Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe wasn't All and I'm Tracy Halloway. So, Tracy,
Speaker 1: we talk a lot about monetary policy on the podcast.
Speaker 1: We talk a lot about central banking, what the future
Speaker 1: of central banking looks like on the post crisis era.
Speaker 1: But for all we talk about it, it's like we
Speaker 1: probably we never talked about it enough. There's always more
Speaker 1: to this, guys. Well, I feel like this is one
Speaker 1: of the big themes of right. So, we've had this
Speaker 1: economic crisis, and we've seen various responses to it from
Speaker 1: central banks, and we've seen various government responses to it
Speaker 1: as well, and now we're sort of waiting to see
Speaker 1: what the combination of those two things actually looks like
Speaker 1: and how monetary policy interacts with fiscal policy. I feel
Speaker 1: like that's that's the thing we're all watching, right, Yeah,
Speaker 1: I think that's that's fair to say. And I think
Speaker 1: you know, and again, this is sort of for people
Speaker 1: who have listened to several episodes, um it's at this
Speaker 1: point is a retread. But I always think it's important
Speaker 1: that a lot of these debates were happening already going
Speaker 1: into this crisis, about the sort of limit to monetary
Speaker 1: policy even in recent years, whether central bankers needed new tools,
Speaker 1: whether there needs to be a greater emphasis on fiscal
Speaker 1: policy and so forth to accelerate growth. These were already
Speaker 1: big debates that were happening pre crisis, and like many
Speaker 1: other things, this crisis has really accelerated them. Yeah. Absolutely,
Speaker 1: It's funny how the crisis is doing that, really accelerating
Speaker 1: trends that were already in play. But I feel like
Speaker 1: the other big question around central banking has to be
Speaker 1: the continued misses on inflation targets as well. So we've
Speaker 1: now have had many, many years of central banks around
Speaker 1: the world missing their inflation target. No one quite knows
Speaker 1: is why. And that's why even before we were starting
Speaker 1: to see that discussion about whether or not something else
Speaker 1: was needed besides pure monetary policy. Yeah, exactly right. And
Speaker 1: you know, this is a pretty profound issue for central
Speaker 1: banks because I think, um, you know, everyone agrees as
Speaker 1: a little more complicated, but on some level, the premise
Speaker 1: of a lot of monetary policy, at least traditionally, or
Speaker 1: sort of interest rate policy, is that there is this
Speaker 1: sort of given take or balance between inflation and full
Speaker 1: employment or inflation and robust growth. And so I think
Speaker 1: if there is some question about what it takes to
Speaker 1: hit the inflation target, or why inflation doesn't pick up
Speaker 1: even when the unemployment rate drops to historically low levels,
Speaker 1: I do think to some extent that really calls into
Speaker 1: question a lot of the traditional models. Yeah. Absolutely, and
Speaker 1: I feel like this has been a long running theme
Speaker 1: on all thoughts. Now absolutely so I'm very excited today
Speaker 1: we're going to be uh speaking to a huge important
Speaker 1: guest in the world of central banking, monetary policy, economics,
Speaker 1: someone who's uh really uh, just a big name, someone
Speaker 1: very excited to talk to. We're gonna be speaking with
Speaker 1: Peter Pratt. He is the former chief economist of the
Speaker 1: European Central Bank. He was on the the Executive Committee
Speaker 1: of the Bank, crucial decision maker for eight years from
Speaker 1: eleven through June twenty nineteen, so has been right in
Speaker 1: the middle of things up until very recently, sort of
Speaker 1: almost right up against the current era and U Currently
Speaker 1: he's a senior fellow at the University of Brussels, and
Speaker 1: we're going to be digging into these topics the ECB,
Speaker 1: the future of central banking, macro policy overall, very excited
Speaker 1: about this conversation. Peter, thank you very much for joining us. So, Peter,
Speaker 1: thank you so much for coming on. I mean, you know,
Speaker 1: Tracy and I introd we've really picking apart these topics
Speaker 1: for a long time before we dive into the sort
Speaker 1: of bigger theoretical questions facing central banks. I'm just curious
Speaker 1: your perspective right now on the recovery in Europe. Do
Speaker 1: are the existing set of policies enough to make the
Speaker 1: recovery from the crisis self sustaining? Can you get back,
Speaker 1: can you get back to pre crisis levels, or does
Speaker 1: there need to be something further yet, either from fiscal
Speaker 1: authorities or the European Central Bank to return to trend.
Speaker 1: I think you have to distinguish a little bit the
Speaker 1: short term and the medium term here. I think it's
Speaker 1: always the case, but I mean it's particular that's is
Speaker 1: in the situation because you have the second wave, which
Speaker 1: has been very strong actually and has led to lockdowns,
Speaker 1: you know, in different countries and different degrees, and for
Speaker 1: that sort of situation here, I think it's absolutely clear
Speaker 1: that you need more this stimulus, uh and basically from
Speaker 1: the fiscal authorities so I think that's that's accepted by
Speaker 1: most economists. I think that's to me very clear. The
Speaker 1: role of the central bank here, as has been communicated recently,
Speaker 1: which is vlatively knew, actually is basically that the central
Speaker 1: bank wants to preserve the easy financial conditions that you
Speaker 1: have and not to try to end accommodation. Basically, the
Speaker 1: message you get from the central bank is to say,
Speaker 1: financial conditions are okay. You know that easy across countries,
Speaker 1: also not only on average, but across countries, and so
Speaker 1: it's important to preserve these conditions in a situation where
Speaker 1: the expectation is that governments are going to come with
Speaker 1: new stimulus measures. I think that's that's fair enough. I
Speaker 1: think that's that's fine. I don't see why, you know,
Speaker 1: by adding accommodation, trying to bring the curve, you know,
Speaker 1: the yield curved lower than what it is today, would
Speaker 1: stimulate you know, the domestic demands. I don't think it will.
Speaker 1: So Basically, some economies that have even alluded to the
Speaker 1: said that to some extent it resembles a yield curve control.
Speaker 1: You know, you want to keep the curve, the interest
Speaker 1: rate curve, you know, more or less as it is today.
Speaker 1: But to do that, to do that, you may need
Speaker 1: of course to buy more bonds, given a huge issuance
Speaker 1: of government bonds. So just to stabilize the conditions, you
Speaker 1: may need to add you know, another round of QE
Speaker 1: basically on the what is called the Tell show, you know,
Speaker 1: the pandemic emergency purchase program of the e c B.
Speaker 1: That's the short term and you want to bridge bridge
Speaker 1: what well, I mean, it's a vaccine story. The vaccine
Speaker 1: is for the time being not taking you know, as
Speaker 1: a as an upside, a very big upside in the
Speaker 1: projections of central bankers in general. They just say when
Speaker 1: it was more or less more or less already in
Speaker 1: our scenario before the announcement, you know, the two announcement
Speaker 1: we handed in recent weeks. But I personally, I think
Speaker 1: the vaccine now has the much higher probability. So the
Speaker 1: variance actually the uncertainty around the seeing the spreading of
Speaker 1: the vaccine, you know, I think this is you have
Speaker 1: reduced the uncertainty. Is that would be a positive factor.
Speaker 1: So for the time being, the simepral Bank and d CB,
Speaker 1: I think in particular, they just want to bridge it
Speaker 1: to that situation. In the second half of next year,
Speaker 1: so you don't need to do much necessarily, but you
Speaker 1: want to ensure that the financial conditions, the easy conditions
Speaker 1: that you have today, are maintained in a situation where
Speaker 1: governments are going to spend you know more. What comes after, well,
Speaker 1: we can discuss that picture, because that will not be easy. Yeah,
Speaker 1: we're definitely going to get into that, but before we do,
Speaker 1: I mean, just looking forward to next year, there are
Speaker 1: a few people who, despite everything that's happened, are pretty
Speaker 1: optimistic about the future of Europe. So, you know, we
Speaker 1: now have the common debt issuance, we have the fiscal
Speaker 1: transfer that we've been talking about for many, many years.
Speaker 1: Brexit might finally be over. Do you buy into the
Speaker 1: idea of things looking up for Europe as a whole.
Speaker 1: You know, there was this this famous quote, you know,
Speaker 1: from Jean Monette by saying your Europe will be forged
Speaker 1: in crisis. Always said, you know, prevention is better than
Speaker 1: you know, reacting to christs. Of course, you have to
Speaker 1: react to crisis better than the opposite. But I think
Speaker 1: that's a little bit risky strategy. I mean, because Europe
Speaker 1: in the past, you know, events that we had with
Speaker 1: the global financial crisis, the sovereign debt crisis, and not
Speaker 1: the pandemic. Well, the Europe was not really prepared for
Speaker 1: that sort of situation. And so the good news, of
Speaker 1: course is that in crisis Europe reacts very strongly. Uh,
Speaker 1: And that's a positive news. But on the other hand,
Speaker 1: very often they account you know, by the events, and
Speaker 1: the events go faster than the capacity you know, to
Speaker 1: reform the institutions. Now, they came, as you rightly mentioned,
Speaker 1: with extremely important decisions in the middle of the crisis,
Speaker 1: the pandemic crisis, coming with transference insurance of common debt.
Speaker 1: But they're all always saying, you know, the communication is
Speaker 1: that this is a one off, you know, it should
Speaker 1: should not project that you're going to do that for
Speaker 1: the future. These will be discussing discussions for after and
Speaker 1: we will see it's it's you. We cannot prejudge, you
Speaker 1: know that that there will be no sort of more
Speaker 1: permanent transfers. But I think it's important what happened. I
Speaker 1: wouldn't call it, as many people say, you know, Hamiltonian moment, moment,
Speaker 1: you know, referring to the US history. I would call
Speaker 1: it that way, but I would certainly recognize that this
Speaker 1: is very important thing. Had don't this happened, the Union
Speaker 1: would have collapsed. I think this is you know, the
Speaker 1: head of states where so, you know, worried about the
Speaker 1: potential consequences on the Union of the COVID crisis and
Speaker 1: the economic effects of the crisis, that they as as
Speaker 1: they did in previous events, you know, came with with
Speaker 1: this huge you know, stimulus program at the European level.
Speaker 1: So I think it's positive, but it doesn't guarantee you
Speaker 1: that you have the right institutions. Now you're puts in place,
Speaker 1: institutions like banking suggusion for example, at the global talentcial crisis.
Speaker 1: But you know, then they tend to to to to
Speaker 1: go backwards, you know, to not to to find the
Speaker 1: lines what they've started with, you know, income with new problems.
Speaker 1: So I think it's there is always an element of
Speaker 1: ambiguity in the institutional reforms in Europe that puts risk
Speaker 1: you know, to the to the to the Union. Can
Speaker 1: you explain that further? I mean, you had a front
Speaker 1: row seat to all of this for several years, and
Speaker 1: from the outside looking in, that's certainly the appearance that
Speaker 1: there will be some big shockun awe announcement, We're going
Speaker 1: to spend all this money, We're going to launch some
Speaker 1: new vehicle. And then it feels like there's like there's
Speaker 1: a inert shaw or the trifical force, and things start
Speaker 1: to slow down and things start a look less oppressive
Speaker 1: than they appeared. What are the forces that cause what
Speaker 1: you just described where things the sort of the ambition
Speaker 1: seems to slow over time? Well, here you know, the
Speaker 1: final approval for the recovery plan you know is not done.
Speaker 1: Because you know that that basically two countries Hungary and
Speaker 1: Poland threatening to vito the whole project. And so that
Speaker 1: means there is today today uncertainty is about that on
Speaker 1: on that point just too because this is news today.
Speaker 1: I mean, I would not be too worried because in Europe,
Speaker 1: you know, when you cannot agree with forty seven countries,
Speaker 1: you can have if there were a coalition of willing.
Speaker 1: You know, at least with nine countries, you can still
Speaker 1: within the European treaties, you can still do the things
Speaker 1: they want to do now, so I think they will,
Speaker 1: They will finalize at least for most countries what they
Speaker 1: decided to do. That means big you know, expansion plan.
Speaker 1: They will do that. The question now, which is which
Speaker 1: is new. I mean, this is really real money for
Speaker 1: a big part of that. The main concern actually that
Speaker 1: most analysts would have is how do you spend that money?
Speaker 1: I think money would be spent, but how do you
Speaker 1: spend that money? Because I mean, at some point you
Speaker 1: to reimburss that money. And the impact of the COVID
Speaker 1: crisis usually is to lower your GDP potential growth, you know,
Speaker 1: and it we can see economy you know, for for
Speaker 1: a while. So the whole plan, that's why it's called
Speaker 1: recovery plan. It's basically directed for investment, and the investment
Speaker 1: as supposed to increase potential growth and that would mean
Speaker 1: the reimbarrassment of debt common that also easier in the future.
Speaker 1: But that's the biggest challenge now in Europe. If it's
Speaker 1: a success, that means that the real money there will
Speaker 1: be real money when the real money it's spent, if
Speaker 1: it's spent correctly across the re addictions in the different countries.
Speaker 1: I think that could serve you know, very positively the
Speaker 1: Union in the future. Now, if it's the other case,
Speaker 1: there will be you know, the political reaction in many
Speaker 1: countries will be totally the opposite. I mean you can imagine,
Speaker 1: you know, you give grants to one country that has
Speaker 1: been hit more part of that money is paid by
Speaker 1: richer countries, and then that money is unwisely spent you know,
Speaker 1: in consumptions. Well maybe income support. That's not the objective now,
Speaker 1: and there will be a surveillance process how the money
Speaker 1: is being spent. If that process is well done, I
Speaker 1: think then we can start talking about the game change
Speaker 1: about all this. I would say for today, this is
Speaker 1: the one shot is extremely important, I think, and certainly
Speaker 1: for the business cycle. But for the longer run, I
Speaker 1: think we have to see how this money is being
Speaker 1: used and and and you cannot tell today because you know,
Speaker 1: it's it's complex. Also, so that last point actually relates
Speaker 1: to a question that I wanted to ask you, which
Speaker 1: is there does seem to be a consensus developing that
Speaker 1: monetary policy is going to be used to augment fiscal
Speaker 1: policy or whatever the government does. But for the e
Speaker 1: c B and for the European Union, I mean clearly
Speaker 1: they have a different set up than say the Bank
Speaker 1: of Japan or the FED. Is the easy going to
Speaker 1: be able to be as effective when it comes to
Speaker 1: using monetary policy to augment piscal policy as other central banks,
Speaker 1: or what are the unique challenges they're going to face
Speaker 1: in doing that. No, they're you're right. I mean they're
Speaker 1: unique challenges because you have one central bank and then
Speaker 1: you have different ministers of finds different countries, so you
Speaker 1: don't have a single fiscal policy. But many of the
Speaker 1: problems we have in Europe are the same as as
Speaker 1: in Japan or the US, in the UK, so they're
Speaker 1: not they're common to all central banks. Let me just
Speaker 1: remind you that, you know, in the eighties the world
Speaker 1: of central bank can change very fundamentally. There was sort
Speaker 1: of general consensus that you know, business cycle policy, you know,
Speaker 1: smoothening the business cycle would be delegated to the central
Speaker 1: bank governments. Basically, the Ministry of Finance would basically, of course,
Speaker 1: let their fiscal policy you know, react automatically, you know,
Speaker 1: to to as the cycles. But discraction policies would not
Speaker 1: really be trusted, you know, from Ministry of Finance. Basically
Speaker 1: because Ministry of Finance they look at the political business
Speaker 1: cycle and so when they spend the money, it's linked
Speaker 1: to a political cycle, which is not necessarily the business cycle.
Speaker 1: So basically the consensus was, you know, business cycle policy. Basically,
Speaker 1: you know, when the economy goes down, you lower the
Speaker 1: rates and then it goes up. If you have inflation,
Speaker 1: you're tightened. I mean that model a La Taylor rule,
Speaker 1: if you see, the same simple rule was the consensus.
Speaker 1: And government basically would look at three things. Basically, they
Speaker 1: would look at the allocation of resources, you know, hot
Speaker 1: taxation influences their location of research, for example, they would
Speaker 1: look at redistribution of income and wealth the television. And
Speaker 1: then they would ensure the sustainability of public debt. And
Speaker 1: so the central banks were kind of independent agencies with
Speaker 1: a very clear mandate. It could be price stability in
Speaker 1: Europe as as a primary endate. But basically all the
Speaker 1: central banks following more or less the same model, you know,
Speaker 1: business cycle responsibilities. You and you have the tools to
Speaker 1: do that. And that was the environment in which I
Speaker 1: was supposed to work. I work, and I was supposed
Speaker 1: to work efficiently during these eight years. And what happened
Speaker 1: is that you know, different things. I mean, one of
Speaker 1: the things which is coming to many central banks is
Speaker 1: that we reached the lower bounds so the interest rates
Speaker 1: went to zero, and so you have a mandate. It's
Speaker 1: just price ability. But in terms of toolbox, you know,
Speaker 1: you you hit something, can you you enter new territories.
Speaker 1: So we tried the number of innovative instruments, quantitative as
Speaker 1: you know, negative rates. Also we went into all this
Speaker 1: and as was said in your introduction, well, the results
Speaker 1: I think can be debated at least, but for the
Speaker 1: general public and analyst in general, well, the conclusion is
Speaker 1: that you didn't reach the two percent that you were targeting.
Speaker 1: And so one is the issue of instruments that is
Speaker 1: you know, still debated today. I think the instruments have
Speaker 1: been efficient, but the question is still open. The serdad.
Speaker 1: The certain reason why central banks didn't succeed, and this
Speaker 1: is one of the points I personally mentioned very often
Speaker 1: in my communication, is that we had a succession of shocks.
Speaker 1: You see, you can say, find your monetary policy, including
Speaker 1: q we would be efficient, but then you get a
Speaker 1: new shock and put putting the economy down again, and
Speaker 1: then you try again with your monitory points and then
Speaker 1: you get again a new shock. I can refer one
Speaker 1: of the last shock we had before the COVID. It
Speaker 1: was what we call the geopolitical shock which hit animal
Speaker 1: spirits in the manufacturing industry. Basically, let's say that protection
Speaker 1: list pressure is coming from the United States, and you know,
Speaker 1: the the the eroding trust in multilateral institutions, the Brexit, etcetera.
Speaker 1: So you can see the issue from not from an
Speaker 1: instrument point of view, like what is the room of
Speaker 1: maneuver when raised a zero, but you can also see
Speaker 1: it as a succession of deflationary shock in the economy
Speaker 1: that complicates very much the central bank action. I think
Speaker 1: we does these two explanations, and then you have a
Speaker 1: third explanation, which is the one you just mentioned. Is
Speaker 1: some people refer that to the flatness of the Philips curve.
Speaker 1: That means that you need a hell a lot of
Speaker 1: monetary stimulus to get inflation, because the reaction of market
Speaker 1: participants in general, labor markets, capital markets, but especially for
Speaker 1: product markets is very slow, you know, compared to you
Speaker 1: to your monetary policy action. So basically saying the world
Speaker 1: has changed, there's a lot of internet connections across the
Speaker 1: economies and so there is competition of China, there is
Speaker 1: a you know, digitalization of the economy. Unions are not
Speaker 1: as strong as before, So the relationship have changed. Now
Speaker 1: if you combine the three elements the lower bound, that
Speaker 1: means your rates go to zero. And then what do
Speaker 1: you do. You try other instruments. Suddenly you have a
Speaker 1: succession of shocks and negative shocks in the economy. And
Speaker 1: third you have changes in the relationships because you know,
Speaker 1: the world has changed because of you know, digitalization, globalization,
Speaker 1: lack of union power and all these things. Then you
Speaker 1: get a little bit the story in which we had
Speaker 1: in Europe. It was even worse because in the global
Speaker 1: financial crisis, in which we were not very well prepared
Speaker 1: as as the US and and many other countries in
Speaker 1: the world. We had also a sovereign debt crisis, which
Speaker 1: stressed you know the fact that the monetary union in
Speaker 1: Europe was not very resilient because you have to prepare
Speaker 1: for the worst if you if you're in a country, well,
Speaker 1: in a country, you have a lot of institutions, you
Speaker 1: know that can be activated very quickly in case of crisis.
Speaker 1: We didn't have that in Europe, and there was i
Speaker 1: would say, you know, with a sovereign debt crisis, and
Speaker 1: we paid a very high price in Europe because of that.
Speaker 1: We had a very big shop, you know, following the
Speaker 1: global financial crisis because of institutional weaknesses what we call
Speaker 1: the incompleteness of the monetary Union. Now, as I said before,
Speaker 1: there have been very strong political reactions institutional improvements in Europe,
Speaker 1: which is very positive. I think, you know, we have
Speaker 1: banking supervision, we have I think a better capital market union, etcetera, etcetera.
Speaker 1: But these institutions I stopped with that. But these institutions
Speaker 1: today are not yet you know, very strong, sufficiently strong
Speaker 1: to face the challenges that we have. M I want
Speaker 1: to focus on something you just said, and this might
Speaker 1: be getting into some controversial territory, but I think it's important,
Speaker 1: interesting stuff. So you're talking about these sort of geopolitical
Speaker 1: sharks or various setbacks, there's also internal politics and again
Speaker 1: speaking as someone who just observes from the outside, and
Speaker 1: uh again you at the front row seat to this.
Speaker 1: But you know, we saw this sort of uh pretty
Speaker 1: the extraordinary lengths that Draggy underwent, especially over the course
Speaker 1: of the europe the sovereign debt crisis, to um you know,
Speaker 1: expand the ECB toolkit, or at least fit the toolkit
Speaker 1: for the the time needed. And that's provoked. UM, that
Speaker 1: provokes some pretty uh, you know, loud backlash, and we
Speaker 1: always heard it, particularly from German media, in particular German
Speaker 1: central bankers, who seem to have a very different view
Speaker 1: on the proper conduct of monetary policy. UM then sort
Speaker 1: of the sort of mainstream views that sort of exist
Speaker 1: in Europe and the US. And it even culminated into
Speaker 1: a situation right after you left in the fall of
Speaker 1: nine in which uh, there was criticism of the Draggy
Speaker 1: era for their view stoking inflation, and you pushed back
Speaker 1: on it publicly and you said it wasn't helpful. How
Speaker 1: much of an impediment was this or is this to
Speaker 1: the evolution of UM, the e c B and monetary
Speaker 1: policy to address the various crisis of the times. This
Speaker 1: sort of very sharp break that there is with the
Speaker 1: sort of core European or sort of the German view
Speaker 1: of monetary policy. How difficult of a challenge was that
Speaker 1: in your eight years on the executive board. No, you're right,
Speaker 1: I mean I was very often surprised that in spite
Speaker 1: of all what you say, that it worked. We always
Speaker 1: in the Governing Council could design uh. And of course
Speaker 1: there were some different views in the governing Council, which
Speaker 1: is not the case today with the COVID shop, which
Speaker 1: is is a bit of a different situation. But in
Speaker 1: these years you had, of course a lot of differences
Speaker 1: across countries. You know, some like Germany recovered very quickly
Speaker 1: after the sovereign death after the sovereign death cries and
Speaker 1: the global financial crisis, not the case of course of
Speaker 1: countries like Italy and others. I think the main problem
Speaker 1: we had in the e c B and I think,
Speaker 1: especially with Mario Mario Dragi, I think, you know, we
Speaker 1: were at some point the only game in town, you know,
Speaker 1: because the political institutions, the institutional settings you know, supporting
Speaker 1: these sort of situations, very extremely weak in you and
Speaker 1: so I think that the CB had to take this leadership,
Speaker 1: and I think a little bit contrary to what you said,
Speaker 1: at the political level, it was accepted, you know, that
Speaker 1: whatever it takes was very much endorsed and accepted, you know,
Speaker 1: including in Germany at the highest level political level, in
Speaker 1: the population. Of course, one of the issues is that
Speaker 1: the situation you know about negative rates. Of course, we
Speaker 1: had to have negative rates. If you look at the
Speaker 1: curve in Germany for example, today you have minus fifty
Speaker 1: basis points for the short term rates minus point five
Speaker 1: and then when you go to the long end to
Speaker 1: the tenure you know curve, you get minus fifty five. Today.
Speaker 1: If you look at a country like Japan for example,
Speaker 1: where you say Japan is not a particularly growing country,
Speaker 1: you know with inflation, well the curve is minus tend
Speaker 1: to zero, and the US it goes you know, it
Speaker 1: goes up to point nine percent. So the country doing
Speaker 1: the best, you know, being a sort of safe asset,
Speaker 1: gets extremely low rates, and countries you know where the
Speaker 1: risk a bit higher get higher rates. And during the
Speaker 1: COVID crisis we lived again, you know, that situation when markets,
Speaker 1: you know, get nervous, you have an increase of the
Speaker 1: spreads you know, across the countries and all the interesting
Speaker 1: cresses that you find within the Union, you know, as
Speaker 1: you know emerging you know in the in in the
Speaker 1: financial asset prices tremendously and at that time Mario had
Speaker 1: to intervene and saying, you know, we do whatever it takes.
Speaker 1: You took that initiative. In the COVID crisis, it was
Speaker 1: a different situation where there was a full consensus, including
Speaker 1: to intervene you know, sometimes more in particular markets than
Speaker 1: other markets because of that particular situation. That's a revolution actually,
Speaker 1: but it's you're right, I mean, it has been in
Speaker 1: the governing Council not too difficult to get, you know,
Speaker 1: a very strong consensus, you know, all all the measures
Speaker 1: with it, but not not always unanimity. But it's the
Speaker 1: length you know of this period, you know, and I
Speaker 1: explained that by the succession of shocks that we had.
Speaker 1: I thought in two thousand and eighteen that this time,
Speaker 1: you know, that's it, they're going to be able to exit,
Speaker 1: you know, from que progressively, and we announced that, you know,
Speaker 1: I was, I was there when you know, I proposed
Speaker 1: you know that at the gnomin In Council at that time.
Speaker 1: But then we had again the new shock that came
Speaker 1: and then now we have a coverage show there came,
Speaker 1: So there's normalization never happened. Actually, Uh, since we're talking
Speaker 1: about the whatever it takes moment from Mario Joggy, I
Speaker 1: kind of wanted to ask you about that. Actually, So
Speaker 1: when when he made that famous speech he was basically
Speaker 1: calling the markets bluff, right, was there ever any doubt
Speaker 1: within the e c B that that just uttering those
Speaker 1: words would be enough to stop contagion. What was the
Speaker 1: debate like before he went out and actually made that statement.
Speaker 1: I think we can say that the president of the
Speaker 1: Central Bank to took his responsibility by making, you know,
Speaker 1: that announcement. So that is a sort of announcement that
Speaker 1: is not without risks. I think so that I gave
Speaker 1: him really the credit by taking this risk as a president,
Speaker 1: because that's as you say something you know it may
Speaker 1: not work, and you know it worked pretty well, and
Speaker 1: then you have to ask yourself why did it work really? First?
Speaker 1: I mean, you have to be a good communicator. I
Speaker 1: think that he was. He knew that he would be
Speaker 1: backed by the Governing Council, even if they would be
Speaker 1: you know, some problems potentially, but he would be backed
Speaker 1: by the Governing council, served a strong majority of the
Speaker 1: Governing Council. And maybe more importantly to all this is
Speaker 1: that before the announcement of Mario in July two thou twelve,
Speaker 1: before that, you had the head of State and Governments
Speaker 1: that decided, you know, to improve the institutional setting of
Speaker 1: Europe by putting in in place, you knows, a single
Speaker 1: supervisory mechanism, the supervision of bank looking at crisis management.
Speaker 1: So there was an institutional change which was accepted by
Speaker 1: government despite the politicians before the announcement of Mariue and
Speaker 1: I know some politicians at the time they thought that
Speaker 1: the e CV was not reacting sufficiently fast to the
Speaker 1: innovations that were decided by the government, and so there
Speaker 1: was a little bit for the president also the timing
Speaker 1: of the announcement that uh, the c B had to do.
Speaker 1: I think it had to do that, and certainly the
Speaker 1: c B would not I don't think the ECB would
Speaker 1: not have made that sort of you know, commitment with
Speaker 1: all the institutional improvements that were decided by the at
Speaker 1: the political level, and the markets understood I think pretty
Speaker 1: well that the politicians would back the Central Bank and
Speaker 1: they would also improve the institutional environment of the monetary union,
Speaker 1: which caused all the problems we solved. Uh. And so
Speaker 1: the fundamentals, the institutional fundamentals would improve, and the Central
Speaker 1: Bank would support that by its police commitment and UH,
Speaker 1: and then you know, the CB came. You know. Then,
Speaker 1: of course, I was very much involved in the design
Speaker 1: of what we call the O m T, which was
Speaker 1: basically that the ECB would you know, do whatever it takes,
Speaker 1: but it would not be a blank check. It would
Speaker 1: be subject to a conditionally the framework where institute European
Speaker 1: institutions would be at political institutions would be involved. So
Speaker 1: I think the framework. But it came, and that's why
Speaker 1: I say, you're will be forced in crisis. Fine, we survived,
Speaker 1: but it was very close, I must say, And so
Speaker 1: it worked. The COVID is a new situation. Indeed, so
Speaker 1: you you mentioned that back inen you had some hope
Speaker 1: that perhaps the era of extraordinary monetary policy might come
Speaker 1: to an end and that we might return to just
Speaker 1: ordinary monetary policy. But of course that didn't happen, and
Speaker 1: we don't even seem like, you know, it's anywhere close.
Speaker 1: These days, the European Central Bank in many ways has
Speaker 1: been far more innovative than say the FED, and more
Speaker 1: and trying multiple tools. So you mentioned negative rates, we've
Speaker 1: also seen dual rates. We've seen not only quantitative easing
Speaker 1: but also easing through the credit channels in a way
Speaker 1: that the FED hasn't done. Essentially all different kinds of
Speaker 1: efforts to get around the lower bound ef fact that
Speaker 1: rates are more or less zero don't have much there
Speaker 1: to go in your view, what are the most promising
Speaker 1: tools for central banks? What actually works at the lower bound?
Speaker 1: That's a very good question. I would say yes, in particular,
Speaker 1: give credit to very brilliant people in the staff of
Speaker 1: the CB, and they're still there, very creative people, and
Speaker 1: it is true that the CBS very often being very innovative.
Speaker 1: I would caution quotion you that when you look at
Speaker 1: the toolbox, you have to look at the combination of
Speaker 1: the toolbox. It's very difficult to say, I take, I
Speaker 1: pick up one instrument and what is the most efficient one.
Speaker 1: It depends on the context, It depends a little bit
Speaker 1: the circumstances that in which you are. One question today
Speaker 1: is to say things that have worked in the past
Speaker 1: do they still would they still work today? So you
Speaker 1: always continuously have to revisit, you know, your toolbox and
Speaker 1: the way they interrelate. I think that snow communicated by
Speaker 1: Christine lag A very clearly that maybe you know in
Speaker 1: December they will take more or less the same decisions.
Speaker 1: You know about the PEP, you know the pandemic, you
Speaker 1: know emergency preshas program, and the you know, cheap lending
Speaker 1: for banks they may do that again and that looks
Speaker 1: quite you know, quite not not a very big innovation
Speaker 1: that may limit but they will always look at all
Speaker 1: the instruments in the relationship between the instruments. So you
Speaker 1: do always this sort of exercise. I think when you
Speaker 1: answer the question what is the most efficient I would
Speaker 1: say today today, because as I said, it's context related.
Speaker 1: Today I think there is a big issue. You have
Speaker 1: a COVIDE shock, which hits a lot the Sames, small
Speaker 1: and medium science firms. Not the very big one that
Speaker 1: can have access to the capital markets, but a lot
Speaker 1: of sammes Sames depend very much of bank lending, and
Speaker 1: the situation of banks is not brilliant. Before the shop,
Speaker 1: you know, the rate of return was a miserable two
Speaker 1: percent returnal equity. And they're well capitalized, the plenty of liquidity,
Speaker 1: which which is good. That makes them resilient, but they're
Speaker 1: not very profitable. And so the biggest risk in your
Speaker 1: when the COVID came was that you've got a credit
Speaker 1: crunch immediately. And so there was a combination of government reactions,
Speaker 1: you know, to give government guarantees and there was on
Speaker 1: the side of the c B cheap lenning funding for
Speaker 1: lending and other measures that the CB and supervisors took,
Speaker 1: you know, to make life a bit easier for banks
Speaker 1: so that they're able to lend to the sector that
Speaker 1: has been hit. So I think the most important instruments
Speaker 1: for today it was because you have a key issue
Speaker 1: is that sort of shock with lending to sames and
Speaker 1: simes depend on bank So you cannot just say, as
Speaker 1: some economies they have written this may be ways that
Speaker 1: money because a lot of sames you know are you know, cinemas,
Speaker 1: you know, restaurants, bars, but tourist industry, etcetera. There big
Speaker 1: the other in services. You cannot just reason like this.
Speaker 1: I think you have to support because that's some very
Speaker 1: good enterprises there. And of course, you know, when you
Speaker 1: close the business, what can you do even if you're
Speaker 1: a good enterprise, And if you let some of these
Speaker 1: firms go down, it's very difficult to recreate the relationship
Speaker 1: that you had before. And that's a classical problem. So
Speaker 1: I think here I would say number one that it
Speaker 1: is the the the how will the bank react, will
Speaker 1: they continue to lend? And one of the policy tools
Speaker 1: that you need to ensure that, And it's a combination
Speaker 1: of government evention and Central Bank. You know, I would
Speaker 1: call it even subsidies for the banks. I don't like
Speaker 1: so much the word. But you know, when you lend,
Speaker 1: you know it minus one percent two banks on the
Speaker 1: conditions that they keep the loan book. You know, basically
Speaker 1: two sam is constant. You know that they're not reduce it. Well,
Speaker 1: it's a form of subidary of course, because that comes
Speaker 1: away from the P and L of the Central Bank.
Speaker 1: But I think the CM has been quite innovative, you
Speaker 1: know in lending at negative rates and and and below
Speaker 1: you know, the money market rates. So it doesn't it's
Speaker 1: not a guarantee, of course, of success, but I think
Speaker 1: it's because the banks could decide not to lend, you know,
Speaker 1: even with these incentives. But that's why the government interventions
Speaker 1: have been absolutely key as well. So that's that's an
Speaker 1: important thing. The other instruments that we have is what
Speaker 1: we call the PEP, you know, the Pandemic Emergency Purchase Program,
Speaker 1: which is just like que but it's more than than
Speaker 1: the traditional QUEI because here you have an envelope that
Speaker 1: that's the I D and you can use this envelope
Speaker 1: extremely flexible. So there were a number of constraints on
Speaker 1: que before across countries. For example, in this case, you say, well,
Speaker 1: if I see that the transmission of monetor policy doesn't
Speaker 1: work well in a particular country because interest rates go up,
Speaker 1: you know, in that country, and that's not what I want,
Speaker 1: I will buy more of these bonds. Let's say Italy, Spain,
Speaker 1: some of the countries which have been hit more by
Speaker 1: the shock, I would buy more. And Marcus will know that,
Speaker 1: of course, and there will be some you know, I
Speaker 1: will normalize. I will facilitate the transmission of my monetary
Speaker 1: policy by specific targeted intervention in some countries. This is
Speaker 1: a revolution because we we we never we never did that. Actually,
Speaker 1: in the O M team, we had a promise that
Speaker 1: we would do that under conditionality. In the case of COVID,
Speaker 1: the CD has an envelope, big envelope and says, I'm
Speaker 1: going to use my firepower powder to ensure that the
Speaker 1: transmission of monitor policy corresponds to what I want. And
Speaker 1: it was very successful because the spreads went down immediately.
Speaker 1: But I immediately say that it was successful also because
Speaker 1: a little bit later you had the recovery fund that
Speaker 1: came from your pain side. So in this crisis, and
Speaker 1: I think it should have been in the previous crisis
Speaker 1: as well. When you have a sort of good coordination
Speaker 1: between the fiscal authorities, the political institutions in the Central Bank,
Speaker 1: I think the impact can be quite good. Uh. And
Speaker 1: that's not what we had in the global financial crisis,
Speaker 1: and certainly not in the sovereign debt crisis in the beginning.
Speaker 1: And then it came and unfortunately it costed a lot
Speaker 1: in terms of who else in Europe. That that's now
Speaker 1: we have a good cooperation between the two. When will
Speaker 1: it end, you know, because that's the next question, of course.
Speaker 1: For the time being, you know, there is no inflation,
Speaker 1: there are some deflationary risk in the economy, and so
Speaker 1: the cooperation between the two is pretty good because there
Speaker 1: is no diverging you know, interest aligned on both sides
Speaker 1: and the inflation is low. That's the mandate of the CB,
Speaker 1: and supporting the economy for that sort of shock, you know,
Speaker 1: is also the priority of government. So I mean it
Speaker 1: works pretty well. The question, of course, which is not
Speaker 1: yet discussed in the markets, of course, because I think
Speaker 1: it's too early, is that supposed the vaccine you know,
Speaker 1: gets very good results in the second half of twenty
Speaker 1: one and that, you know, the animal spirits changes changed
Speaker 1: totally because people start getting optimistic, you know, and there's
Speaker 1: all this you know, uh, pent up demand. You know,
Speaker 1: it's going to be materialized. People start buying, they start
Speaker 1: going in restaurant, they want to add fun and then
Speaker 1: suddenly the cycle turns very much. Then of course you
Speaker 1: have to see what will be the reaction of the
Speaker 1: central bank. At what point. I don't think the central
Speaker 1: bank is to rush because the damage to the economy
Speaker 1: is so big, you know that. I think inflationy forces
Speaker 1: will come much later. But I mean, you know, markets
Speaker 1: like to anticipate all situations, and I think that's a
Speaker 1: situation that you know, needs a little bit more work
Speaker 1: from the side of the CB, more compunication. It's probably
Speaker 1: too early to do that, because that's not a priority
Speaker 1: to think, you know about phasing out. You may send
Speaker 1: ambiguous messages if you do that, but at some point
Speaker 1: they will have to to to start, you know, in speeches,
Speaker 1: maybe communicating about you know, how do we see a
Speaker 1: situation where inflation starts to go a bit too fast?
Speaker 1: Maybe you know the aligned interest you know that you
Speaker 1: see today between Treasury and the central bank would not
Speaker 1: be there anymore at some point. I don't think it's
Speaker 1: it's for the time being a situation which is realistic,
Speaker 1: but it may happen at some point, and as you know,
Speaker 1: markets always have to be ready for any situation. You know,
Speaker 1: we always have seen surprises in the past, so you
Speaker 1: can always have surprises. So that's the strategy of phasing
Speaker 1: out and the relationship with governments with the treasury. I
Speaker 1: think that would be a key debate for the coming years.
Speaker 1: I mean, as as you said in your introduction, rightly,
Speaker 1: I wanted to go back to what you were saying
Speaker 1: about the banking system, because, of course, one of the
Speaker 1: criticisms of unconventional monetary policy is that it damages banks.
Speaker 1: It potentially pushes risks outside of the banking system onto
Speaker 1: shadow financial institutions that we don't really have very good
Speaker 1: data or insight into what they're doing. And you know,
Speaker 1: we're now into at least our tenth year of unconventional
Speaker 1: monetary policy. How confident can central bankers be that they're
Speaker 1: going to be able to offset the longer term risks.
Speaker 1: The longer term financial risks is reach for yield, things
Speaker 1: like that of their unconventional monetary policies. Yes, I think
Speaker 1: that's an excellent question. Uh, for the time being, it's
Speaker 1: a question around financial stability, and uh, you know, financial
Speaker 1: stability risks moving from the banking sector to the non
Speaker 1: bank you know, the non the other financial institutions, and
Speaker 1: we don't have that to to the same degree as
Speaker 1: in the United States. So I think it's a it's
Speaker 1: still in Europe, I would say it's unfortunate. In Europe
Speaker 1: you still have a highly bank intermediated environment. And as
Speaker 1: I said, you have a shocking SAMES which really depends
Speaker 1: on banks. It's it's it's very simple, so that's the priority.
Speaker 1: On the other hand, you're right, I mean when you
Speaker 1: look at the instruments like Hui and when the central banks,
Speaker 1: for example, also in Europe, I said that also we
Speaker 1: want to ensure that financial conditions remain very accommodative. Well,
Speaker 1: financial conditions are equity prices, you know, bond prices, everything,
Speaker 1: credit spreads and all that. When you say financial conditions,
Speaker 1: so it's a sort of compact, you know, a sort
Speaker 1: of average of all asset prices. And if you say
Speaker 1: you want to keep them accommodative, I think it's fine,
Speaker 1: that's that's your objective. But of course at some point,
Speaker 1: you know, it gives the impression among market parsities participants
Speaker 1: there is a sort of backstop or sort of put
Speaker 1: cheap put option which is put in place by central
Speaker 1: banks basically saying, well, look, if there is an event
Speaker 1: somewhere and financial conditions deteriorate, maybe because equity prices certainly
Speaker 1: fall very much, and what would be the reaction of
Speaker 1: central banks? So markets start to internalize the reaction function
Speaker 1: of the central bank saying this is a quasi objective
Speaker 1: of the central bank is to keep financial conditions, you know,
Speaker 1: as they are accommodative. And then the central the market
Speaker 1: people would then say, well, look there is a backstop.
Speaker 1: You know, it's as that pricess fall, you know, anyway,
Speaker 1: the central banks would intervene and uh and that may
Speaker 1: lead of course to excess us in the market where
Speaker 1: people don't perceive your tail risk on the left side,
Speaker 1: and they basically say there is a backstop on the
Speaker 1: central banks. So I think central banks have to be
Speaker 1: very cautious, and I personally, when I was there, always
Speaker 1: avoided to say things that I read sometimes in communication
Speaker 1: of central banks. For example, to say we want to
Speaker 1: ensure that financial conditions are going to remain accommodative. I
Speaker 1: think that's fine, that's what they want to do. But
Speaker 1: what you want to ensure something is well, you know,
Speaker 1: it's uh, you have to be careful about that. What
Speaker 1: do you do about this? I mean the answer, the
Speaker 1: classical answer is to say, well, you have to monitor
Speaker 1: this sort of risk, you know, so you have micropudential framework,
Speaker 1: you have regulation and supervision, and that's basically what you
Speaker 1: have to do. And uh. And but we know, for example,
Speaker 1: in the United States, the toolbox in terms of micropudential
Speaker 1: instruments is not very is not very impressive. I mean,
Speaker 1: if you look at the U S and I know
Speaker 1: that in several speeches, you know, some governors in the
Speaker 1: US have complained about this. So that's an issue. In Europe,
Speaker 1: I think we have a little bit more in the
Speaker 1: toolbox at the national level and also the European level,
Speaker 1: but essentially the national level. But I would agree also
Speaker 1: that the toolbox in macrol pudential is not impressive for
Speaker 1: the time being to deal with the problems you mentioned.
Speaker 1: I think the central banks in the monetary policy deliberations,
Speaker 1: you know, when you decide about queen, if you do
Speaker 1: more quee, I think in the future they need they
Speaker 1: will need to put in the discussions in the monetary
Speaker 1: policy discussions to give a more prominent role, you know,
Speaker 1: to financial stability consideration. Usually, you know, the monitor policy
Speaker 1: decisions are not very focused on financial stability in general.
Speaker 1: If you're a big shock, of course there will be
Speaker 1: but there will not be a systematic discussion about financial
Speaker 1: stability risk and the sort of you know, what are
Speaker 1: the trade offs you know, between the different risks. I
Speaker 1: think this has started in recent years and I think
Speaker 1: it will continue. As Custine I think has rightly said,
Speaker 1: you know, in response to the German constitutional court issue
Speaker 1: by saying, you know, we look at you know, the
Speaker 1: pros and cons of our measures, including you know, the
Speaker 1: side effects on financial stability. But I think this will
Speaker 1: have to be done in a more systematic way in
Speaker 1: the deliberation of monetory policy. It's not easy to do,
Speaker 1: you know, this sort of armitage. I think if that
Speaker 1: had been done in recent time with a compte shock,
Speaker 1: for example, I don't think it would have changed anything
Speaker 1: in monetary policy, because they was the reaction of the
Speaker 1: Central bank to the sort of shock that we saw
Speaker 1: was very clear, so I think it would have changed.
Speaker 1: But in the future it may be when you think
Speaker 1: about the length you know of your interventions in the markets,
Speaker 1: or the way you intervene in specific markets, like with
Speaker 1: the pandemic purchase program. I think there you you need
Speaker 1: that sort of discussion about you know, other market prices.
Speaker 1: Right do you see movements which you think are exuberance?
Speaker 1: You know, the CB for example, has said, you know,
Speaker 1: when you know, we want to go against non fundamental
Speaker 1: volatility in the spreads. You know, that sort of a message,
Speaker 1: the non fundamental volatility in spreads in spreads of some
Speaker 1: countries for example. I mean when you're going when you
Speaker 1: go into that sort of reasoning, it's it's very delicate
Speaker 1: to do. I think in crisis you can say that
Speaker 1: because you know there was so much you know, access volatility.
Speaker 1: But when you're go into more normal time, you know
Speaker 1: you may have more minor shop and what are you
Speaker 1: going to qualify as you know non fundamental volatility, what
Speaker 1: is or close to the fundamentals? And this is a
Speaker 1: tricky issue. So in a cute phase, you don't ask
Speaker 1: yourself this sort of question. Because you have to act
Speaker 1: and very quickly and frontload your interventions. And I think
Speaker 1: the CB pretty well with the COVID shock. I was
Speaker 1: very impressed on the say, by what they did. M M.
Speaker 1: I want to ask another question about a sort of
Speaker 1: post crisis risk. Obviously trade to talk about financial risks,
Speaker 1: but there's also you know, you mentioned all of these
Speaker 1: um same s, many of which could end up going
Speaker 1: out of business, whether it's movie theaters, restaurants, bars. Some
Speaker 1: will be saved, that may not be saved, and that
Speaker 1: the thing I'm interested in is hystory sists and the
Speaker 1: idea that if we have you know, the longer this
Speaker 1: goes on, the more the economy suffers a sustained degradation
Speaker 1: of productive capacity that even after the vaccine is let's
Speaker 1: say we get a vaccine in the spring or early summer,
Speaker 1: that there's because of this sustained shutdown, because of lots
Speaker 1: of businesses that can't easily be reverse. We're just in
Speaker 1: the US, are Europe or anywhere there's not as uh,
Speaker 1: we don't have what it takes productively to come back.
Speaker 1: How big of a risk is that in your view
Speaker 1: in terms of growth potential post crisis and how much
Speaker 1: does say, aggressive fiscal policy now help mitigate that risk?
Speaker 1: You know, Joe, this this is my main concern what
Speaker 1: you say, no, because when you look at major shocks
Speaker 1: like the global financial crisis, but also other shocks, you
Speaker 1: know that the old shock in the seventies, what you
Speaker 1: always saw is that the potential growth went down, so
Speaker 1: the long term growth went down, so that it's it's
Speaker 1: very much the supply side of the economy. And so
Speaker 1: you know, when you talk about, for example, the fiscal
Speaker 1: policy and the sustainability of debt, people will tell you
Speaker 1: good news. You know, interest rates are very low and
Speaker 1: the growth rate is higher, so you know, you can
Speaker 1: you can have sustainable debt at much higher ratios. The problem,
Speaker 1: of course is that j you know, the growth rate
Speaker 1: the long term has also fallen, so interest rates go down,
Speaker 1: but the long term rates also go down. And the
Speaker 1: extent to which this happened is not sufficiently factored in
Speaker 1: in the long term that sustainability analysis that you see
Speaker 1: among many market participants. So I think this is a
Speaker 1: real issue now Europe. You're paying politicians, I mean have
Speaker 1: understood that actually, and the recovery plan is precisely to
Speaker 1: try to answer to your question by saying, look, we
Speaker 1: don't talk about support measures for the economy as it is,
Speaker 1: but we want to invest, you know, in technologies of
Speaker 1: the future digitalization. Now the question can they realized that,
Speaker 1: because as you know, before the crisis, you know, potential
Speaker 1: growth was trending down in most economies was trending down.
Speaker 1: It was not trending up, and so these these problems
Speaker 1: of the past are still there. So the optimistic view,
Speaker 1: which I must say, I I don't share really, I
Speaker 1: think it's going to be very challenging. But the optimistic
Speaker 1: view is to say, well, it's a big shock. People
Speaker 1: have understood, you know that your future depends, you know,
Speaker 1: of innovation and all these things. Europe is going to
Speaker 1: make a lot of efforts to improve the economy, etcetera, etcetera.
Speaker 1: They're going to invest in digitalization. But at the same time,
Speaker 1: if you look at climate, take climate for example, a
Speaker 1: lot of the investment will be in climate. And one
Speaker 1: of the questions, uh, is all these investments in climate,
Speaker 1: which I think are necessary, and these investment going to
Speaker 1: increase the potential growth rate. This is not obvious, of course,
Speaker 1: because you could say, uh, you know, the pollution is
Speaker 1: lower and in the long run is better for a society.
Speaker 1: Is even in the short term, but it's it's better.
Speaker 1: And maybe you have less retail risks, you know, and
Speaker 1: shocks climate shocks than before. But in between, you know,
Speaker 1: your potential growth is maybe not stimulated by that. This
Speaker 1: is a key question. That's why the r Pain Commission
Speaker 1: came with a combination of climate change investment and digitalization.
Speaker 1: That was I wouldn't I wouldn't call it the trick,
Speaker 1: but that was the beauty of their plan is to say,
Speaker 1: look as something that would improve the supply side, and
Speaker 1: I will make a diffort you know, in innovation and
Speaker 1: all these things, and at the same time it will
Speaker 1: be climate friendly. Now as as as as we said
Speaker 1: before that many other reforms that you have to do,
Speaker 1: you know, to get you know, to increase your potential
Speaker 1: growth rates. So this is the right question, and I
Speaker 1: think that question about sustainability of public finance is addressed
Speaker 1: by many economies today in a in a way you know,
Speaker 1: which politicians very much like of course, because they say, well,
Speaker 1: are is lower, you know, for almost forever before the
Speaker 1: growth below the growth rates, so you can you can
Speaker 1: increase your public that much further, you know, than than
Speaker 1: what you've thought before. And of course politicians like that.
Speaker 1: Uh No, there's just one qualification to that. So I'm
Speaker 1: worried about this, But there is one qualification I think
Speaker 1: in the short and you have no choice. So I
Speaker 1: I still believe that fiscal policies the way they are
Speaker 1: conducted are absolutely necessary in spite of what I say.
Speaker 1: But when things will normalize, it will be quite complicated.
Speaker 1: And that's why you see I say, you know, there
Speaker 1: may be political tensions in different countries. Then it will
Speaker 1: be probably more asymmetries. You know, some countries will do better,
Speaker 1: and times will be extremely challenging. So you will go
Speaker 1: with the vaccine and improvements. Where is the phase of euphoria?
Speaker 1: Uh And then certainly the problems of the past, magnified
Speaker 1: by what you just said, will come back, you know, enforce,
Speaker 1: and there will be a lot of claims in order
Speaker 1: to say look, you know, look I need I need
Speaker 1: For example, you need to put more money in health care,
Speaker 1: you need to go in climate you know, you go
Speaker 1: into education. And so the politics you know, of the
Speaker 1: post convict shock will be quite complicated. That's not the
Speaker 1: priority today. The priority today is to get out of
Speaker 1: this situation. But after it will not be easy. And
Speaker 1: between the Central Bank and the Ministry of Finance, it
Speaker 1: can be fined as long as inflation as well behaved.
Speaker 1: And I think that's probably part of the good part
Speaker 1: of the good scenario, which has a high probability, and
Speaker 1: the central Bank put then But imagine, for example, imagining
Speaker 1: for example, things go much better and in the markets
Speaker 1: market people start to say, look, plenty of people, plenty
Speaker 1: of investors have bought you know, bonds and other you know,
Speaker 1: long term bonds at negative rates for a very long
Speaker 1: period of long maturity. At some points, as you know,
Speaker 1: markets function, at some points when you will see you know,
Speaker 1: things improving, there will be a lot of people selling
Speaker 1: their positions and go to short, shorter term maturities. And
Speaker 1: when when you see that long term rates will increase.
Speaker 1: You have seen that in in the US following modestly
Speaker 1: you know, ten to fifteen basis points, you know, after
Speaker 1: the announcement on the vaccine. But imagine you go to
Speaker 1: a situation when the vaccine it works, it's it's being
Speaker 1: you know, it's being given to a big part of
Speaker 1: the population and faster than what you expect so in
Speaker 1: the second half of next year, then there will be
Speaker 1: a lot of selling of government bonds because who wants
Speaker 1: to keep you know, a bound at minus fifty sixty
Speaker 1: basis points, And so that means that long term rates,
Speaker 1: as we have seen in this little episode in the US,
Speaker 1: will go up, and then you will have to see,
Speaker 1: you know, at what point the central banks will intervene
Speaker 1: or not intervene in this normalization phase. I think it's
Speaker 1: a little bit too early to think too much about this,
Speaker 1: but the episode in the US, you know, two weeks
Speaker 1: ago with a vaccine, I think was precisely the sort
Speaker 1: of scenario I've in mind, you know, but that a
Speaker 1: bigger scale, and that the central bench should be prepared
Speaker 1: for that steepening of the yield curve. I think when
Speaker 1: you have good news is absolutely not the problem. But
Speaker 1: as you see markets that tend to overshoot usually and
Speaker 1: a strong increase of rates, you know, in a normalization
Speaker 1: will not be welcome. As long as you don't have inflation.
Speaker 1: The central banks may intervene, but they have already they
Speaker 1: will have already twenty public that in their books. Are
Speaker 1: they going to buy another ten percent in their books?
Speaker 1: Just to make the point. And I think this this
Speaker 1: Nobody wants really to talk too much about this because
Speaker 1: you know, the priority is not yet to think about this.
Speaker 1: But at some point we have to be prepared because
Speaker 1: you know, there is light at the end of the tunnel,
Speaker 1: as we say, and the trade it may it may
Speaker 1: be faster than some people think. So we have to
Speaker 1: be prepared for all scenarios. And I I confess with you,
Speaker 1: I'm I'm worried about the normalization face, but also more
Speaker 1: fundamentally about the potential growth in Europe because normally it
Speaker 1: should go down and not. Now there's a little bit
Speaker 1: hope that you know, people get wiser, they will invest wise,
Speaker 1: and all these things. But that's not so much the
Speaker 1: lessons of the pense what we have seen in the Pense.
Speaker 1: Let's let's hope for that. Well, just as a quick
Speaker 1: follow up to that point, I mean, one of the
Speaker 1: ideas that you here and you certainly hear it in
Speaker 1: the US and maybe implicitly through the FED new framework,
Speaker 1: is that there are benefits to running it hot and
Speaker 1: that okay, we we've we've uh FED sort of implicitly
Speaker 1: has admitted that in the past. It's hip rates prematurely
Speaker 1: that it sort of was too aggressive to normalize rates
Speaker 1: and then had to reverse the rate hikes and uh
Speaker 1: come to mind, and and then the reversal in twenty nineteen.
Speaker 1: Are there benefits to running it hot? And what do
Speaker 1: you feel about this debate? That it's like, Okay, let's
Speaker 1: let the economy grow, let's tolerate some more inflation, and
Speaker 1: that could engender the sort of investment that we need
Speaker 1: to see so that these uh declining trend growth rates
Speaker 1: and as you pointed out, even going into COVID growth
Speaker 1: potential growth rates were going down, that we might actually
Speaker 1: get a meaningful sustain reversal of these trends as opposed
Speaker 1: to just a temporary a temporary growth boom that then
Speaker 1: reverse it again. That's an excellent important I mean, the
Speaker 1: intuition is it is readily simple that if if you're
Speaker 1: trying to stimulate and support demand and even create excess demand,
Speaker 1: firms are going to invest, you see, and and that
Speaker 1: would have an impact on supply side and you can
Speaker 1: have a sort of virtuous circle. Support of aggregate demand
Speaker 1: would follow the followed by you know, good supply side reaction.
Speaker 1: My my, there is probably some point with this, I mean,
Speaker 1: there is always some truth into that, but I would
Speaker 1: I would warrant generally that the supply side depends of
Speaker 1: many other things like taxation, regulation, you know, the business environment,
Speaker 1: and if you support I mean, that's the more classical
Speaker 1: view of that. And I think you know, in Europe,
Speaker 1: if you take the periods before we saw declining productivity
Speaker 1: in just before the financial crisis, you saw declining productivity
Speaker 1: growth in spite of high aggregate demands, you know, very
Speaker 1: strong aggregate demand. So I think it didn't work. I mean,
Speaker 1: you need to have a structural reforms, you know, to
Speaker 1: increase your potential growth. So I think there is some
Speaker 1: point you know, to that, but I would certainly not
Speaker 1: say that this is a sufficient condition. The sufficient necessary
Speaker 1: condition is that you improve your your your your regulatory
Speaker 1: your taxation, your business you know environment if you really
Speaker 1: want to change you know, the potential growth. When I
Speaker 1: see the business environment, it doesn't exclude necessarily the state.
Speaker 1: You know, we know that public infrastructure can play an
Speaker 1: important role if it's well done, of course, and it's
Speaker 1: it's a question of governments. But we immediately said it's
Speaker 1: not supporting aggregate demand that's going to make the trick.
Speaker 1: I think that's that would be an illusion again, and
Speaker 1: we have seen that in the past. I don't see
Speaker 1: reasons why that should be different in the future. So
Speaker 1: you need reforms again. And that's why I'm saying the
Speaker 1: normalization face. Don't forget. We aren't going to get back
Speaker 1: to the level of of pre pre COVID shock to
Speaker 1: the level not before well at best early twenty two.
Speaker 1: Before we get to the level, that means there is
Speaker 1: a huge empoverishment compared to expectations of people. And that
Speaker 1: means that you know, at some point people were already
Speaker 1: complaining before in different countries about you know, their status,
Speaker 1: you know, the wealth evolution, the income evolution. These things
Speaker 1: will come back. This is not the priority today, but
Speaker 1: these things will come back. So I think when we
Speaker 1: talk about institutions in Europe, it's absolutely essential, including the
Speaker 1: transfer we talk about that you have the mechanism of
Speaker 1: surveillance of the money which is being given, that it's
Speaker 1: efficiently used. Because if that is in place and things
Speaker 1: go down later on, you know you better have tested
Speaker 1: your new institutions on that. And there you know, you
Speaker 1: cannot be optimistic on that naively optimistic because the banking
Speaker 1: union is not even achieved today. I think we don't
Speaker 1: have much time to do these reforms, and they have
Speaker 1: to be done in crisis actually, and I think it's
Speaker 1: understood by for the banking unions, certainly by the e
Speaker 1: c B pleading you know, for the Capital market Union
Speaker 1: and the banking union. But you need, you know, regulatory
Speaker 1: changes to do that, you need legal changes to do that,
Speaker 1: solvency loan and that, many things you have to do.
Speaker 1: And when you see minis of finance, for example, their
Speaker 1: priority today is not ready to do that because they
Speaker 1: have to deal the shop now and coming with new
Speaker 1: regulatory changes, you know, tax changes for the future, completing
Speaker 1: the capital market union, the banking union. It's it's not
Speaker 1: the top priority you know, in the day to day
Speaker 1: life of politicians. They say, well, we'll see that a
Speaker 1: little bit later because now I have to manage the crisis.
Speaker 1: But when the crisis is finished, you will lack of
Speaker 1: course of renewed institution. So I think this message is
Speaker 1: very well understood by the Central Bank, by the European Commission,
Speaker 1: by a number of minister of finance. If you look
Speaker 1: at Germany, they would absolutely approve a thing that's so
Speaker 1: reasoning that it's not that you have to change and improve,
Speaker 1: you know, institutions, the internal market, especially with the Brexit.
Speaker 1: You know, you have to do all this thing. You
Speaker 1: have to increase the co the political coesient, you know,
Speaker 1: to deal with China. You know, the US will be
Speaker 1: a bit better, you know, in the international relations. But
Speaker 1: I think what we have seen in the US is
Speaker 1: a warning for the future. I mean, you know, it
Speaker 1: will not be as before, even with the new administration,
Speaker 1: it will not be as before. So Europe is to
Speaker 1: organize itself, doesn't have much time and they have to
Speaker 1: do it. No, but it's it's it's not easy. I
Speaker 1: mean for me it is so fine. It's because they
Speaker 1: have their short term priorities, which is normally Peter, that
Speaker 1: was fantastic. That really appreciate you taking a time as
Speaker 1: a real trade to get here your perspective, and thank
Speaker 1: you for coming out. Thanks Peter, that was great. Bye,
Speaker 1: but okay, Moe bye bye bye. Yeah, that was a
Speaker 1: real treat. Tracy Peterson, he's I don't know if pessimistic
Speaker 1: it was the right word, but at no point did
Speaker 1: he seem like particularly optimistic, did he? No? I think
Speaker 1: even in his sort of I mean, I think even
Speaker 1: in the what many people would say is the best
Speaker 1: case scenario where we do get a vaccine and things
Speaker 1: change very quickly, he seemed to lay out a very
Speaker 1: uncertain policy path in that case, the idea of a
Speaker 1: potential inflation overshoot or maybe markets getting royaled, like along
Speaker 1: the lines of what we saw a couple of weeks ago,
Speaker 1: when we have this big rotation from growth into value
Speaker 1: and it was supposed to have broken a lot of
Speaker 1: quant models and things like that. It's not it's not
Speaker 1: what most people would focus on and when we're talking
Speaker 1: about the economic implications of a vaccine. But I do
Speaker 1: think he has a point. No, I mean, I guess,
Speaker 1: on on the one hand, I think it's good for
Speaker 1: public official central bankers just sort of maybe they should
Speaker 1: have a sort of slightly skeptical or pessimistic outlook because
Speaker 1: they should be guarding against downside. But you know, just
Speaker 1: thinking about the issues he identified and his sort of
Speaker 1: skepticism that demands side policies would work, that there's much
Speaker 1: appetite to engage in reform outside of a crisis, which
Speaker 1: is another sort of recurring theme that we've talked about
Speaker 1: a few times. It's it's it's not great, but I mean,
Speaker 1: I love I loved this perspective. Obviously, I love hearing it. Yeah, absolutely,
Speaker 1: And it was interesting to hear him reminisce a little
Speaker 1: bit about, um, what was going on at the e
Speaker 1: c V during some pretty famous times, like during Mario
Speaker 1: jogs whatever it takes moment. Yeah, I mean, he's sort
Speaker 1: of it's it's interesting. It's fairly diploma attic, and obviously
Speaker 1: most central bankers are pretty good at diplomacy. But one
Speaker 1: has questions about how annoying the Germans were when it
Speaker 1: came to physical transfer. I just say, uh, he um,
Speaker 1: there must have been some pretty tense moments in the
Speaker 1: behind closed doors between uh, the sort of the Germanic
Speaker 1: view of central banking versus everyone else who wanted to
Speaker 1: get things moving along. That's that's also a diplomatic way
Speaker 1: of putting it. Yeah, exactly, well, man, this is my
Speaker 1: audition to be a central banker one day that I
Speaker 1: can that I could describe things like that at up
Speaker 1: word okay, um on that note, shall we leave it there? Sure,
Speaker 1: let's leave it there, all right? This has been another
Speaker 1: episode of the ad Thoughts Podcast. I'm Tracy Alloway. You
Speaker 1: can follow me on Twitter at Tracy Alloway and I'm
Speaker 1: Joe Why Isn't Thal. You can follow me on Twitter
Speaker 1: at The Stalwart. Follow our producer Laura Carlston. She's at
Speaker 1: Laura M. Carlson. Follow the Bloomberg head of podcast, Francesco
Speaker 1: Levi at Francesco Today, and check out all of our
Speaker 1: podcasts under the handle at podcast. Thanks for listening.