WEBVTT - The ECB’s Former Vice-President Explains The Historic Step That Europe Just Took 0:00:10.800 --> 0:00:14.680 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:14.720 --> 0:00:19.040 I'm Joe Wisenthal and I'm Tracy Halloway. Tracy, I was thinking, 0:00:19.120 --> 0:00:21.640 we don't really talk that much about Europe these days. 0:00:23.640 --> 0:00:27.560 I mean, I guess not in relation to the heady 0:00:27.680 --> 0:00:31.160 days of the Eurozone debt crisis. No, we don't. But 0:00:31.280 --> 0:00:34.800 also I feel like in this particular crisis, at least 0:00:34.840 --> 0:00:36.919 from some of our episodes. You know, obviously we talk 0:00:36.960 --> 0:00:39.479 a lot in the FED context, in the US contact, 0:00:39.960 --> 0:00:42.840 and of course, uh, you know, talk plenty about Hong 0:00:42.920 --> 0:00:46.920 Kong and Asia and Asian supply chains and China and 0:00:46.960 --> 0:00:49.880 so forth. It feels like we focus a little bit 0:00:49.960 --> 0:00:53.880 less on how this current crisis is playing out in 0:00:53.920 --> 0:00:57.280 the European contact. Yeah. I think that's right. I guess 0:00:57.280 --> 0:01:00.120 the implication is that maybe this has been unfair are 0:01:00.120 --> 0:01:03.720 in some respects because there has actually been something very 0:01:03.800 --> 0:01:07.160 very interesting going on in Europe at the moment. Yeah. 0:01:07.240 --> 0:01:09.120 I mean, for one thing, you know, there's a good 0:01:09.200 --> 0:01:11.840 argument to be made that Europe, at least relative to 0:01:11.880 --> 0:01:15.360 the US, if not necessarily Asian countries, has done a 0:01:15.360 --> 0:01:20.920 pretty decent job overall of suppressing the virus itself and 0:01:21.360 --> 0:01:24.360 you know, for years during the Euro Area crisis, there 0:01:24.400 --> 0:01:27.839 are always people like fiscal policy. Fiscal policy, that's what's missing. 0:01:27.880 --> 0:01:29.800 You've got to spend more. You gotta get the Germans 0:01:29.840 --> 0:01:33.199 to spend more. And uh, you know, maybe this time 0:01:33.240 --> 0:01:36.080 it looks like they're actually doing Yeah, that's exactly what 0:01:36.120 --> 0:01:38.640 I was thinking. So we had the announcement of a 0:01:38.680 --> 0:01:43.280 big deal seven hundred fifty billion euros worth by the 0:01:43.319 --> 0:01:47.600 EU to fund Um, a sort of long term recovery 0:01:47.640 --> 0:01:50.280 fund for the Eurozone. And that's a big deal because, 0:01:50.320 --> 0:01:53.120 as you point out, everyone's been talking about fiscal stimulus, 0:01:53.160 --> 0:01:57.280 but it looks like the Eurozone is finally going ahead 0:01:57.280 --> 0:02:00.440 and doing it right. And so this of course raises 0:02:00.520 --> 0:02:02.960 questions and it's a theme that we've definitely had a 0:02:03.000 --> 0:02:07.360 lot on our podcast, which is does this augur something 0:02:07.440 --> 0:02:10.120 bigger for the post crisis period. So of course it's 0:02:10.160 --> 0:02:12.680 well known that, you know, there's a lot of money 0:02:12.680 --> 0:02:16.359 being spent by governments all around the world, including the US. 0:02:16.360 --> 0:02:19.560 But the question mark is, Okay, when the cute crisis 0:02:19.560 --> 0:02:23.080 phase is over, the government's just retrench or does this 0:02:23.160 --> 0:02:27.120 become a sort of new macroeconomic stabilization model that's a 0:02:27.200 --> 0:02:31.000 theme that we've hit dozens of times, but it's particularly 0:02:31.040 --> 0:02:34.080 important in the European context, I think because people have 0:02:34.200 --> 0:02:37.280 sort of identified the lack of fiscal burden sharing is 0:02:37.360 --> 0:02:43.440 sort of a basic architectural tension or flaw within the eurosystem. Yeah, 0:02:43.600 --> 0:02:46.560 I think that's exactly right. How does the I don't 0:02:46.560 --> 0:02:49.160 want to say the intrusion of fiscal stimulus, but how 0:02:49.160 --> 0:02:52.680 does the arrival of fiscal stimulus on the scene actually 0:02:52.800 --> 0:02:57.280 reshape the way that monetary policy works? And I guess 0:02:57.320 --> 0:02:59.560 we should also mention that the e c B is 0:02:59.600 --> 0:03:03.079 also in the midst of another really important project, which 0:03:03.120 --> 0:03:07.440 is rethinking, um, how it targets inflation. So we have 0:03:07.600 --> 0:03:12.079 all of this going on simultaneously, real existential questions for 0:03:12.120 --> 0:03:17.560 the role of the European Central Bank. Absolutely well, I'm 0:03:17.639 --> 0:03:21.240 very excited. We have a fantastic guest to talk about 0:03:21.240 --> 0:03:23.320 all of this. We are going to be talking with 0:03:23.440 --> 0:03:27.560 Vitor Constantio. He is the former Vice president of the 0:03:27.600 --> 0:03:31.720 European Central Bank from two thousand and ten through May. 0:03:32.360 --> 0:03:37.200 He's now a professor at Navara University in Madrid. The 0:03:37.280 --> 0:03:40.120 perfect guest to discuss all this. So, without further ado, 0:03:40.240 --> 0:03:42.160 let's bring him in a vito or thank you very 0:03:42.200 --> 0:03:46.280 much for joining us. So are you happy to not 0:03:46.400 --> 0:03:49.520 being a policy maker in this time or do you 0:03:50.120 --> 0:03:52.400 do you miss being at the ECB during such an 0:03:52.400 --> 0:03:57.040 extraordinary moment. Well, it's always difficult to get out of, 0:03:57.240 --> 0:04:01.520 you know, executive responsibilities, and I need them. Of course, 0:04:01.840 --> 0:04:05.040 I could not say that I am happy to be out. 0:04:05.480 --> 0:04:10.720 For unfortunate circumstances of the COVID, the shock. We are 0:04:10.840 --> 0:04:16.080 again in a very important period of policy making. But 0:04:16.440 --> 0:04:20.960 fortunately Europe has been doing well I think in these 0:04:21.000 --> 0:04:27.440 episodes better than in the previous episode of two thousands 0:04:27.480 --> 0:04:31.320 tend to two thousand twelve. Just to start out with 0:04:31.680 --> 0:04:35.760 walker thing, the significance of the deal that was agreed, 0:04:35.839 --> 0:04:40.080 the seven hundred billion euros. You tweeted about it. Clearly 0:04:40.160 --> 0:04:46.680 you think it's important. What's the significance, Well, it establishes 0:04:47.360 --> 0:04:53.920 for precedents that are very meaningful. In the first place, um, 0:04:54.560 --> 0:04:59.680 it involves a decision to issue common European depth that 0:04:59.760 --> 0:05:04.960 can aviation will issue seven fifty billion of debt to 0:05:05.160 --> 0:05:12.000 fund these program and that's the first The second point 0:05:12.640 --> 0:05:18.839 is that this is going to be distributed in the 0:05:19.000 --> 0:05:25.080 form of budget transfers and not loans to the countries. Third, 0:05:25.640 --> 0:05:31.359 it's a big program to implement what it is a 0:05:31.720 --> 0:05:39.039 European fiscal policy stimulus to address a recessionary phase in 0:05:39.080 --> 0:05:43.440 the European economy, and that's also the first time that 0:05:43.640 --> 0:05:48.920 this happens at this level. And fourth, the distribution of 0:05:49.000 --> 0:05:56.080 the public transfers, which correspond to a little more than 0:05:56.200 --> 0:06:00.360 half of the seven other than fifty billion, is in 0:06:00.360 --> 0:06:04.200 a way that it is not proportional to the size 0:06:04.360 --> 0:06:09.599 of each country, but indeed benefits more the countries that 0:06:09.880 --> 0:06:14.640 have lower level of living and higher unemployment. So there 0:06:14.800 --> 0:06:19.440 is a convergence play. There is a solidarity aspect of 0:06:19.480 --> 0:06:23.040 this that it's also quite new in terms of transfers. 0:06:23.080 --> 0:06:27.240 To give you two examples on a proportional basis, Italy 0:06:27.440 --> 0:06:32.320 would be entitled to fifty billion, but they are getting 0:06:32.440 --> 0:06:37.799 eighty billion, whereas Germany would be entitled to ninety six 0:06:37.839 --> 0:06:42.120 billion in proportional terms, but are is getting only twenty seven. 0:06:42.560 --> 0:06:47.480 So these four points put together constitute indeed very important 0:06:47.800 --> 0:06:51.880 precedents and perhaps, and we all hope so that it 0:06:51.960 --> 0:06:56.640 will be a sign of things to happen if again 0:06:57.080 --> 0:07:01.919 there will be a stressful situation in the European economy, 0:07:02.200 --> 0:07:06.400 and that's a very important element for everyone. The notion 0:07:06.680 --> 0:07:12.560 that when there is a very stressful socio economic situation, 0:07:12.800 --> 0:07:19.520 Europe steps up and takes decisions to fight the the 0:07:19.560 --> 0:07:25.040 recession and does not leave behind any of the member countries. 0:07:25.360 --> 0:07:28.400 It's a big message for the future, and I think 0:07:28.480 --> 0:07:35.680 markets are really beginning to interiorize what these means, and 0:07:35.960 --> 0:07:40.480 we see that already, but it will take time, of course, 0:07:40.880 --> 0:07:48.280 perhaps for the markets, particularly Anglo Saxon markets, to overcome 0:07:48.840 --> 0:07:55.560 the lingering doubts about the European project. So you mentioned 0:07:55.600 --> 0:07:59.480 some really important things for the first time, sort of 0:07:59.600 --> 0:08:03.960 joint that issuance is happening. Also the fact that Germany 0:08:04.320 --> 0:08:07.320 is going to bear more of the burden or the 0:08:07.360 --> 0:08:10.080 idea that their economy is more robust. There will be 0:08:10.120 --> 0:08:12.760 these transfers. But people are calling this for years, like 0:08:12.800 --> 0:08:15.720 ten years now. People say Germany needs to spend more 0:08:15.840 --> 0:08:18.400 euro bonds, Germany needs to spend more. It never happens. 0:08:18.920 --> 0:08:21.840 Talk to us from your perspective, having been an ECB 0:08:22.000 --> 0:08:27.160 policy maker, about the pace that Europe operates, why does 0:08:27.240 --> 0:08:29.200 it sort of from the outside, it's like, oh, this 0:08:29.240 --> 0:08:32.200 took so long, ten years. Everyone knew this needed to happen. 0:08:32.800 --> 0:08:35.960 What is it about Europe that these things tend to 0:08:36.200 --> 0:08:40.360 unfold seemingly quite slowly over a long period. I don't 0:08:40.360 --> 0:08:46.040 even know. The initial design of our monetary union was 0:08:46.520 --> 0:08:50.680 under the influence of what was the macro economic thinking 0:08:50.720 --> 0:08:56.080 of the time, and particularly Central European economic thinking, and 0:08:56.640 --> 0:09:01.199 that maintained that it would be enough to have monetary 0:09:01.240 --> 0:09:06.400 policy as a macro stabilization tool, and that second, it 0:09:06.440 --> 0:09:10.880 would be enough for monetary policy to cater for price 0:09:10.920 --> 0:09:17.120 stability in order for the economy to work smoothly and progress. 0:09:17.679 --> 0:09:24.040 A great believe in the private sector and the market economy, 0:09:24.160 --> 0:09:29.319 and so no one was aware that facing big economic 0:09:29.679 --> 0:09:32.800 shocks as the one in two thousand and eight and nine, 0:09:33.320 --> 0:09:37.840 more would be needed. Initially, of course, because there was 0:09:37.880 --> 0:09:40.840 a big pressure on the banks UH and the banks 0:09:40.880 --> 0:09:46.320 had to be helped by the public sector. There was 0:09:46.840 --> 0:09:52.400 indeed some increase in deficits for that purpose, but very 0:09:52.480 --> 0:09:58.520 quickly since the twenty meeting in Toronto, there was physical 0:09:58.600 --> 0:10:02.880 retrenchment and as a result we had in Europe in 0:10:02.960 --> 0:10:07.560 two thousands, eleven and twelve we had a double deep 0:10:08.080 --> 0:10:14.239 second recession that no other advanced economy or region had 0:10:14.480 --> 0:10:17.880 and that was the result of this thinking and also 0:10:18.040 --> 0:10:24.520 the fear of Central Europeans that if more lacks fiscal 0:10:24.559 --> 0:10:29.200 policy in member countries would be allowed, that could result 0:10:29.280 --> 0:10:32.199 in the future to more need of assistance, and they 0:10:32.200 --> 0:10:36.680 didn't want it. So everyone was a little blocked by 0:10:37.280 --> 0:10:42.160 the initial rules and it took time then even for 0:10:42.800 --> 0:10:47.400 us at the ECB to be able to start quee, 0:10:47.440 --> 0:10:52.280 which we did only in January two thousand fifteen, as 0:10:52.280 --> 0:10:56.840 you know, much later than other major central banks. But 0:10:57.040 --> 0:11:04.000 lessons were learned from that episode. I believe, especially that 0:11:04.160 --> 0:11:09.000 the double deep the second recession was the result of 0:11:09.080 --> 0:11:13.280 too much physical consolidation in all member countries at the 0:11:13.320 --> 0:11:17.560 same time. So this time the reaction was different, which 0:11:17.679 --> 0:11:20.480 was of course also helped not only by lessons learned, 0:11:20.880 --> 0:11:24.160 but also by the fact that this was a symmetric shock. 0:11:24.679 --> 0:11:27.600 It was an act of nature which was eating all 0:11:27.679 --> 0:11:30.880 countries in the same way, and no country could be 0:11:31.000 --> 0:11:37.199 blamed for this shock, so that helped also the response 0:11:37.480 --> 0:11:43.520 to be quite different. And the third point, which I 0:11:43.559 --> 0:11:47.320 think it's also very important, we are in a very 0:11:47.360 --> 0:11:51.920 different geopolitical situation, and so in Europe, starting with German 0:11:52.000 --> 0:11:55.640 but but not only Germany. We are now more aware 0:11:56.160 --> 0:12:00.760 of the need of Europe acting to get there, to 0:12:00.960 --> 0:12:06.480 protect and expand its sovereignty, to be able indeed to 0:12:06.720 --> 0:12:12.760 stay on its own feet, as justl America said some 0:12:12.920 --> 0:12:17.480 time ago. And this awareness increases the sense of collective 0:12:17.520 --> 0:12:21.320 responsibility for the whole and that also it's a big 0:12:21.440 --> 0:12:27.760 driver behind what is happening. This new awareness that Europe 0:12:27.880 --> 0:12:33.560 has indeed to deepen its integration in order to survive 0:12:33.720 --> 0:12:38.680 better and prosper in a new international situation where the 0:12:38.720 --> 0:12:42.360 pressure is coming from Russia, from China and unfortunately now 0:12:42.400 --> 0:12:46.560 also from the US, have to be considered as real 0:12:46.760 --> 0:12:51.040 and serious. M hm. Since we're talking about that shift 0:12:51.280 --> 0:12:54.640 in mindset, if we if we zoom in on Germany 0:12:54.640 --> 0:12:57.800 in particular, I'm just curious, why do you think or 0:12:58.160 --> 0:13:01.439 what is it about either the German economy, the structure 0:13:01.440 --> 0:13:05.280 of the economy, or the German mindset that made them 0:13:05.520 --> 0:13:10.679 so resistant to fiscal spending or you know, establishing some 0:13:10.760 --> 0:13:16.320 sort of your zone wide federal type deficit for so long. Well, 0:13:16.400 --> 0:13:23.400 it was indeed their owned domestic approach for four years, 0:13:25.280 --> 0:13:29.480 which it's called or the liberalism in the sense indeed 0:13:29.480 --> 0:13:33.360 that the central bank and monetary policy taking care of 0:13:33.440 --> 0:13:36.440 price stability would be enough because the rest of the 0:13:36.480 --> 0:13:41.600 economy would work well on its own, and it has 0:13:41.640 --> 0:13:45.320 worked well for for them for quite some time. But 0:13:45.440 --> 0:13:48.360 they reacted to the shock, to the crisis, to the 0:13:48.400 --> 0:13:54.360 banking crisis very fearful of what could happen. And we 0:13:54.400 --> 0:13:58.800 saw that at the time because think for instance, since 0:13:58.960 --> 0:14:03.640 nineteen sixteen nine until two thousand nine, Germany add in 0:14:03.720 --> 0:14:09.559 its very constitutional law the principle of the Golden rule 0:14:09.679 --> 0:14:14.600 for physical policy, meaning basically that investment expenditure would not 0:14:14.800 --> 0:14:20.960 count for the physical rule. They change it into thousand nine, 0:14:21.280 --> 0:14:25.960 introducing an overall that break as it is called, on 0:14:26.200 --> 0:14:32.440 the overall structural deficit and no uh specific treatment of 0:14:32.560 --> 0:14:38.680 investment whatsoever. So they tightened the physical rule precisely at 0:14:38.720 --> 0:14:42.720 the peak of the crisis of oh eight or nine 0:14:43.080 --> 0:14:48.200 for them, and then of course this was exported three 0:14:48.280 --> 0:14:53.040 years later to the European Physical Rule under their influence, 0:14:53.400 --> 0:14:56.080 of course in a softer way than the rule they have. 0:14:56.800 --> 0:15:02.120 But it shows that they react very fearful to the 0:15:02.160 --> 0:15:05.520 shock at the time. Lessons were learned, I think because 0:15:05.720 --> 0:15:09.160 they themselves last year or rather this year, had to 0:15:09.280 --> 0:15:13.520 break in a way that rule in order to expand 0:15:13.560 --> 0:15:18.720 their own physical policy in response to the COVID shock. 0:15:19.160 --> 0:15:23.720 This text time, but lessons, lessons have been learned, and 0:15:23.760 --> 0:15:28.760 we see everywhere for many reasons, a return of physical policy, 0:15:29.560 --> 0:15:34.640 not only because of short term reaction to conjunctual shocks, 0:15:34.680 --> 0:15:38.360 but also that in the in the context of the 0:15:38.480 --> 0:15:44.160 second stagnation phase, that advanced economies are going through fiscal 0:15:44.280 --> 0:15:51.560 policy as a unsubstitutal role to play. And finally there 0:15:51.720 --> 0:15:58.200 is a recognition of that even in Germany. So do 0:15:58.200 --> 0:16:00.880 you feel this is a never going back moment, as 0:16:00.960 --> 0:16:04.800 in now we have established or now Europe has established 0:16:04.840 --> 0:16:09.000 this fiscal policy mechanism, some precedent for burden sharing. That 0:16:09.240 --> 0:16:11.960 I feel confident, at least for the time being and 0:16:12.000 --> 0:16:14.200 for years to come, this is going to be a 0:16:14.200 --> 0:16:18.440 part of the talk kit. Well, no one can predict 0:16:18.480 --> 0:16:22.040 the future. Of course, this will be operational for a 0:16:22.120 --> 0:16:24.800 number of years because it will take time to implement, 0:16:25.280 --> 0:16:28.720 and then the economy will improve and so on. But 0:16:29.200 --> 0:16:34.560 indeed these shows that there is a new awareness about 0:16:34.600 --> 0:16:40.560 the importance of keeping Europe really covisive, which is even 0:16:40.640 --> 0:16:46.400 more important in terms of having a monetary union. Now, 0:16:46.800 --> 0:16:52.240 the big cements that we have in the European project 0:16:52.760 --> 0:16:58.480 is indeed the monetary Union and the europe because it's objectively, 0:16:59.320 --> 0:17:04.440 i would say, a practically unbreakable experience. And then it 0:17:04.480 --> 0:17:07.320 means that if there are stresses, if there are shocks, 0:17:07.680 --> 0:17:10.880 they have to be coped with. This president shows that 0:17:10.920 --> 0:17:15.000 there is this collective sense of responsibility that I am 0:17:15.080 --> 0:17:20.440 sure will happen again if there is a major crisis. 0:17:20.440 --> 0:17:23.720 This does not mean that, you know, we are going 0:17:23.760 --> 0:17:26.880 to have a physical union around the corner. It's not 0:17:27.400 --> 0:17:34.639 the case. It does not mean that other institutional reforms 0:17:34.640 --> 0:17:39.040 are going to happen in the visible horizon. But indeed 0:17:39.280 --> 0:17:42.520 is a game changer and the result of the new 0:17:42.600 --> 0:17:47.840 situation and of the lessons learned from the previous crisis, 0:17:48.280 --> 0:18:06.760 and that will not, of course go go away. So 0:18:06.800 --> 0:18:10.960 we have this uh new or growing recognition of the 0:18:11.000 --> 0:18:14.200 importance of fiscal stimulus, not just in Europe, of course, 0:18:14.240 --> 0:18:17.320 but in a lot of other places um specifically the US. 0:18:17.920 --> 0:18:20.400 I feel like we talk a lot about the need 0:18:20.440 --> 0:18:23.520 for fiscal stimulus, but we don't talk as much about 0:18:23.560 --> 0:18:27.600 what that fiscal stimulus should actually look like. So when 0:18:27.600 --> 0:18:31.920 it comes to the European Deal. What is the best 0:18:32.000 --> 0:18:36.919 way to spend that seven fifty billion euros and what 0:18:37.119 --> 0:18:41.879 kind of spending I guess would promote long term economic 0:18:41.920 --> 0:18:47.320 recovery the best it it will be spent mostly on 0:18:47.440 --> 0:18:51.520 toblic investment by the Member states. And there is already 0:18:51.600 --> 0:18:56.840 a rule principle in the decision of the European Council 0:18:57.000 --> 0:19:02.920 that says that thirty cent has to be used for 0:19:03.600 --> 0:19:10.040 the purpose of grining of our economies to fight climate change. 0:19:10.359 --> 0:19:17.119 So it's already a chunk of the overall amount that 0:19:17.280 --> 0:19:22.280 has to be dedicated to investments that will help this 0:19:22.560 --> 0:19:27.080 fight and these objective that Europe has defined to reach 0:19:27.240 --> 0:19:32.120 a situation of being carbon neutral um and so there 0:19:32.119 --> 0:19:36.960 are targets, there are milestones, there is a timetable. All 0:19:37.040 --> 0:19:39.800 that is going to be very present in the national 0:19:39.920 --> 0:19:43.040 plans that now the member states will have to develop 0:19:43.160 --> 0:19:46.119 to use the money. And then there are of course 0:19:46.600 --> 0:19:50.840 other types of infrastructure needs in all countries that will 0:19:50.880 --> 0:19:54.800 benefit from from this plan, and in itself it's an 0:19:54.800 --> 0:19:59.439 element of stimulating aggregate demands. So it will be really 0:20:00.000 --> 0:20:04.880 going mostly to investment. I hope also that it will 0:20:04.920 --> 0:20:09.679 help some countries with the lower level of living to 0:20:09.840 --> 0:20:17.000 have the resources to support some segments of the population 0:20:17.640 --> 0:20:20.679 that are not so well protected by the programs that 0:20:20.760 --> 0:20:26.040 already have been put in place. I'm thinking about gig workers, uh, 0:20:26.800 --> 0:20:33.640 precarious workers, say in performing arts and other types of 0:20:33.680 --> 0:20:37.760 things that do not have a regular employment and were 0:20:37.800 --> 0:20:41.480 not the object of the peneply of measures that were 0:20:41.520 --> 0:20:45.639 put in place to help everyone in these initial stages 0:20:46.280 --> 0:20:50.399 of the crisis. So and that of course also is 0:20:50.440 --> 0:20:57.600 important for stimulating aggregate demands. So it's basically the eighth anniversary. 0:20:57.640 --> 0:21:00.840 I guess we just passed it of when Mario Droggi, 0:21:01.600 --> 0:21:03.960 who is the president of the e c B, when 0:21:03.960 --> 0:21:06.199 you were the vice president, he had his famous whatever 0:21:06.200 --> 0:21:12.399 it takes speech establishing that the ECB would, theoretically, if needed, 0:21:12.440 --> 0:21:16.440 backstop government debt. And we saw spreads on peripheral debt 0:21:16.880 --> 0:21:19.040 close very sharply, and that was sort of the beginning 0:21:19.480 --> 0:21:23.160 of the end of the Euro Area crisis. Are we 0:21:23.240 --> 0:21:25.760 ever going to get back, in your view, to the 0:21:25.800 --> 0:21:28.680 sort of boring old central banking of how we used 0:21:28.680 --> 0:21:31.960 to think about it. It's like occasionally high grades, occasionally 0:21:32.119 --> 0:21:34.680 cut rates. No one ever talks about balance sheets or 0:21:34.680 --> 0:21:37.520 anything like that or is that gone for good? And 0:21:37.600 --> 0:21:39.720 if we do have this world where fiscal plays a 0:21:39.800 --> 0:21:43.280 much more active and aggressive role, what is the future 0:21:43.520 --> 0:21:49.280 of central banking even outside of a crisis. Well, I 0:21:49.320 --> 0:21:54.719 would say that it is normal that in certain situations 0:21:54.800 --> 0:21:58.760 of recession or in the case of a monetary union, 0:21:58.920 --> 0:22:04.119 of fragmentation and beyond what would be justified by the 0:22:04.240 --> 0:22:08.879 situation of fundamental values, that in those cases there is 0:22:09.200 --> 0:22:16.120 a implicit collaboration between monetary policy and physical policy because 0:22:16.160 --> 0:22:22.080 the stance of both policies converge in those situations like 0:22:22.200 --> 0:22:24.760 the one we had before and particularly like the one 0:22:24.880 --> 0:22:29.399 we have now, because of course, this time, the phiscal 0:22:29.480 --> 0:22:33.080 policy was more important to respond to this type of 0:22:33.119 --> 0:22:37.920 shock in order to maintain income of the people suddenly 0:22:38.080 --> 0:22:42.120 unemployed or lockdown, and only physical policy could do that, 0:22:42.560 --> 0:22:46.760 and also to help firms to survive these this period, 0:22:47.440 --> 0:22:52.160 and monetary policy took care both of normalizing financial markets, 0:22:52.200 --> 0:22:57.440 avoiding a financial crisis and helping credit supply by the 0:22:57.480 --> 0:23:01.840 banking sect. So the division of labor was easy to 0:23:02.160 --> 0:23:07.640 define and the stands was convergent. But let's not extrapolate 0:23:07.760 --> 0:23:13.560 that for every situation, because the test of this sort 0:23:13.640 --> 0:23:19.040 of new relationship that people talk about. The test will 0:23:19.080 --> 0:23:24.840 come one day when inflation may increase, and then of 0:23:24.880 --> 0:23:28.760 course the central bank has to respond to that, and 0:23:28.840 --> 0:23:33.320 that's the crunch moment when we will see how this 0:23:33.960 --> 0:23:40.080 this go. But we are ears from that challenge to 0:23:40.080 --> 0:23:43.679 to happen, and the degrees of collaboration have varied among 0:23:43.760 --> 0:23:48.320 the countries. I would say that it's important to underline 0:23:48.320 --> 0:23:53.320 the following. Neither in the Euro Area or in the 0:23:53.440 --> 0:23:58.959 US there was any degree of full fledged, properly named 0:23:59.480 --> 0:24:04.200 monetary financing. What the central banks are doing, it's not 0:24:04.440 --> 0:24:08.080 monetary financing. The Bank of England did a little bit 0:24:08.320 --> 0:24:14.000 of monetary financing by giving a bridge credit to the 0:24:14.520 --> 0:24:18.080 to the Treasury, but neither the e c B or 0:24:18.160 --> 0:24:23.240 the FED really did monetary financing. So when I also 0:24:23.359 --> 0:24:28.080 to to take that into consideration, although loosely, of course, 0:24:28.160 --> 0:24:31.320 the media are calling what the central banks are doing 0:24:31.359 --> 0:24:35.960 as monetary financing, but it is not so okay. I 0:24:36.000 --> 0:24:40.080 wanted to pick up on that inflation point because, as 0:24:40.119 --> 0:24:43.359 we mentioned in the intro, the e c B is 0:24:43.880 --> 0:24:48.040 currently thinking very hard about how it approaches its own 0:24:48.119 --> 0:24:51.560 inflation target, which um I think the exact language is 0:24:51.600 --> 0:24:56.680 below but close to two percent. Do you think, I mean, 0:24:56.680 --> 0:24:59.360 there seems to be lots of confusion about why central 0:24:59.359 --> 0:25:03.080 banks around the world haven't been able to hit those 0:25:03.119 --> 0:25:06.240 inflation targets in recent years. And do you think that 0:25:06.600 --> 0:25:13.520 central bankers understand how inflation works? Yeah, good question, of course, 0:25:13.560 --> 0:25:16.480 and it would be a very long answer to address 0:25:17.280 --> 0:25:23.840 aspect for it. But yes, Now the question is starts 0:25:24.119 --> 0:25:29.280 with the following thing. You know, Milton Friedman instilled in 0:25:29.359 --> 0:25:33.600 the minds of many economists and many central banks at 0:25:33.640 --> 0:25:38.680 the time when he was writing that inflation is always 0:25:38.840 --> 0:25:43.680 an everywhere a monetary phenomenon. That's what he said, and 0:25:43.720 --> 0:25:48.600 by that he meant that inflation was determined by the 0:25:48.640 --> 0:25:53.879 development of monetary aggregates. And two in the case of US, 0:25:53.920 --> 0:25:57.960 I am three in the case of you. And so 0:25:58.119 --> 0:26:02.639 the idea that the central banks could fine tune the 0:26:02.680 --> 0:26:08.000 inflation rate, not immediately, not you know, in a very 0:26:08.000 --> 0:26:13.359 short term horizons, but you know, within two, three, four years, 0:26:13.640 --> 0:26:17.920 could indeed put inflation at whatever level they would wish. Well, 0:26:17.960 --> 0:26:22.639 things proved to be much more complex than that, because 0:26:22.680 --> 0:26:30.280 inflation depends on the overall relationship between aggregate demand and supply. 0:26:30.760 --> 0:26:35.400 Uh uh, and that is influenced by many other factors, 0:26:36.040 --> 0:26:42.280 including of course physical policy, but also including external shocks 0:26:42.320 --> 0:26:47.080 that microeconomics, particularly in the US, which has dominated the field, 0:26:47.119 --> 0:26:50.919 of course for all the reasons we know, tended to 0:26:51.000 --> 0:26:55.679 be thinking mostly in terms of closed economies because the 0:26:55.760 --> 0:26:59.800 US being so big, you know, the external sector was 0:27:00.000 --> 0:27:05.480 not so important or seen as so important. But the 0:27:05.600 --> 0:27:10.840 point is that inflation depends for long periods of time 0:27:11.240 --> 0:27:15.600 on many other things. Friedman himself was interviewed in the 0:27:15.840 --> 0:27:19.840 two thousand about Japan, where there was the beginning of 0:27:19.880 --> 0:27:23.680 the deflation, as you know, and he answered, well, it's 0:27:23.760 --> 0:27:27.520 very simple to solve it. You just have to have 0:27:27.640 --> 0:27:33.680 the central bank buying sovereign bonds. That will expand money 0:27:33.720 --> 0:27:37.840 and money aggregates and the problem will be solved. Well, 0:27:37.880 --> 0:27:40.640 it was not followed at the time, but some years 0:27:40.760 --> 0:27:44.840 later it was followed. Now the Bank of Japan has 0:27:44.880 --> 0:27:49.760 bought a little more than one of GDP of Japanese 0:27:50.600 --> 0:27:54.320 public debt and inflation has not responded. So it was 0:27:54.359 --> 0:28:00.440 wrong clearly, and we do have now, you know, many 0:28:00.480 --> 0:28:06.280 reduced form regressions to forecast inflation that take into account 0:28:07.280 --> 0:28:11.920 the import prices, which includes of course the change rate 0:28:12.600 --> 0:28:18.920 that include also possibly other cost shocks that may occur, 0:28:19.320 --> 0:28:24.920 and that include expectations and inertia. That indeed, the economic agents, 0:28:24.960 --> 0:28:29.240 both households and firms, when they decide prices, tend to 0:28:29.320 --> 0:28:35.199 have certain inertia in taking those decisions. By thinking about 0:28:35.280 --> 0:28:39.560 what has been the progression of inflation in previous years, 0:28:39.600 --> 0:28:42.400 and if you put all these elements in a way 0:28:42.400 --> 0:28:46.920 to forecast inflation, you can have relatively reliable ways of 0:28:47.080 --> 0:28:51.760 forecasting inflation where the slack of the economy is also there. 0:28:52.200 --> 0:28:56.680 Of the domestic it's also there. It's still meaningful, but 0:28:56.800 --> 0:29:01.400 of course during certain periods is overwhelmed by the effect 0:29:01.520 --> 0:29:05.880 of the other drivers of inflation. It has not disappeared. 0:29:06.320 --> 0:29:09.560 What has disappeared, and it's also in all the media, 0:29:10.160 --> 0:29:15.440 is that the initial Philip's curve, what's just a relation 0:29:15.680 --> 0:29:21.960 between in this case wages and unemployment, that simple bivariate 0:29:22.240 --> 0:29:27.280 relations as indeed collapsed UH and a more complex way 0:29:27.320 --> 0:29:31.640 of UH forecasting inflation, which the economy is also called 0:29:31.840 --> 0:29:35.360 Philip curves. Adding to the confusion of all these discussion. 0:29:35.840 --> 0:29:39.160 The slack is still there, but it's also a factor. 0:29:39.440 --> 0:29:44.840 And as you see, monetary aggregates are not there any anymore. 0:29:45.320 --> 0:29:49.400 So it has been difficult then, just by monetary policy 0:29:49.560 --> 0:29:53.080 to change inflation to the level in a period where 0:29:53.280 --> 0:29:58.960 globalization and the entry of more than one billion Asian 0:29:59.080 --> 0:30:03.520 workers with low wages in the world economy put a 0:30:03.640 --> 0:30:09.760 lot of pressure on declining prices of many industrial products, 0:30:09.880 --> 0:30:14.560 and that was a major shock that affected the overall 0:30:14.880 --> 0:30:19.240 economy of inflation in all our countries so much that 0:30:19.480 --> 0:30:23.640 the pure domestic slack was not so much in command 0:30:24.360 --> 0:30:28.560 of inflation as it was in the past. And that, 0:30:28.720 --> 0:30:31.960 as of course, is still true, and that's why central 0:30:32.000 --> 0:30:36.800 banks indeed have not the easiness the discretion to put 0:30:36.880 --> 0:30:40.880 inflation at whatever level they want within the period of 0:30:41.440 --> 0:30:46.440 say five years. But that is not imply that monetary 0:30:46.520 --> 0:30:51.480 policy had a big contribution to avoid even a worse 0:30:51.760 --> 0:30:56.320 scenario of deflation, and that was avoided in all advanced 0:30:56.320 --> 0:31:01.840