Friday, 14 March 2014

Thoughts on Trichet

This afternoon I had the opportunity to see Jean-Claude Trichet, President of the European Central Bank from 2003 to 2011, give a speech about the Euro crisis at the Oxford Union. I have been known to describe him as 'the man who caused the Euro crisis,' but I was pleasantly surprised by his speech. The speech was everything you might expect – he described the 'extraordinarily accomodative' monetary policy of the ECB, and there was the usual handwringing about competitiveness and imbalances. But much of his speech was interesting nevertheless.

What struck me the most was how much the discussion focused on financial factors. He stressed the importance of the 'swift, bold' reaction of the world's central banks in preventing the collapse of the global financial system and averting a second Great Depression. He downplayed the role of interest rate policies, barely mentioning them in his main speech.

He stressed the importance of the cooperation of global central banks. I was puzzled by the importance he placed on the fact that the world's four major central banks all now agree on a definition of price stability at around 2%. I do not see why this is particularly crucial or relevant.

When asked whether he was concerned by zero interest rate policies, he argued that they were necessitated by the severity of the crisis. He sounded surprisingly market monetarist when he said this.

When asked whether the ECB should have acted more quickly and decisively to cut interest rates, he argued that interest rate policy was always focused on the medium-term inflation target and that all actions he took while president were made in light of this. He was sympathetic to the view that the ECB should at the present time be doing more to prevent inflation expectations from becoming unanchored in the downward direction. He seems to believe that the ECB's inflation target is symmetric. However, I don't know if he would recommend sticking to the status quo if Eurozone inflation were 3.2%, rather than the 0.8% figure he quoted.

His view seemed to be that the ECB had two major roles. Macro policy (interest rates) should be set to ensure price stability. Liquidity mechanisms and political oversight would then be needed as separate policies, to prevent problems in the real economy caused by financial or sovereign debt crises. My prior is that Europe's fiscal and financial problems would be far less systemic and severe if macro policy had been more aggressive. Trichet and the ECB think that, once you ensure price stability, by definition all other problems must be problems in the real economy and not caused by nominal issues.

An interesting side point he made was that, in the USA, 20% of investment is financed by banks and 80% is financed by the market, whereas this ratio is the exact reverse in Europe. This may explain his focus on the importance of financial policy and the disruption of monetary transmission mechanisms.

He mentioned the importance of greater democracy within the European project and in particular how more power should be in the hands of those members of the European Parliament who represent Eurozone countries. One of the most serious problems with the Eurozone is how it must rely on the dysfunctional institutions of the EU, where non-Eurozone countries fight increasing integration at every turn. This makes it much more difficult to respond to crises.

I was surprised that no questions were asked by the normally reliable Union audience about austerity, the flaws of neoliberalism, the evils of structural adjustment or the plight of the Greeks.

Overall I came out of the room with a higher opinion of Trichet than I had entered it with. He seemed thoughtful and less dogmatic than many European policymakers, although this is no doubt partly down to the fact than he no longer holds office.

At no point did he mention the word 'unemployment.'