Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Hello and welcome to another episode of the All Thoughts Podcast.
Speaker 2: I'm Tracy Allaway.
Speaker 3: And I'm Joe Wisenthal.
Speaker 2: Joe, did you see last month the European Commission released
Speaker 2: a competitiveness compass with a bunch of recommendations for how
Speaker 2: to boost productivity in the Eurozone.
Speaker 3: I missed that, However, I know that there have been
Speaker 3: a number of sort of similar reports and studies. Mario Draghi,
Speaker 3: I think the former ECB chief last year put out
Speaker 3: this big thing. There's certainly been a source of debate, consternation, anxiety,
Speaker 3: so forth.
Speaker 2: So Mario Droggy's competitiveness report was four hundred pages and
Speaker 2: the European commission one was twenty seven pages. And I
Speaker 2: can't figure out whether or not that makes the Commission
Speaker 2: more productive than Joggy or less, Like their output is
Speaker 2: physically smaller, but maybe it's more efficient and succinct. You're
Speaker 2: absolutely right. This is kind of a tough spot for
Speaker 2: the Eurozone. So growth has been slowing while inflation is
Speaker 2: still kind of sticky. In fact, we had EU inflation
Speaker 2: for January recently and it came in slightly hotter than expected.
Speaker 2: I think it was something like two point five percent,
Speaker 2: and Europe's been dealing with an energy crisis, plus now
Speaker 2: the threat of tariffs emanating from the Trump administration and
Speaker 2: against all of those sort of short term immediate challenges,
Speaker 2: kind of hovering in the background is the sense that
Speaker 2: Europe is falling behind in key technologies like AI, that
Speaker 2: it's becoming less competitive, less productive relative to other places.
Speaker 3: Right, and it's sort of Implaicitt, well, you're saying here,
Speaker 3: but the other big, key source of anxiety is just
Speaker 3: the sort of core industrial super powers and their competitiveness,
Speaker 3: particular visa via China, and I'm thinking about oil, perhaps
Speaker 3: the chemical industry and so forth. And then you know,
Speaker 3: you layer onto it, as you already mentioned, the possibility
Speaker 3: of tariffs and the future of trade with the United
Speaker 3: States specifically, There's a lot going on.
Speaker 2: Yeah, all of this is a very long winded way
Speaker 2: of saying that Europe is facing both cyclical and structural
Speaker 2: problems or challenges. So I am very happy to say
Speaker 2: we have the perfect guests to discuss all of this.
Speaker 2: We're going to be speaking with Philip Lane, the cheap
Speaker 2: economist over at the European Central Bank. So Philip, thank
Speaker 2: you so much for coming on all.
Speaker 4: Thoughts, Good morning, it's great to be here.
Speaker 2: Why don't we start with the thing that is all
Speaker 2: over the news, which would be tariffs. Joe and I
Speaker 2: personally are kind of struggling to cover these because the
Speaker 2: headlines change so fast by the time we get a
Speaker 2: podcast out, like the news on trade restrictions has already changed.
Speaker 2: How does the ECB factor potential tariffs into its monetary policy,
Speaker 2: because you're forecast right now. I don't think they actually
Speaker 2: take tariffs into account, but we know that Trump has
Speaker 2: talked about imposing tariffs on the EU at some point.
Speaker 4: So let me make two differentiations there. Number one, of course,
Speaker 4: for a long time now there has been speculation about tariffs,
Speaker 4: so to the extent the speculation about tariffs is feeding
Speaker 4: into investor plans, consumer plans. It's there in the data,
Speaker 4: and as you said, a lot of the sentiment in
Speaker 4: disease are kind of subdued, and I think clearly the
Speaker 4: uncertainty about trade is one of those factors. What is true, though,
Speaker 4: is we have looked in great detail about different tariff scenarios,
Speaker 4: but until you really know the scope of what we're
Speaker 4: talking about, putting those into the baseline we haven't done.
Speaker 4: We will essentially at us when and if we see
Speaker 4: more detail, and of course this kind evolve. The trade
Speaker 4: policy configuration we have in spring twenty twenty five may
Speaker 4: not be the trade policy configuration we have in the
Speaker 4: autumn or next year. So I don't think it's kind
Speaker 4: of a zero one, one day only type event. It's
Speaker 4: something we will continually reassess.
Speaker 3: Sitting aside, obviously there's a lot of uncertainty. We don't
Speaker 3: know ten percent, twenty five percent, zero percent, we don't know.
Speaker 3: But how do you think about tariffs, because you know,
Speaker 3: you hear two different things when it comes to tariffs
Speaker 3: and cyclical policy. One is, okay, maybe you get some
Speaker 3: sort of like price shock or something like that, and
Speaker 3: maybe that's inflationary, maybe that's not. But then also the
Speaker 3: implication is that tariffs force a longer term adjustment and
Speaker 3: perhaps countries have to invest more to be more self sufficient,
Speaker 3: et cetera. When you think about the eurozones trading position today,
Speaker 3: what are the vulnerabilities and are how do you think
Speaker 3: about the sort of macro effects of how tarffs play out.
Speaker 4: I don't think there's any question in terms of output.
Speaker 4: The effect of introducing frictions into global trading system is
Speaker 4: a negative, so it has to be bad rabit. Now
Speaker 4: there will be mitigants, as you say, firms who will
Speaker 4: work out Okay, now I'm going to find another supplier.
Speaker 4: Now I'm going to build another plant somewhere else to
Speaker 4: kind of get around tarfs. But those are mitigants. They're
Speaker 4: not going to say, well, all of a sudden, that's
Speaker 4: a net positive. So I think there's no doubt it's
Speaker 4: net negative for output, as you say, for inflation, and
Speaker 4: there's many conjectures that. Of course, mechanically, if it turns
Speaker 4: out to be the case that there's more expensive imports
Speaker 4: from America, mechanically there's an operate effect from that. On
Speaker 4: the other hand, as we just talked about, if there's
Speaker 4: kind of a weakning of domestic demand in Europe, if
Speaker 4: there's a lot of trade frictions globally, if there's a
Speaker 4: weakening in the global economy, those are disinflationy forces. So
Speaker 4: in December we basically and now again in our January meeting,
Speaker 4: we've said for output, it's a downside scenario. For inflation,
Speaker 4: the effects are uncertain, but as you indicated earlier on
Speaker 4: there's also classic issues about price level versus inflation, how
Speaker 4: big this is compared to all the other factors we
Speaker 4: have to think about for inflation. So I would say,
Speaker 4: you know, I think it's very natural to focus on
Speaker 4: the economic effects and then we will look at the
Speaker 4: inflation effects as we see it unfold. Rather than taking
Speaker 4: a very strong exanity position on that.
Speaker 2: I'm going to ask a very broad question. But European
Speaker 2: growth has kind of been flatlining, and at the same
Speaker 2: time we had that inflation number recently coming in slightly
Speaker 2: hotter than expected. How would you characterize the EU economy
Speaker 2: right now?
Speaker 4: So I think what you have to go back to
Speaker 4: is twenty twenty two. So twenty two, on the one side,
Speaker 4: we were coming out of the pandemic. There was a
Speaker 4: burst of activity as we reopened, and remember Europe had
Speaker 4: a much longer lockdown than over here. But then we
Speaker 4: had the Russia Ukraine War in spring twenty two. So
Speaker 4: after that we had inflation going all the way to
Speaker 4: ten point six percent in October twenty two, and of
Speaker 4: course we had to respond to that by raising rates,
Speaker 4: which were in a low for long before then. So
Speaker 4: our policy rate went from minus zero point five to
Speaker 4: plus four hundred in terms of basis points, So there's
Speaker 4: a lot of adjustment. What that meant is in twenty
Speaker 4: twenty three we did flatline. In twenty three Q four
Speaker 4: the year Area economy group by zero point one. Now
Speaker 4: look in last year twenty four, there was a partial recovery.
Speaker 4: We went from zero point one in twenty three to
Speaker 4: zero point nine in twenty four, and that we expected
Speaker 4: that we expected consumption to recover in particular, now it
Speaker 4: wasn't as strong as we would like. Then we have
Speaker 4: as we just talked about new types of shocks hidden
Speaker 4: the economy. But let me emphasize is that we do
Speaker 4: think going back to this cyclical structural issue you raised
Speaker 4: that there is cyclical recovery as our baseline. We should
Speaker 4: expect to grow probably a bit above potential this year
Speaker 4: and next year. And essentially, if you think about a
Speaker 4: lot of factors are kicking in as we ease market policy,
Speaker 4: we still expect this year to be led by consumption,
Speaker 4: and then in twenty six more than this year, a
Speaker 4: recovery in investment, and then also I think a contribution
Speaker 4: from exports. So I think it's important, you know, if
Speaker 4: you kind of are too backward looking about this, you're
Speaker 4: looking at maybe the stagnation in twenty three, or you
Speaker 4: are looking in fairness at the Q four which did
Speaker 4: flat line a bit. But I think there's some cyclical
Speaker 4: factors in those key four data. On inflation. We're down
Speaker 4: from a zen point six in October twenty two to
Speaker 4: two point five in the most recent number. That's, by
Speaker 4: the way. I know there was some market speculation was
Speaker 4: that a bit high. From my point of view, what's
Speaker 4: been developing is a bit more energy inflation, But actually
Speaker 4: services inflation, which has been what we've been really looking at,
Speaker 4: came in softer than I would have expected. So it's
Speaker 4: not the case the overall inflation profile is too dramatic
Speaker 4: and what we think is fairly soon we would be
Speaker 4: back at our two percent target, And essentially that's why
Speaker 4: we cut rates last week.
Speaker 3: The market is still pricing in several more rate cuts
Speaker 3: for twenty twenty five. I take your point about the
Speaker 3: salience of services inflation, and obviously, you know, it's very
Speaker 3: common for central bankers to sort of recognize that there's
Speaker 3: always so much you can do about the energy price component.
Speaker 3: But given where inflation is in given what you describe
Speaker 3: as a cyclical recovery likely further impulse, does it make
Speaker 3: sense to still be cutting into that environment or at
Speaker 3: their depth.
Speaker 4: Well, I think we're trying to be cautious. So one
Speaker 4: of our kind of stable sentences is no preset path.
Speaker 4: So even if the market is pricing several cuts, you know,
Speaker 4: and I'm not saying that there is there any reason
Speaker 4: not to have that market view. From a policy point
Speaker 4: of view, our emphasis is really on agility. The energy
Speaker 4: situation is changing, it may change again in either direction
Speaker 4: in the coming weeks, and I say we have a
Speaker 4: balancing act. We do have the recovery, but we also
Speaker 4: know that essentially the disinflation is well on track. And
Speaker 4: as disinflation continues, finding if you like, the new normal
Speaker 4: for interest rates is essentially a part of our challenge.
Speaker 4: And when we cut last week from three hundred basis
Speaker 4: points to two seventy five, that was essential thinking, wow,
Speaker 4: this three hundred is not the new normal. I think
Speaker 4: we'll be in that search process as we go along.
Speaker 2: Since you brought up the new normal. I mean, one
Speaker 2: thing the US and Europe do have in common right
Speaker 2: now is this debate over the neutral rate, so our star.
Speaker 2: How useful is that idea when it comes to setting
Speaker 2: interest rates? And also when you look at the economy
Speaker 2: right now, how restrictive do you think rates actually are.
Speaker 4: I think it's important of narrative frameworks, and one of
Speaker 4: the narrative frameworks is when inflation is well above two percent,
Speaker 4: it's very important that everyone understands that munchopolicy is going
Speaker 4: to be restrictive, and that's important to be able to
Speaker 4: demonstrate that the policy rate is higher than so called normal.
Speaker 4: It's important to look at is demand dampening, is the
Speaker 4: pricing environment make them more difficult for firms to be
Speaker 4: able to get through price increases? As inflation comes back
Speaker 4: to more or less around target, those factors lose kind
Speaker 4: of resonance and you do have to kind of change
Speaker 4: the narrative framework. Now what we set in December, and
Speaker 4: I think this is maybe not rocket science, but maybe
Speaker 4: it's helpful. Is what we're going to do is we're
Speaker 4: going to set mount policy appropriately. Now the appropriate phrase
Speaker 4: is essentially saying what do we need to do to
Speaker 4: keep inflation around two And this is where the neutrality
Speaker 4: debate loses some relevance. You know what is the probability
Speaker 4: in the next number of months the world is neutral,
Speaker 4: so there's no shocks. So it's a nice hypothetical conjecture.
Speaker 4: But if you are more dealing with shocks, so whether
Speaker 4: downside shocks are upside shocks, manchopolicy has to if they're material,
Speaker 4: so they're there for the medium term, that not just noise.
Speaker 4: So I think now as you get closer to that zone,
Speaker 4: let's not talk about neutrality. Let's talk about what's appropriate.
Speaker 4: And then you do the standard wish list. You know,
Speaker 4: are we seeing, what are we seeing in the pricing data,
Speaker 4: what are we seeing in the activity data, what are
Speaker 4: we seeing in the transmission because again we have a
Speaker 4: bank based system over here in America, much more market
Speaker 4: based system. I mean the markets of course matter in Europe,
Speaker 4: but we pay a lot of attention to banks. And
Speaker 4: right now to one of the dimensions of the question
Speaker 4: is what we see is credits starting to pick up,
Speaker 4: So there is some easing there, but it's still very subdued,
Speaker 4: still well below historical averages. So what I would say
Speaker 4: is compared to the peak, this been some easy but
Speaker 4: it's not the case that that process has gone into
Speaker 4: a kind of new steady state. We're still in a
Speaker 4: recovery phase.
Speaker 3: I want to ask you a question that I've actually
Speaker 3: asked several policy makers in the US about the last
Speaker 3: several years. The nature of inflation in the US and
Speaker 3: in the Eurozone. Some similarities, some differences. The spike of
Speaker 3: the Eurozone was probably more pronounced a bit thanks to
Speaker 3: the energy shock specifically. But you know, obviously there's a
Speaker 3: sort of like cyclical component and then an energy specific component.
Speaker 3: What's interesting to me, setting aside energy, unemployment in the Aurozone,
Speaker 3: if I'm looking at this correctly, is actually like at
Speaker 3: a multi year low right now, lower than it was
Speaker 3: at the peak in twenty twenty two. What is your
Speaker 3: story for if we think of central banking as sort
Speaker 3: of working through this unemployment or employment activity inflation trade off,
Speaker 3: what is your employment for why the sort of core
Speaker 3: measures of inflation or services inflation have eased so much
Speaker 3: even at a time of what seems to be labor
Speaker 3: market tightness.
Speaker 4: All so, I think the labor market titaness is part
Speaker 4: of it. And actually the your area is an interesting
Speaker 4: place to look at that, because, of course, across the
Speaker 4: area you have some economies that are hotter than others,
Speaker 4: you've kind of a laboratory, So absolutely the kind of
Speaker 4: there is a correlation between a tight labor market and wages,
Speaker 4: but the strength of that effect is not big compared
Speaker 4: to the size of the inflation shock we had, which
Speaker 4: was essentially an intersection of two factors. One was the
Speaker 4: energy shock and to us the exit from the pandemic.
Speaker 4: So more or less exactly, at the same time in
Speaker 4: spring twenty two, we had the Russian innovation of Ukraine,
Speaker 4: and that wasn't just a kind of a level shift
Speaker 4: in energy from there until August twenty two, this really large,
Speaker 4: extreme run up in gas prices. But in the same
Speaker 4: six months, so spring to Autumn twenty two, this is
Speaker 4: when the European economy reopened. So actually, if you look
Speaker 4: at activity data is quite strong for those six months
Speaker 4: because tourism restarted, hospitality restarted, So this is a very
Speaker 4: unusual configuration of events. That reopening had a demand element
Speaker 4: to it, because of course people really wanted to spend,
Speaker 4: and of course the supply was still a pandemic constrained.
Speaker 4: So this, I would say, is weird, unusual, not representative,
Speaker 4: so not that surprise. Implementing the most basic macromodel only
Speaker 4: gets you so far, and then if you like, compared
Speaker 4: since then, and I think that's common across the US
Speaker 4: and Europe is a lot of what's happened is the
Speaker 4: supply side has recovered. The exact nature of it on
Speaker 4: both sides of Atlantic is there. And that recovering the
Speaker 4: supply side is essentially why you are able to have
Speaker 4: disinflation and recovery in economy. And as you say, we
Speaker 4: do have the lowest unemployment in the history of your area. Again,
Speaker 4: let me come back to this differences across the you area.
Speaker 4: Germany has been suffering. We know that unemployment has gone
Speaker 4: up in Germany, so the labor market is what you
Speaker 4: would expect. Spain has been very strong. Unemployment is coming
Speaker 4: down in Spain. And so when you think about the
Speaker 4: overall your area narrative, I mean, when you talk about
Speaker 4: the US economy, we all tend to think about the
Speaker 4: US and the aggregate, but of course the differences across California, Chicago,
Speaker 4: New York and so on. Same for US. There are
Speaker 4: big differences right now across some of the major countries.
Speaker 2: You touched on this earlier, but could you talk a
Speaker 2: little bit more about the transmission mechanism of lower rates
Speaker 2: and how those actually feed into the economy, and perhaps
Speaker 2: more importantly, how long they actually take to take effect.
Speaker 2: So in the US we hear the Federal Reserve talk
Speaker 2: a lot about long and variable lags, which gives them
Speaker 2: quite a lot of wiggle room to argue whether or
Speaker 2: not hikes or cuts are actually having an effect. How
Speaker 2: do you think about the transmission mechanism and the time
Speaker 2: frame for changes in policy to take effect.
Speaker 4: So, I mean, this is what keeps us busy, and
Speaker 4: this is why throughout this period. Some people don't like
Speaker 4: these phrases, but they're essential. We said we're going to
Speaker 4: be data dependent, and we said we have this reaction
Speaker 4: function where essentially, as we see the transmission in action,
Speaker 4: we can recalibrate our policy. So let me maybe explain
Speaker 4: why it's the complexity in the area. We were in
Speaker 4: a low for long environment. Even in December twenty one,
Speaker 4: when already inflation was picked up, the markets believed the
Speaker 4: policy rate would not go above zero until around twenty
Speaker 4: twenty seven. So there's high conviction that we were in
Speaker 4: this low for long period.
Speaker 2: This is my favorite chart that charts, Yeah, the MEDUSA
Speaker 2: charts of market expectations or rates, and they're always always off.
Speaker 4: Well, I mean, the world changes. Then we had this
Speaker 4: fairly rapid hiking cycle to four percent, and now we're
Speaker 4: coming down from that, and then the market is debating
Speaker 4: somewhere in the neighborhood of two percent, let's say, is
Speaker 4: the new steady state. So in terms of the how
Speaker 4: people are thinking about the financial system, some of it is, well,
Speaker 4: we're gone from an old steady state of basically at
Speaker 4: the floor. The new steady state is around two percent,
Speaker 4: and how do I value assets? How do I organize
Speaker 4: my saving my investment around that. So on top of
Speaker 4: the cyclical issue of as we ease rates, but we're
Speaker 4: easing from four hundred to in the neighborhood of two percent,
Speaker 4: we're not going back to the pre shock super low rate.
Speaker 4: I mean we don't expect to. So that that's an
Speaker 4: additional factor in transmission. Let me emphasize a couple of things.
Speaker 4: One is about the bank based system, and then in
Speaker 4: one is how the economy responds. So in a bank
Speaker 4: based system, and we had new numbers this morning essentially
Speaker 4: because of course banks are partly funded by deposits, partly
Speaker 4: funded by market funding deposits. They have responded, but not
Speaker 4: one for one. There's still lots of zero interest overnight
Speaker 4: deposits funding banks. So the one for one transmission of
Speaker 4: the policy rate that works in the runny market, it's
Speaker 4: soft both on their way up and on the way
Speaker 4: down for the banking system. So we have taken their
Speaker 4: account in the banking system with a mix of deposit
Speaker 4: funding and market funding, the transmission is slower. And then
Speaker 4: on the economic side, one issue we talked about last
Speaker 4: week was has an investment. That's the classic interest rates
Speaker 4: sensitive area. And we are seeing mortgage loans pick up
Speaker 4: quite a bit in Europe, but we haven't seen housing
Speaker 4: investment move up yet. And this goes back to here
Speaker 4: to some extent. Okay, someone's decided I'm going to start
Speaker 4: a new project, getting the permits, finding the workers, all
Speaker 4: of that takes time. And so this is why I
Speaker 4: said to you earlier on, we think the big recovery
Speaker 4: investment is going to take a while. It's not all
Speaker 4: going to happen this year in twenty five, it's going
Speaker 4: to go into twenty six. So a long way to
Speaker 4: summarize where we are is it's multi year. It really
Speaker 4: is a long lag. And again from word go, from
Speaker 4: the time we started hiking, I am the easy be
Speaker 4: flagged quite a bit. We haven't done this very often.
Speaker 4: How much of an evidence space do we have about
Speaker 4: how long are those lags? How powerful this transmission? And
Speaker 4: in the context of a pandemic and a war. So
Speaker 4: for all of those reasons, it really goes back to
Speaker 4: I'm reassured that transmission is working. I see it, but
Speaker 4: I'm also validated if you like that it takes real time.
Speaker 4: It takes real time before it transmits all the way
Speaker 4: to the economy.
Speaker 3: Tracy, I just remembered something, And you know, you started
Speaker 3: the episode talking about some of the big structural things
Speaker 3: that we should get to do you remember in the
Speaker 3: blog a sphere like the twenty tens. I just remember this,
Speaker 3: the sixth versus the structs debate.
Speaker 2: Oh no, I don't remember that.
Speaker 3: Some people were like, oh, it is the US face
Speaker 3: like just a cyclical challenge where we need more demand
Speaker 3: or is there a structs thing where we need to
Speaker 3: like structurally change how the US economy works?
Speaker 2: Do you remember that?
Speaker 1: Anyway?
Speaker 3: It occurs to me like every time there's some big
Speaker 3: economic shock of any you get this debate right, how
Speaker 3: much is it a cyclical thing where you know, economies
Speaker 3: go up and down, inflation goes up and down, unemployment
Speaker 3: goes up and down, versus something structural deeper with the
Speaker 3: economy perhaps which demand policies, whether they be fiscal or monetary,
Speaker 3: are sort of to some extent insufficient to address them.
Speaker 3: And obviously, you know Tracy mentioned in the beginning these competitiveness,
Speaker 3: so the Dragging Report, all that stuff. Do you feel
Speaker 3: like we're at a moment where it's important for Europe
Speaker 3: to be thinking about like deep structural issues or is
Speaker 3: it just weird sort of taking our eye off the ball.
Speaker 3: And then in the end these are still sort of
Speaker 3: cyclical challenges for the economy.
Speaker 4: Well, let me make a few points about this, because
Speaker 4: of course this debate is ongoing. First of all, I
Speaker 4: think it's important to recognize there isn't a clear bright
Speaker 4: line between cyclical and structural because of course, if an
Speaker 4: economy faces structural issues more or less, if your pessimism
Speaker 4: on a structural basis, it will lower demand. So so
Speaker 4: cyclical policy is called for even if the origin is structural.
Speaker 4: But let me say, on top of all the structural
Speaker 4: issues which are global. Every country debates, had to deal
Speaker 4: with aging, had to deal with climate change, had to
Speaker 4: deal with digitalization, AI, and so on. In the European context,
Speaker 4: maybe there's two extra fact. One is the structure of Europe.
Speaker 4: That's literally a structural factor. We have choices and debates
Speaker 4: about essentially more integration the single market, and as you
Speaker 4: mentioned earlier on Tracy, last week, the European Commission announced
Speaker 4: this Competitiveness Compass. That's essentially a long to do list
Speaker 4: to convert the Drag Report, the Letter Report into essentially action.
Speaker 4: And of course you can imagine in a European Union
Speaker 4: there's a lot of things need step by step action.
Speaker 4: So I would say it's all aligned, but it's just
Speaker 4: we have a new commission. It's basically a kind of
Speaker 4: an agenda for the next few years. But fundamentally, and
Speaker 4: this is where the Dragy Report starts, is Europe had
Speaker 4: a very good idea forty years ago now that essentially,
Speaker 4: in a modern world scale economies matter. If the European
Speaker 4: member countries essentially come together and build a single market,
Speaker 4: that will really help. That remains And the intersection now
Speaker 4: is I think with digitization with other new technologies. Scale
Speaker 4: economies really matter. It's really hard to think about. Okay,
Speaker 4: if I have a big fixed cost investment, if I
Speaker 4: build some new AI kind of business model, rolling that
Speaker 4: out is a function of scale. So the European Union
Speaker 4: building scale through a single market, that the case for
Speaker 4: it is now reinforced. So I think there's a new
Speaker 4: energy about that. And then of course the other big one,
Speaker 4: maybe just because I think this is interesting from a
Speaker 4: global point of view, is the global if you like equilibrium.
Speaker 4: One thing the ECB has worked on and identified is
Speaker 4: essentially when you can do this exercise of comparing economies.
Speaker 4: And what's interesting of the last fifteen years is Europe
Speaker 4: and China have become more similar. The US has not
Speaker 4: become more similar. So if you think about which industries
Speaker 4: are important activity, the composition of activity, and of course
Speaker 4: this is immediate applications like in the car industry, now
Speaker 4: China is much more similar to Europe. And with that,
Speaker 4: of course, if you think about individual firms who might
Speaker 4: have been used to certain margins, certain ability to obtain
Speaker 4: market share, they are under a new competitiveness challenge. So
Speaker 4: that is something where Europe is in between China and America.
Speaker 4: Everyone has their kind of structural priorities, but this issue
Speaker 4: how do you not kind of try and build a wall,
Speaker 4: but how do you navigate this new world?
Speaker 3: Is important.
Speaker 2: So there's a general recognition that competitiveness is an issue,
Speaker 2: low productivity is an issue, and as you mentioned, there's
Speaker 2: probably multiple to do lists and ideas about how you
Speaker 2: could go about addressing some of these issues. I guess
Speaker 2: my question is how confident are you that the various
Speaker 2: parties within the European Union will be able to follow
Speaker 2: through on some of this and actually turn their economies around.
Speaker 2: Because the other thing that's happening is we've had the
Speaker 2: rise of right wing parties in lots of places in Europe,
Speaker 2: and often those parties come with an agenda which is
Speaker 2: cutting spending and really cracking down on debt and things
Speaker 2: like that. So it feels like there's a tension there,
Speaker 2: right How are you thinking about that?
Speaker 4: So I would say, does it shared identification of essentially
Speaker 4: the challenge that what I would say is a lot
Speaker 4: of the problems your faces let me not say problems,
Speaker 4: but a lot of the desires what we want. A
Speaker 4: lot of these would look a lot easier to achieve
Speaker 4: with a faster growth rate. And this is going back
Speaker 4: to the four hundred pages with the dragging report. Some
Speaker 4: of those pages are devoted about look all of this
Speaker 4: debate about fiscal space, it looks a lot better if
Speaker 4: you get your economy to grow more quickly. So I
Speaker 4: think fundamentally the identification that if we can grow more quickly,
Speaker 4: how to distribute resources, how to make progress on decarbonization,
Speaker 4: all of these issues would look a lot easier. So
Speaker 4: let me focus on the fact that there is a
Speaker 4: kind of more and more and identification is the only
Speaker 4: way to square the circle is to commit to policies
Speaker 4: to improve the growth rate. But let me say there's
Speaker 4: a huge opportunity here. You can look at the fact
Speaker 4: that Europe has been a bit slower in terms of,
Speaker 4: for example, option of AI. You might say, oh my god,
Speaker 4: going more slowly under the hand, you may say, okay,
Speaker 4: here's the real opportunity. So to embrace the diffusion of
Speaker 4: new technologies. Again, if you looked thirty years ago with
Speaker 4: the transmission of internet to the business sector, that happened
Speaker 4: here first, but it then happened in Europe because of
Speaker 4: course European firms could see what's possible. So i'd be,
Speaker 4: you know, in the optimistic camp that there's a lot
Speaker 4: of opportunities and going back to the single market idea. Again,
Speaker 4: it does require political will, it does require political leadership,
Speaker 4: but there's a huge opportunity here just.
Speaker 3: On this point about the idea that the euro Zone
Speaker 3: is an unfinished project, that there's still more opportunities for
Speaker 3: integration between the member nations. In one very crude way
Speaker 3: of sort of looking at European fragmentation so to speak,
Speaker 3: in they're probably multiple ways. It was just looking at
Speaker 3: like sort of you know, fact that there is not
Speaker 3: a uniform sovereign spread, right because each country has its
Speaker 3: own bond market, and we saw that play out very
Speaker 3: dramatically in twenty eleven and twenty twelve. But lately spreads
Speaker 3: for some countries are widening out again. It's come in
Speaker 3: a little bit, but say the French German ten year
Speaker 3: spread is certainly higher than much of the sort of
Speaker 3: post twenty fourteen period, not as high as it was
Speaker 3: in twenty eleven and twenty twelve. How much when you
Speaker 3: look at these spreads, is this a function of part
Speaker 3: of the agenda of some of the parties in Europe
Speaker 3: is essentially capital as sovereignty, this idea that like, is
Speaker 3: it compatible to talk about creating a single market finishing
Speaker 3: the project of integration at the same time as there
Speaker 3: is this big push for a sort of like nationalist
Speaker 3: sovereign agenda.
Speaker 4: So I think what you've seen in Europe is essentially
Speaker 4: I'm not seen that debate these days too much. Okay,
Speaker 4: no one is really saying the answer is to kind
Speaker 4: of go out nation state basis, because, of course you
Speaker 4: can see going back to the scaied economy issue, it's
Speaker 4: really hard to think about being a small country in
Speaker 4: today's world. So the value of the European Union is
Speaker 4: I think common. I don't think there's any anti EU,
Speaker 4: serious anti EU kind of proposals in any of the
Speaker 4: national systems. And going back to the spread issue, I
Speaker 4: mean there's nothing like the situation we had fifteen years ago.
Speaker 4: So of course, going back to division here that essentially
Speaker 4: the European Union is a unique structure, and I think
Speaker 4: that's very important because sometimes in my career I've heard
Speaker 4: why can't he just be like the US? And of
Speaker 4: course this kind of one.
Speaker 2: Line do people still say that.
Speaker 4: I get it, But of course you need a certain
Speaker 4: amount of fiscal integration. We have stepped forward with more
Speaker 4: joint debt and so on. You do need a certain amount.
Speaker 4: You need to make sure your backing system don't require
Speaker 4: a lot of physical support i e. They have to
Speaker 4: be well capitalized and well regulated, and we've come a
Speaker 4: long way on that. And you have to make sure
Speaker 4: every member country is following fairly stable policies so we
Speaker 4: don't have the really large property bubbles, the big current
Speaker 4: account deficits we had. So Europe is quite a kind
Speaker 4: of stable environment, not super growing fast. So dynamism is
Speaker 4: an issue, but stable, yes, But stability is if you
Speaker 4: like a kind of minimal condition. And I think this
Speaker 4: is where the conversation is. Let's move on from being
Speaker 4: stable to be delivering more of what we want and
Speaker 4: if we grow more quickly, we can do more on
Speaker 4: all of the different dimensions of policy that Europeans want.
Speaker 2: Just going back to the very beginning of this conversation,
Speaker 2: we were talking about energy prices increasing and feeding into inflation.
Speaker 2: I mean, energy price is just one of many external
Speaker 2: shots to the European economy in recent years. As a
Speaker 2: central banker, what can you do to actually offset those
Speaker 2: types of supply side shocks.
Speaker 4: So what we have to make sure is when we
Speaker 4: had a really big energy shock, and we had to
Speaker 4: make sure and to be able to provide the reassurance
Speaker 4: to everyone that we will make sure inflation comes back
Speaker 4: down to two percent, not overnight, but in a realistic
Speaker 4: timeframe and essentially threat the whole process to keep inflation
Speaker 4: expectations stable. So in contrast to nineteen seventies, this has happened.
Speaker 4: So the famous second round or third round effects, they
Speaker 4: were there to an extent that they'd have to be
Speaker 4: a catchup phrase for wages, which is now maybe nearly over.
Speaker 4: But no, I think the central bank world, once it
Speaker 4: was diagnosed that we needed to act, that has not
Speaker 4: been the biggest headache here. So for central banks, that's
Speaker 4: our offer or our promise. We will deliver price to
Speaker 4: polity and meet in term. That doesn't mean there won't
Speaker 4: be shocks, but when there is a shock, we get
Speaker 4: it back down to two percent in a realistic timeframe.
Speaker 3: One of the things that we saw recently is that
Speaker 3: the Federal Reserve has removed itself from the ENNGFS organization
Speaker 3: where central banks think about the greening of the financial system,
Speaker 3: the effect of climate change on its goals and so forth.
Speaker 3: The ECB is a member of this organization. Over the
Speaker 3: last several years various political reasons, I'm sure inflation and
Speaker 3: the energy shock. It feels like menu organizations, certainly in
Speaker 3: the US, have lost some of their motivation to prioritize
Speaker 3: climate What is that like in Europe? Is there any
Speaker 3: change in the amount of energy and interest and prioritization
Speaker 3: of climate change issues, both at the ECB specifically, but
Speaker 3: also at the sort of political and corporate set avoids
Speaker 3: around it.
Speaker 4: So I think the assessment is pretty stable, and that
Speaker 4: that's not just in central banking but in many dimensions.
Speaker 4: The assessment is the world is getting hotter. The assessment
Speaker 4: is policy is needed both to slow that down and
Speaker 4: the cap it but also to make sure the economy
Speaker 4: and society adapts to hotter temperatures. So it's I think
Speaker 4: important for central banks to prepare the financial system for that.
Speaker 4: It's important for central banks in how we do multi
Speaker 4: policy to recognize the effects of these climate shocks and
Speaker 4: also the underlying transition issue. So what is true which
Speaker 4: is inevitable? These are pretty big policies. There's big policies,
Speaker 4: but of course all the time you have to recalibration.
Speaker 4: What exactly is the right subsistye policy for heat pumps,
Speaker 4: for example, so to move housing away from using oil
Speaker 4: and gas towards using heat pumps, what is the right
Speaker 4: pole see and the right timeline for getting people to
Speaker 4: move from petrol and diesel cars to electric vehicles out
Speaker 4: viewing all of that as recalibration tactical adjustments, but again
Speaker 4: coming back to where we started with the European Commissions
Speaker 4: agenda for the next few years, decarbonization remains central to that.
Speaker 4: So I would say we're learning a lot the evidence
Speaker 4: from all of the severe weather effects, not just in
Speaker 4: Europe but around the world. People see it, they see
Speaker 4: it every day how they live their lives. So I
Speaker 4: think the identification of the problem is there, but of
Speaker 4: course making sure that the trade offs are recognized, the
Speaker 4: scope for new technologies to help and to be sensible
Speaker 4: about what you ask different parts of the economy, whether
Speaker 4: it's households, large corporates, small corporates, and the banking system,
Speaker 4: that's essentially in evolving work in progress.
Speaker 2: So I can't pass up an opportunity to talk more
Speaker 2: about the hairy charts of market expectations of the future
Speaker 2: path of interest rates MEDUSA charts, spaghetti charts people call them.
Speaker 2: Sometimes the market currently is pricing in at least three
Speaker 2: more twenty five basis point cuts. Is that reasonable in
Speaker 2: your mind? Is the market finally going to get this
Speaker 2: one right?
Speaker 4: Okay? I'm going to side step up to some extent
Speaker 4: because you know, philosophically, the world is subject to shocks.
Speaker 4: So going back to when you get these market revisions,
Speaker 4: that's their point in time view. Right now, let's see
Speaker 4: what happens. So you know, my world is not really
Speaker 4: I think too kind of overly comment on the market view.
Speaker 4: But let me go back to the peak inflation of
Speaker 4: late twenty two. We well are staff to your system. Staff,
Speaker 4: I think did a pretty good job of provide the
Speaker 4: timeline saying, look, where you are now around ten percent inflation,
Speaker 4: you're going to be basically back around two percent in
Speaker 4: twenty five. That was a kind of timeline that's been
Speaker 4: very stable. And under that timeline, which has really been followed,
Speaker 4: then of course the market is recognizing the interest rates
Speaker 4: you need when you're at ten or five or three
Speaker 4: percent inflation are not the interest rate you need when
Speaker 4: you're around two So I think in that context the
Speaker 4: predictability of how this inflation works has held up fairly well.
Speaker 4: The big issue was had that inflation erupt in the
Speaker 4: first place, and the scale of it. But once we
Speaker 4: got to the peak, going from peak back to two
Speaker 4: percent has been I think in line with how the
Speaker 4: macro modeling community would think about it. So I don't
Speaker 4: think there's been all that surprising so far, and so
Speaker 4: let me go back to this year. What I would
Speaker 4: say is, as we've thought about, there's a lot going
Speaker 4: on in the world, and so the fluctuation of inflation,
Speaker 4: what would be the appropriate market policy is very much
Speaker 4: It could to depend on a lot of policy decisions
Speaker 4: around the world.
Speaker 3: The recent discovery, maybe in the US about deep seek
Speaker 3: create a lot of anxiety about Chinese growth and AI,
Speaker 3: but also just sort of hammered home. There are a
Speaker 3: lot of areas where China seems to be doing very
Speaker 3: well at the technological edge, and obviously we all know
Speaker 3: the incredible story with batteries, electric cars, the technology for
Speaker 3: green power. They have a growing petrochemical industry. They even
Speaker 3: have a growing pharmaceutical industry. These are industries that I
Speaker 3: really think of as core to you know, a big
Speaker 3: part of when I think of European industry, pharma, automobiles, chemicals,
Speaker 3: and so forth. I'd like to just hear your thoughts
Speaker 3: about this more broadly. How anxious does that make you?
Speaker 3: And are there opportunities with respect to China, especially if
Speaker 3: the US is reliability as a trading partner grows more questionable.
Speaker 4: So let me focus on the economics. Yes, of course
Speaker 4: there's a parallel political debate which is not for me.
Speaker 4: But economically, what we've had for a long time now
Speaker 4: is China growing, becoming a bigger share of the world economy.
Speaker 4: And the most basic point is that operates in both
Speaker 4: demand and supply. So as they get more productive, the
Speaker 4: technologies they diffuse around the world. So you know, those
Speaker 4: who are able to buy a cheap electric vehicle, to
Speaker 4: buy cheap solar panels, windmills, all of those. I mean,
Speaker 4: there is a kind of global impact of that. Also,
Speaker 4: it's trying to get richer again, their interest in buying
Speaker 4: exports from Europe and from America goes up. So the baseline,
Speaker 4: of course is essentially the world gain richer is win win. Now,
Speaker 4: of course, there is a debate about industrial policy and
Speaker 4: you know under what circumstances, whether for economic security reasons
Speaker 4: or for kind of stability of various industries. You recognize
Speaker 4: that there are concepts such as kind of countervating tarits.
Speaker 4: So Europe imposed in a very calibrated way tarifts and
Speaker 4: Chinese evs a wile ago. But essentially that was done
Speaker 4: within I think WTO rules, which is basically, if you
Speaker 4: think the origin of some of the low prices out
Speaker 4: of China, or if you like unfair subsidies, then the
Speaker 4: handbook says you can countervail that and correct that. So
Speaker 4: what I would say is there are kind of WTO
Speaker 4: mechanisms that can go a long way in dealing with
Speaker 4: any kind of identification of if you like unfair subsidies.
Speaker 4: But I think we should remember the word gaining richer
Speaker 4: technologies getting invented wherever they get invented creates global possibilities.
Speaker 4: I'll call them possibilities. But I would say, and I
Speaker 4: said it earlier on, is the fact that China is
Speaker 4: becoming more similar, whether in chemicals, auto and so on,
Speaker 4: does create adjustment issues. It does mean the kind of
Speaker 4: price in which a European firm can sell its output
Speaker 4: around the world is compromised. The answer to that is
Speaker 4: not to say, look, I wish this new competition didn't exist.
Speaker 4: The answer is, okay, how do we adjust? So I
Speaker 4: would say individual sectors, adjustment issues. That's always been true
Speaker 4: with trade, but also to recognize that rising real incomes
Speaker 4: in China are at the world's at demand as well.
Speaker 2: All Right, Philip Blane truly the perfect guest to discuss
Speaker 2: all of this. Thank you so much for coming on
Speaker 2: the show.
Speaker 4: Well, thank you for having me, Joe.
Speaker 2: I thought that discussion was really interesting, and it's been
Speaker 2: a while since we've had a europe centric episode. One
Speaker 2: thing I was thinking is it's kind of amazing how
Speaker 2: much politics is intertwined with the economy and minetary policy
Speaker 2: right now. And we asked a bunch of questions along
Speaker 2: these lines. But there's a broad recognition of the challenges
Speaker 2: that Europe faces, and there are some concrete ideas about
Speaker 2: what to do about those. But at the same time,
Speaker 2: it feels like politics is heading in the other direction,
Speaker 2: away from multilateralism, as you pointed out. And even I
Speaker 2: mean even Belgium, so Brussels is like the seat of
Speaker 2: the European Union. Even Belgium has a far right party
Speaker 2: in power now. Yeah, so you know it seems like
Speaker 2: an uphill battle.
Speaker 4: Yeah right. I mean, I really like the.
Speaker 3: Way he framed the answer when we sort of pivoted
Speaker 3: to structural questions, because sure, there's always structural quote, but
Speaker 3: Europe seems to have both external structural questions and internal
Speaker 3: structural questions, and it's hard to think about addressing some
Speaker 3: of the external structural questions such as how and do
Speaker 3: you sort of have a competitive AI sector? Do you
Speaker 3: want a competitive AI sector, but how would you have
Speaker 3: one given the scale of investment, or can you compete
Speaker 3: with the scale of Chinese chemicals or autos. At the
Speaker 3: same time, as the internal structure still is not complete,
Speaker 3: there's still individual states and obviously there are formal trade
Speaker 3: barriers between the states, but there's you know, there are
Speaker 3: different countries still in different financial markets and a not
Speaker 3: fully integrated banking system, and whether, as you say, there's
Speaker 3: the appetite currently in today's twenty twenty five politics to
Speaker 3: talk about further integration is a.
Speaker 2: Challenge, definitely an open question. Shall we leave it there?
Speaker 4: Let's leave it there.
Speaker 2: This has been another episode of the Odd Loots podcast.
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy.
Speaker 3: Alloway and I'm Joe Wisenthal. You can follow me at
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