WEBVTT - Former ECB Chief Economist Peter Praet on What's Next For Central Banks 0:00:10.800 --> 0:00:14.680 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:14.760 --> 0:00:19.640 I'm Joe wasn't All and I'm Tracy Halloway. So, Tracy, 0:00:20.239 --> 0:00:23.720 we talk a lot about monetary policy on the podcast. 0:00:23.760 --> 0:00:26.920 We talk a lot about central banking, what the future 0:00:26.920 --> 0:00:30.360 of central banking looks like on the post crisis era. 0:00:30.840 --> 0:00:32.600 But for all we talk about it, it's like we 0:00:32.680 --> 0:00:35.400 probably we never talked about it enough. There's always more 0:00:35.440 --> 0:00:38.120 to this, guys. Well, I feel like this is one 0:00:38.159 --> 0:00:41.199 of the big themes of right. So, we've had this 0:00:41.240 --> 0:00:45.320 economic crisis, and we've seen various responses to it from 0:00:45.400 --> 0:00:48.320 central banks, and we've seen various government responses to it 0:00:48.560 --> 0:00:51.240 as well, and now we're sort of waiting to see 0:00:51.320 --> 0:00:54.440 what the combination of those two things actually looks like 0:00:54.480 --> 0:00:58.880 and how monetary policy interacts with fiscal policy. I feel 0:00:58.880 --> 0:01:02.760 like that's that's the thing we're all watching, right, Yeah, 0:01:02.840 --> 0:01:05.000 I think that's that's fair to say. And I think 0:01:05.040 --> 0:01:07.360 you know, and again, this is sort of for people 0:01:07.360 --> 0:01:10.520 who have listened to several episodes, um it's at this 0:01:10.640 --> 0:01:13.000 point is a retread. But I always think it's important 0:01:13.000 --> 0:01:16.160 that a lot of these debates were happening already going 0:01:16.200 --> 0:01:19.559 into this crisis, about the sort of limit to monetary 0:01:19.640 --> 0:01:24.679 policy even in recent years, whether central bankers needed new tools, 0:01:24.920 --> 0:01:27.360 whether there needs to be a greater emphasis on fiscal 0:01:27.400 --> 0:01:31.000 policy and so forth to accelerate growth. These were already 0:01:31.040 --> 0:01:34.280 big debates that were happening pre crisis, and like many 0:01:34.319 --> 0:01:39.560 other things, this crisis has really accelerated them. Yeah. Absolutely, 0:01:39.600 --> 0:01:42.840 It's funny how the crisis is doing that, really accelerating 0:01:42.880 --> 0:01:45.280 trends that were already in play. But I feel like 0:01:45.319 --> 0:01:48.400 the other big question around central banking has to be 0:01:48.600 --> 0:01:53.400 the continued misses on inflation targets as well. So we've 0:01:53.440 --> 0:01:56.600 now have had many, many years of central banks around 0:01:56.600 --> 0:01:59.960 the world missing their inflation target. No one quite knows 0:02:00.080 --> 0:02:03.440 is why. And that's why even before we were starting 0:02:03.480 --> 0:02:06.560 to see that discussion about whether or not something else 0:02:06.640 --> 0:02:12.160 was needed besides pure monetary policy. Yeah, exactly right. And 0:02:12.240 --> 0:02:16.200 you know, this is a pretty profound issue for central 0:02:16.240 --> 0:02:19.480 banks because I think, um, you know, everyone agrees as 0:02:19.400 --> 0:02:23.280 a little more complicated, but on some level, the premise 0:02:23.360 --> 0:02:26.120 of a lot of monetary policy, at least traditionally, or 0:02:26.120 --> 0:02:28.880 sort of interest rate policy, is that there is this 0:02:29.000 --> 0:02:33.360 sort of given take or balance between inflation and full 0:02:33.360 --> 0:02:38.239 employment or inflation and robust growth. And so I think 0:02:38.280 --> 0:02:40.679 if there is some question about what it takes to 0:02:40.800 --> 0:02:44.680 hit the inflation target, or why inflation doesn't pick up 0:02:44.760 --> 0:02:48.240 even when the unemployment rate drops to historically low levels, 0:02:48.680 --> 0:02:50.679 I do think to some extent that really calls into 0:02:50.760 --> 0:02:54.640 question a lot of the traditional models. Yeah. Absolutely, and 0:02:54.680 --> 0:02:56.679 I feel like this has been a long running theme 0:02:56.800 --> 0:03:00.440 on all thoughts. Now absolutely so I'm very excited today 0:03:00.480 --> 0:03:04.480 we're going to be uh speaking to a huge important 0:03:04.520 --> 0:03:09.320 guest in the world of central banking, monetary policy, economics, 0:03:09.400 --> 0:03:13.000 someone who's uh really uh, just a big name, someone 0:03:13.400 --> 0:03:15.520 very excited to talk to. We're gonna be speaking with 0:03:15.680 --> 0:03:19.320 Peter Pratt. He is the former chief economist of the 0:03:19.400 --> 0:03:23.560 European Central Bank. He was on the the Executive Committee 0:03:23.600 --> 0:03:27.320 of the Bank, crucial decision maker for eight years from 0:03:27.840 --> 0:03:32.720 eleven through June twenty nineteen, so has been right in 0:03:32.760 --> 0:03:36.080 the middle of things up until very recently, sort of 0:03:36.120 --> 0:03:39.680 almost right up against the current era and U Currently 0:03:39.720 --> 0:03:42.760 he's a senior fellow at the University of Brussels, and 0:03:42.800 --> 0:03:45.760 we're going to be digging into these topics the ECB, 0:03:46.080 --> 0:03:50.160 the future of central banking, macro policy overall, very excited 0:03:50.160 --> 0:03:55.600 about this conversation. Peter, thank you very much for joining us. So, Peter, 0:03:55.760 --> 0:03:58.360 thank you so much for coming on. I mean, you know, 0:03:58.480 --> 0:04:02.280 Tracy and I introd we've really picking apart these topics 0:04:02.320 --> 0:04:06.400 for a long time before we dive into the sort 0:04:06.440 --> 0:04:10.400 of bigger theoretical questions facing central banks. I'm just curious 0:04:10.480 --> 0:04:15.360 your perspective right now on the recovery in Europe. Do 0:04:15.840 --> 0:04:19.480 are the existing set of policies enough to make the 0:04:19.520 --> 0:04:22.880 recovery from the crisis self sustaining? Can you get back, 0:04:22.960 --> 0:04:27.120 can you get back to pre crisis levels, or does 0:04:27.160 --> 0:04:30.240 there need to be something further yet, either from fiscal 0:04:30.279 --> 0:04:34.920 authorities or the European Central Bank to return to trend. 0:04:36.320 --> 0:04:38.320 I think you have to distinguish a little bit the 0:04:38.839 --> 0:04:41.520 short term and the medium term here. I think it's 0:04:41.600 --> 0:04:43.800 always the case, but I mean it's particular that's is 0:04:44.240 --> 0:04:47.360 in the situation because you have the second wave, which 0:04:47.400 --> 0:04:51.480 has been very strong actually and has led to lockdowns, 0:04:51.520 --> 0:04:55.200 you know, in different countries and different degrees, and for 0:04:55.440 --> 0:04:58.599 that sort of situation here, I think it's absolutely clear 0:04:59.000 --> 0:05:02.800 that you need more this stimulus, uh and basically from 0:05:02.839 --> 0:05:06.000 the fiscal authorities so I think that's that's accepted by 0:05:06.040 --> 0:05:09.200 most economists. I think that's to me very clear. The 0:05:09.320 --> 0:05:12.560 role of the central bank here, as has been communicated recently, 0:05:12.560 --> 0:05:16.280 which is vlatively knew, actually is basically that the central 0:05:16.320 --> 0:05:20.000 bank wants to preserve the easy financial conditions that you 0:05:20.080 --> 0:05:24.159 have and not to try to end accommodation. Basically, the 0:05:24.240 --> 0:05:26.400 message you get from the central bank is to say, 0:05:26.440 --> 0:05:31.000 financial conditions are okay. You know that easy across countries, 0:05:31.040 --> 0:05:33.920 also not only on average, but across countries, and so 0:05:33.960 --> 0:05:37.479 it's important to preserve these conditions in a situation where 0:05:37.600 --> 0:05:41.120 the expectation is that governments are going to come with 0:05:41.160 --> 0:05:44.719 new stimulus measures. I think that's that's fair enough. I 0:05:44.760 --> 0:05:47.440 think that's that's fine. I don't see why, you know, 0:05:47.520 --> 0:05:51.440 by adding accommodation, trying to bring the curve, you know, 0:05:51.480 --> 0:05:54.280 the yield curved lower than what it is today, would 0:05:54.279 --> 0:05:56.839 stimulate you know, the domestic demands. I don't think it will. 0:05:56.960 --> 0:05:59.800 So Basically, some economies that have even alluded to the 0:06:00.000 --> 0:06:03.520 said that to some extent it resembles a yield curve control. 0:06:03.560 --> 0:06:05.800 You know, you want to keep the curve, the interest 0:06:05.880 --> 0:06:09.119 rate curve, you know, more or less as it is today. 0:06:09.200 --> 0:06:11.560 But to do that, to do that, you may need 0:06:11.600 --> 0:06:14.360 of course to buy more bonds, given a huge issuance 0:06:14.440 --> 0:06:17.680 of government bonds. So just to stabilize the conditions, you 0:06:17.720 --> 0:06:20.480 may need to add you know, another round of QE 0:06:20.720 --> 0:06:23.560 basically on the what is called the Tell show, you know, 0:06:23.600 --> 0:06:26.360 the pandemic emergency purchase program of the e c B. 0:06:26.720 --> 0:06:29.520 That's the short term and you want to bridge bridge 0:06:29.560 --> 0:06:33.120 what well, I mean, it's a vaccine story. The vaccine 0:06:33.720 --> 0:06:36.760 is for the time being not taking you know, as 0:06:36.800 --> 0:06:39.520 a as an upside, a very big upside in the 0:06:39.560 --> 0:06:43.640 projections of central bankers in general. They just say when 0:06:43.680 --> 0:06:45.760 it was more or less more or less already in 0:06:45.760 --> 0:06:49.160 our scenario before the announcement, you know, the two announcement 0:06:49.240 --> 0:06:52.800 we handed in recent weeks. But I personally, I think 0:06:52.839 --> 0:06:57.400 the vaccine now has the much higher probability. So the 0:06:57.720 --> 0:07:01.000 variance actually the uncertainty around the seeing the spreading of 0:07:01.040 --> 0:07:04.359 the vaccine, you know, I think this is you have 0:07:04.440 --> 0:07:07.240 reduced the uncertainty. Is that would be a positive factor. 0:07:07.680 --> 0:07:10.040 So for the time being, the simepral Bank and d CB, 0:07:10.160 --> 0:07:12.360 I think in particular, they just want to bridge it 0:07:12.480 --> 0:07:15.600 to that situation. In the second half of next year, 0:07:15.720 --> 0:07:18.440 so you don't need to do much necessarily, but you 0:07:18.480 --> 0:07:22.160 want to ensure that the financial conditions, the easy conditions 0:07:22.200 --> 0:07:25.280 that you have today, are maintained in a situation where 0:07:25.320 --> 0:07:29.559 governments are going to spend you know more. What comes after, well, 0:07:29.600 --> 0:07:33.520 we can discuss that picture, because that will not be easy. Yeah, 0:07:33.640 --> 0:07:35.960 we're definitely going to get into that, but before we do, 0:07:36.240 --> 0:07:38.640 I mean, just looking forward to next year, there are 0:07:39.400 --> 0:07:43.280 a few people who, despite everything that's happened, are pretty 0:07:43.320 --> 0:07:48.000 optimistic about the future of Europe. So, you know, we 0:07:48.080 --> 0:07:52.120 now have the common debt issuance, we have the fiscal 0:07:52.160 --> 0:07:55.480 transfer that we've been talking about for many, many years. 0:07:56.280 --> 0:08:01.520 Brexit might finally be over. Do you buy into the 0:08:01.600 --> 0:08:05.080 idea of things looking up for Europe as a whole. 0:08:05.680 --> 0:08:07.840 You know, there was this this famous quote, you know, 0:08:08.040 --> 0:08:10.640 from Jean Monette by saying your Europe will be forged 0:08:10.680 --> 0:08:13.800 in crisis. Always said, you know, prevention is better than 0:08:13.880 --> 0:08:16.040 you know, reacting to christs. Of course, you have to 0:08:16.080 --> 0:08:19.040 react to crisis better than the opposite. But I think 0:08:19.080 --> 0:08:21.920 that's a little bit risky strategy. I mean, because Europe 0:08:21.960 --> 0:08:24.280 in the past, you know, events that we had with 0:08:24.320 --> 0:08:27.080 the global financial crisis, the sovereign debt crisis, and not 0:08:27.200 --> 0:08:30.720 the pandemic. Well, the Europe was not really prepared for 0:08:30.840 --> 0:08:33.520 that sort of situation. And so the good news, of 0:08:33.559 --> 0:08:38.079 course is that in crisis Europe reacts very strongly. Uh, 0:08:38.080 --> 0:08:41.000 And that's a positive news. But on the other hand, 0:08:41.760 --> 0:08:44.040 very often they account you know, by the events, and 0:08:44.080 --> 0:08:46.840 the events go faster than the capacity you know, to 0:08:47.200 --> 0:08:50.840 reform the institutions. Now, they came, as you rightly mentioned, 0:08:50.880 --> 0:08:54.600 with extremely important decisions in the middle of the crisis, 0:08:54.640 --> 0:08:58.960 the pandemic crisis, coming with transference insurance of common debt. 0:08:59.440 --> 0:09:01.840 But they're all always saying, you know, the communication is 0:09:01.840 --> 0:09:03.839 that this is a one off, you know, it should 0:09:03.880 --> 0:09:06.000 should not project that you're going to do that for 0:09:06.080 --> 0:09:10.360 the future. These will be discussing discussions for after and 0:09:10.760 --> 0:09:13.040 we will see it's it's you. We cannot prejudge, you 0:09:13.040 --> 0:09:15.720 know that that there will be no sort of more 0:09:15.760 --> 0:09:19.120 permanent transfers. But I think it's important what happened. I 0:09:19.120 --> 0:09:22.960 wouldn't call it, as many people say, you know, Hamiltonian moment, moment, 0:09:23.040 --> 0:09:26.280 you know, referring to the US history. I would call 0:09:26.320 --> 0:09:29.000 it that way, but I would certainly recognize that this 0:09:29.040 --> 0:09:33.920 is very important thing. Had don't this happened, the Union 0:09:33.960 --> 0:09:36.480 would have collapsed. I think this is you know, the 0:09:36.520 --> 0:09:39.000 head of states where so, you know, worried about the 0:09:39.000 --> 0:09:42.480 potential consequences on the Union of the COVID crisis and 0:09:42.520 --> 0:09:45.640 the economic effects of the crisis, that they as as 0:09:45.679 --> 0:09:48.199 they did in previous events, you know, came with with 0:09:48.320 --> 0:09:51.520 this huge you know, stimulus program at the European level. 0:09:51.559 --> 0:09:54.480 So I think it's positive, but it doesn't guarantee you 0:09:54.720 --> 0:09:58.720 that you have the right institutions. Now you're puts in place, 0:09:58.720 --> 0:10:04.160 institutions like banking suggusion for example, at the global talentcial crisis. 0:10:04.640 --> 0:10:07.080 But you know, then they tend to to to to 0:10:07.160 --> 0:10:09.920 go backwards, you know, to not to to find the 0:10:10.000 --> 0:10:12.840 lines what they've started with, you know, income with new problems. 0:10:12.880 --> 0:10:15.800 So I think it's there is always an element of 0:10:15.880 --> 0:10:20.079 ambiguity in the institutional reforms in Europe that puts risk 0:10:20.160 --> 0:10:22.440 you know, to the to the to the Union. Can 0:10:22.480 --> 0:10:24.280 you explain that further? I mean, you had a front 0:10:24.360 --> 0:10:28.200 row seat to all of this for several years, and 0:10:28.240 --> 0:10:32.240 from the outside looking in, that's certainly the appearance that 0:10:32.280 --> 0:10:35.800 there will be some big shockun awe announcement, We're going 0:10:35.840 --> 0:10:37.800 to spend all this money, We're going to launch some 0:10:37.880 --> 0:10:41.200 new vehicle. And then it feels like there's like there's 0:10:41.240 --> 0:10:44.600 a inert shaw or the trifical force, and things start 0:10:44.679 --> 0:10:47.440 to slow down and things start a look less oppressive 0:10:47.480 --> 0:10:50.880 than they appeared. What are the forces that cause what 0:10:51.040 --> 0:10:54.720 you just described where things the sort of the ambition 0:10:54.760 --> 0:10:57.640 seems to slow over time? Well, here you know, the 0:10:58.400 --> 0:11:03.040 final approval for the recovery plan you know is not done. 0:11:03.080 --> 0:11:05.679 Because you know that that basically two countries Hungary and 0:11:05.760 --> 0:11:09.720 Poland threatening to vito the whole project. And so that 0:11:09.760 --> 0:11:13.720 means there is today today uncertainty is about that on 0:11:13.720 --> 0:11:16.840 on that point just too because this is news today. 0:11:16.920 --> 0:11:20.200 I mean, I would not be too worried because in Europe, 0:11:20.200 --> 0:11:23.840 you know, when you cannot agree with forty seven countries, 0:11:24.520 --> 0:11:27.680 you can have if there were a coalition of willing. 0:11:27.720 --> 0:11:30.520 You know, at least with nine countries, you can still 0:11:30.559 --> 0:11:33.160 within the European treaties, you can still do the things 0:11:33.160 --> 0:11:35.720 they want to do now, so I think they will, 0:11:35.880 --> 0:11:40.360 They will finalize at least for most countries what they 0:11:40.360 --> 0:11:43.360 decided to do. That means big you know, expansion plan. 0:11:43.679 --> 0:11:46.640 They will do that. The question now, which is which 0:11:46.679 --> 0:11:48.560 is new. I mean, this is really real money for 0:11:48.559 --> 0:11:51.600 a big part of that. The main concern actually that 0:11:51.800 --> 0:11:55.040 most analysts would have is how do you spend that money? 0:11:55.120 --> 0:11:57.160 I think money would be spent, but how do you 0:11:57.200 --> 0:11:59.880 spend that money? Because I mean, at some point you 0:12:00.040 --> 0:12:03.040 to reimburss that money. And the impact of the COVID 0:12:03.080 --> 0:12:07.400 crisis usually is to lower your GDP potential growth, you know, 0:12:07.679 --> 0:12:10.320 and it we can see economy you know, for for 0:12:10.360 --> 0:12:12.760 a while. So the whole plan, that's why it's called 0:12:12.800 --> 0:12:17.920 recovery plan. It's basically directed for investment, and the investment 0:12:17.960 --> 0:12:20.679 as supposed to increase potential growth and that would mean 0:12:20.720 --> 0:12:25.120 the reimbarrassment of debt common that also easier in the future. 0:12:25.720 --> 0:12:28.280 But that's the biggest challenge now in Europe. If it's 0:12:28.320 --> 0:12:30.839 a success, that means that the real money there will 0:12:30.880 --> 0:12:33.719 be real money when the real money it's spent, if 0:12:33.720 --> 0:12:37.360 it's spent correctly across the re addictions in the different countries. 0:12:38.080 --> 0:12:40.680 I think that could serve you know, very positively the 0:12:40.800 --> 0:12:44.560 Union in the future. Now, if it's the other case, 0:12:45.360 --> 0:12:48.560 there will be you know, the political reaction in many 0:12:48.600 --> 0:12:51.880 countries will be totally the opposite. I mean you can imagine, 0:12:52.160 --> 0:12:54.720 you know, you give grants to one country that has 0:12:54.760 --> 0:12:57.760 been hit more part of that money is paid by 0:12:58.000 --> 0:13:02.080 richer countries, and then that money is unwisely spent you know, 0:13:02.240 --> 0:13:07.280 in consumptions. Well maybe income support. That's not the objective now, 0:13:07.559 --> 0:13:09.800 and there will be a surveillance process how the money 0:13:09.880 --> 0:13:13.360 is being spent. If that process is well done, I 0:13:13.400 --> 0:13:16.240 think then we can start talking about the game change 0:13:17.080 --> 0:13:20.440 about all this. I would say for today, this is 0:13:20.480 --> 0:13:23.000 the one shot is extremely important, I think, and certainly 0:13:23.040 --> 0:13:25.960 for the business cycle. But for the longer run, I 0:13:26.000 --> 0:13:27.760 think we have to see how this money is being 0:13:27.880 --> 0:13:31.640 used and and and you cannot tell today because you know, 0:13:31.679 --> 0:13:35.760 it's it's complex. Also, so that last point actually relates 0:13:35.760 --> 0:13:37.720 to a question that I wanted to ask you, which 0:13:37.800 --> 0:13:41.480 is there does seem to be a consensus developing that 0:13:41.840 --> 0:13:46.040 monetary policy is going to be used to augment fiscal 0:13:46.120 --> 0:13:49.800 policy or whatever the government does. But for the e 0:13:49.920 --> 0:13:52.760 c B and for the European Union, I mean clearly 0:13:52.840 --> 0:13:56.120 they have a different set up than say the Bank 0:13:56.160 --> 0:14:00.400 of Japan or the FED. Is the easy going to 0:14:00.400 --> 0:14:03.640 be able to be as effective when it comes to 0:14:03.760 --> 0:14:08.280 using monetary policy to augment piscal policy as other central banks, 0:14:08.360 --> 0:14:11.080 or what are the unique challenges they're going to face 0:14:11.160 --> 0:14:13.920 in doing that. No, they're you're right. I mean they're 0:14:14.000 --> 0:14:18.000 unique challenges because you have one central bank and then 0:14:18.040 --> 0:14:21.280 you have different ministers of finds different countries, so you 0:14:21.320 --> 0:14:24.600 don't have a single fiscal policy. But many of the 0:14:24.640 --> 0:14:28.000 problems we have in Europe are the same as as 0:14:28.080 --> 0:14:30.880 in Japan or the US, in the UK, so they're 0:14:30.920 --> 0:14:33.840 not they're common to all central banks. Let me just 0:14:34.320 --> 0:14:37.920 remind you that, you know, in the eighties the world 0:14:37.920 --> 0:14:42.000 of central bank can change very fundamentally. There was sort 0:14:42.040 --> 0:14:45.760 of general consensus that you know, business cycle policy, you know, 0:14:45.840 --> 0:14:49.800 smoothening the business cycle would be delegated to the central 0:14:49.800 --> 0:14:54.600 bank governments. Basically, the Ministry of Finance would basically, of course, 0:14:54.720 --> 0:14:59.320 let their fiscal policy you know, react automatically, you know, 0:14:59.400 --> 0:15:03.120 to to as the cycles. But discraction policies would not 0:15:03.240 --> 0:15:06.840 really be trusted, you know, from Ministry of Finance. Basically 0:15:07.240 --> 0:15:10.080 because Ministry of Finance they look at the political business 0:15:10.080 --> 0:15:13.000 cycle and so when they spend the money, it's linked 0:15:13.040 --> 0:15:15.880 to a political cycle, which is not necessarily the business cycle. 0:15:16.120 --> 0:15:21.080 So basically the consensus was, you know, business cycle policy. Basically, 0:15:21.120 --> 0:15:23.080 you know, when the economy goes down, you lower the 0:15:23.160 --> 0:15:26.040 rates and then it goes up. If you have inflation, 0:15:26.080 --> 0:15:28.840 you're tightened. I mean that model a La Taylor rule, 0:15:29.320 --> 0:15:33.040 if you see, the same simple rule was the consensus. 0:15:33.320 --> 0:15:37.120 And government basically would look at three things. Basically, they 0:15:37.120 --> 0:15:39.840 would look at the allocation of resources, you know, hot 0:15:39.880 --> 0:15:43.920 taxation influences their location of research, for example, they would 0:15:43.920 --> 0:15:47.640 look at redistribution of income and wealth the television. And 0:15:47.680 --> 0:15:51.280 then they would ensure the sustainability of public debt. And 0:15:51.320 --> 0:15:55.280 so the central banks were kind of independent agencies with 0:15:55.400 --> 0:15:58.040 a very clear mandate. It could be price stability in 0:15:58.080 --> 0:16:02.160 Europe as as a primary endate. But basically all the 0:16:02.240 --> 0:16:04.920 central banks following more or less the same model, you know, 0:16:05.080 --> 0:16:08.320 business cycle responsibilities. You and you have the tools to 0:16:08.360 --> 0:16:11.000 do that. And that was the environment in which I 0:16:11.080 --> 0:16:13.480 was supposed to work. I work, and I was supposed 0:16:13.600 --> 0:16:17.480 to work efficiently during these eight years. And what happened 0:16:17.720 --> 0:16:20.600 is that you know, different things. I mean, one of 0:16:20.640 --> 0:16:23.520 the things which is coming to many central banks is 0:16:23.560 --> 0:16:26.400 that we reached the lower bounds so the interest rates 0:16:26.400 --> 0:16:29.000 went to zero, and so you have a mandate. It's 0:16:29.040 --> 0:16:32.680 just price ability. But in terms of toolbox, you know, 0:16:32.800 --> 0:16:35.480 you you hit something, can you you enter new territories. 0:16:35.560 --> 0:16:40.400 So we tried the number of innovative instruments, quantitative as 0:16:40.400 --> 0:16:42.960 you know, negative rates. Also we went into all this 0:16:43.680 --> 0:16:47.040 and as was said in your introduction, well, the results 0:16:47.120 --> 0:16:51.360 I think can be debated at least, but for the 0:16:51.440 --> 0:16:54.720 general public and analyst in general, well, the conclusion is 0:16:54.800 --> 0:16:57.280 that you didn't reach the two percent that you were targeting. 0:16:57.960 --> 0:17:00.920 And so one is the issue of instruments that is 0:17:01.040 --> 0:17:04.119 you know, still debated today. I think the instruments have 0:17:04.240 --> 0:17:08.240 been efficient, but the question is still open. The serdad. 0:17:08.440 --> 0:17:12.320 The certain reason why central banks didn't succeed, and this 0:17:12.400 --> 0:17:15.560 is one of the points I personally mentioned very often 0:17:15.560 --> 0:17:19.640 in my communication, is that we had a succession of shocks. 0:17:19.760 --> 0:17:23.760 You see, you can say, find your monetary policy, including 0:17:23.840 --> 0:17:26.600 q we would be efficient, but then you get a 0:17:26.640 --> 0:17:29.639 new shock and put putting the economy down again, and 0:17:29.680 --> 0:17:31.680 then you try again with your monitory points and then 0:17:31.680 --> 0:17:34.560 you get again a new shock. I can refer one 0:17:34.600 --> 0:17:37.399 of the last shock we had before the COVID. It 0:17:37.520 --> 0:17:40.920 was what we call the geopolitical shock which hit animal 0:17:41.000 --> 0:17:46.200 spirits in the manufacturing industry. Basically, let's say that protection 0:17:46.200 --> 0:17:49.800 list pressure is coming from the United States, and you know, 0:17:49.840 --> 0:17:55.240 the the the eroding trust in multilateral institutions, the Brexit, etcetera. 0:17:55.640 --> 0:17:58.120 So you can see the issue from not from an 0:17:58.160 --> 0:18:00.800 instrument point of view, like what is the room of 0:18:00.840 --> 0:18:04.000 maneuver when raised a zero, but you can also see 0:18:04.000 --> 0:18:08.200 it as a succession of deflationary shock in the economy 0:18:08.280 --> 0:18:11.760 that complicates very much the central bank action. I think 0:18:11.800 --> 0:18:14.439 we does these two explanations, and then you have a 0:18:14.480 --> 0:18:18.239 third explanation, which is the one you just mentioned. Is 0:18:18.440 --> 0:18:21.600 some people refer that to the flatness of the Philips curve. 0:18:21.720 --> 0:18:23.920 That means that you need a hell a lot of 0:18:24.400 --> 0:18:29.199 monetary stimulus to get inflation, because the reaction of market 0:18:29.280 --> 0:18:33.520 participants in general, labor markets, capital markets, but especially for 0:18:33.680 --> 0:18:37.560 product markets is very slow, you know, compared to you 0:18:37.800 --> 0:18:42.119 to your monetary policy action. So basically saying the world 0:18:42.160 --> 0:18:44.680 has changed, there's a lot of internet connections across the 0:18:44.760 --> 0:18:48.359 economies and so there is competition of China, there is 0:18:48.400 --> 0:18:51.879 a you know, digitalization of the economy. Unions are not 0:18:51.960 --> 0:18:55.280 as strong as before, So the relationship have changed. Now 0:18:55.320 --> 0:18:58.119 if you combine the three elements the lower bound, that 0:18:58.200 --> 0:19:00.080 means your rates go to zero. And then what do 0:19:00.119 --> 0:19:02.600 you do. You try other instruments. Suddenly you have a 0:19:02.640 --> 0:19:06.240 succession of shocks and negative shocks in the economy. And 0:19:06.359 --> 0:19:10.199 third you have changes in the relationships because you know, 0:19:10.280 --> 0:19:14.200 the world has changed because of you know, digitalization, globalization, 0:19:15.160 --> 0:19:18.199 lack of union power and all these things. Then you 0:19:18.240 --> 0:19:20.280 get a little bit the story in which we had 0:19:20.600 --> 0:19:23.920 in Europe. It was even worse because in the global 0:19:23.960 --> 0:19:27.560 financial crisis, in which we were not very well prepared 0:19:27.640 --> 0:19:30.080 as as the US and and many other countries in 0:19:30.119 --> 0:19:33.960 the world. We had also a sovereign debt crisis, which 0:19:34.520 --> 0:19:36.919 stressed you know the fact that the monetary union in 0:19:36.960 --> 0:19:40.679 Europe was not very resilient because you have to prepare 0:19:40.720 --> 0:19:43.400 for the worst if you if you're in a country, well, 0:19:43.440 --> 0:19:45.679 in a country, you have a lot of institutions, you 0:19:45.680 --> 0:19:49.919 know that can be activated very quickly in case of crisis. 0:19:49.920 --> 0:19:52.159 We didn't have that in Europe, and there was i 0:19:52.160 --> 0:19:55.639 would say, you know, with a sovereign debt crisis, and 0:19:55.920 --> 0:19:58.400 we paid a very high price in Europe because of that. 0:19:58.760 --> 0:20:01.720 We had a very big shop, you know, following the 0:20:01.800 --> 0:20:06.160 global financial crisis because of institutional weaknesses what we call 0:20:06.480 --> 0:20:10.520 the incompleteness of the monetary Union. Now, as I said before, 0:20:10.880 --> 0:20:15.159 there have been very strong political reactions institutional improvements in Europe, 0:20:16.040 --> 0:20:18.320 which is very positive. I think, you know, we have 0:20:18.600 --> 0:20:24.200 banking supervision, we have I think a better capital market union, etcetera, etcetera. 0:20:24.359 --> 0:20:28.280 But these institutions I stopped with that. But these institutions 0:20:28.320 --> 0:20:32.920 today are not yet you know, very strong, sufficiently strong 0:20:33.000 --> 0:20:48.920 to face the challenges that we have. M I want 0:20:48.920 --> 0:20:51.960 to focus on something you just said, and this might 0:20:52.000 --> 0:20:57.159 be getting into some controversial territory, but I think it's important, 0:20:57.160 --> 0:20:59.320 interesting stuff. So you're talking about these sort of geopolitical 0:20:59.440 --> 0:21:03.800 sharks or various setbacks, there's also internal politics and again 0:21:04.440 --> 0:21:08.200 speaking as someone who just observes from the outside, and 0:21:08.280 --> 0:21:10.040 uh again you at the front row seat to this. 0:21:10.119 --> 0:21:13.120 But you know, we saw this sort of uh pretty 0:21:13.160 --> 0:21:18.080 the extraordinary lengths that Draggy underwent, especially over the course 0:21:18.119 --> 0:21:21.520 of the europe the sovereign debt crisis, to um you know, 0:21:21.600 --> 0:21:25.400 expand the ECB toolkit, or at least fit the toolkit 0:21:25.560 --> 0:21:29.720 for the the time needed. And that's provoked. UM, that 0:21:29.840 --> 0:21:33.320 provokes some pretty uh, you know, loud backlash, and we 0:21:33.320 --> 0:21:36.919 always heard it, particularly from German media, in particular German 0:21:37.000 --> 0:21:39.800 central bankers, who seem to have a very different view 0:21:39.800 --> 0:21:43.920 on the proper conduct of monetary policy. UM then sort 0:21:43.920 --> 0:21:47.320 of the sort of mainstream views that sort of exist 0:21:47.400 --> 0:21:51.000 in Europe and the US. And it even culminated into 0:21:51.040 --> 0:21:54.560 a situation right after you left in the fall of 0:21:55.160 --> 0:21:59.360 nine in which uh, there was criticism of the Draggy 0:21:59.440 --> 0:22:03.920 era for their view stoking inflation, and you pushed back 0:22:03.960 --> 0:22:06.920 on it publicly and you said it wasn't helpful. How 0:22:07.160 --> 0:22:11.000 much of an impediment was this or is this to 0:22:11.119 --> 0:22:15.480 the evolution of UM, the e c B and monetary 0:22:15.560 --> 0:22:19.000 policy to address the various crisis of the times. This 0:22:19.160 --> 0:22:22.919 sort of very sharp break that there is with the 0:22:23.000 --> 0:22:25.960 sort of core European or sort of the German view 0:22:26.320 --> 0:22:30.200 of monetary policy. How difficult of a challenge was that 0:22:30.280 --> 0:22:33.800 in your eight years on the executive board. No, you're right, 0:22:33.920 --> 0:22:38.200 I mean I was very often surprised that in spite 0:22:38.200 --> 0:22:41.200 of all what you say, that it worked. We always 0:22:41.359 --> 0:22:44.640 in the Governing Council could design uh. And of course 0:22:44.680 --> 0:22:47.600 there were some different views in the governing Council, which 0:22:47.640 --> 0:22:50.160 is not the case today with the COVID shop, which 0:22:50.200 --> 0:22:53.400 is is a bit of a different situation. But in 0:22:53.440 --> 0:22:57.000 these years you had, of course a lot of differences 0:22:57.040 --> 0:23:00.600 across countries. You know, some like Germany recovered very quickly 0:23:00.600 --> 0:23:03.159 after the sovereign death after the sovereign death cries and 0:23:03.200 --> 0:23:05.440 the global financial crisis, not the case of course of 0:23:05.520 --> 0:23:08.439 countries like Italy and others. I think the main problem 0:23:08.520 --> 0:23:10.440 we had in the e c B and I think, 0:23:11.560 --> 0:23:15.000 especially with Mario Mario Dragi, I think, you know, we 0:23:15.080 --> 0:23:17.840 were at some point the only game in town, you know, 0:23:17.880 --> 0:23:22.399 because the political institutions, the institutional settings you know, supporting 0:23:22.440 --> 0:23:25.239 these sort of situations, very extremely weak in you and 0:23:25.320 --> 0:23:29.800