attacks on 11 September 2001.
A second example is the decisions we took to help stabilising money market conditions
during the financial market turmoil of last summer. Here again, close contact with the Fed
proved extremely useful in sharing information on the financial conditions and central bank
actions in our respective economies.
The close contact I have with the Chairman is, as you see, only the tip of the "iceberg". Our
two institutions collaborate closely at all possible levels, involving Board members,
management and staff. Across various domains of central banking, we have set up joint
platforms for the regular exchange of information. In the field of economic research, we have
set up the International Research Forum on Monetary Policy to discuss theoretical and
empirical aspects of monetary policy. So far, four conferences have been organised, and a
fifth one is scheduled for June 2008. In the area of payment and settlement systems and
infrastructure, we have organised a number of joint conferences, for instance in April 2006 on
central counterparty clearing, as well as regular meetings with the Federal Reserve Board.
Even in an area such as education, we have undertaken joint work, for example at the
conference on the Role of Central Banks in Economic and Personal Finance Education in
Poland in 2006, organised by Narodowy Bank Polski, the Federal Reserve Bank of New York
and the ECB.
Our ties are also facilitated by geographic proximity. You may be surprised to hear me
mention geographic proximity, given that the centres of the Eurosystem and Federal Reserve
System are in Frankfurt and Washington respectively. However, the ECB maintains a
permanent representative office at the IMF, only a few streets away from the Federal
Reserve Board in Washington. Though liaison with the Federal Reserve is not its main raison
d'être, this office is another channel for closer contact and interaction.
Staff members of the two central banks also participate regularly in conferences organised
by the other institution. For instance, so far in 2007, over ten staff members of the ECB, the
Federal Reserve Board and the Federal Reserve District Banks have presented their
research work in seminars and conferences organised by one of these institutions. Staff
members also regularly visit the other central bank, spending several days discussing
research work or technical issues. On some occasions, these stays even run over several
months. Since 2003, six ECB staff members have spent a total of 40 months at the Federal
Reserve Board and District Banks as part of the ECB's External Work Experience
programme. And I do not mention here the many many relationships that are established
between the national central banks of the Eurosystem and the Federal Reserve System.
Conclusion
Ladies and gentlemen, allow me to conclude.
The euro area and the United States are large economic blocs which are, at the same time,
largely open to world markets. The last decades, in particular, have witnessed a tightening of
the trade and financial linkages and the bilateral relationships between the United States and
the euro area have been reinforced. As a result, central banks worldwide, and in particular
the Federal Reserve and the Eurosystem, always keep an eye on partners' economic,
monetary and financial developments. The ECB and the Federal Reserve System have
many opportunities to share their experience and technical expertise, whether through
discussions within international meetings or in informal ways through conferences, staff
visits, personal contacts of all nature, including confident personal relationships at the level of
Chairmen. I would also like to point to one example of cooperation that might look unusual.
Last year, we had one case of cooperation in the domain of culture and arts, as the Federal
Reserve exhibited a remarkable set of the art works of its collection at the premises of the
ECB in Frankfurt. This art exhibition was another symbolic illustration of our close
crossAtlantic ties, in which tonight's journalist prize ceremony also plays a part. I have always
been convinced that a very strong relationship between both sides of the Atlantic is essential
for the stability and continued prosperity of our respective continents but also for the
continuing stability and prosperity of the global economy itself. This is today particularly true
in a period of immense opportunities and of significant challenges.
Thank you very much for your attention.
References
Bayoumi T. and A. Swiston (2007), Foreign Entanglements: Estimating the Source and Size
of Spillovers Across Industrial Countries, IMF Working Paper 07/182.
Calza A. and S. Dées (2007), The Euro Area in the Global Economy: Its Sensitivity to the
International Environment and Its Influence on Global Economic Developments, in Di Mauro
and Anderton (eds.), The External Dimension of the Euro Area: Assessing the Linkages,
Cambridge: Cambridge University Press.
Di Mauro F., L.V. Smith, S. Dées and M. H. Pesaran (2007), Exploring the international
linkages of the euro area: a global VAR analysis, Journal of Applied Econometrics, vol. 22(1),
pages 1-38.