Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe Wisenthal and I'm Tracy Halloway. Tracy, I was thinking,
Speaker 1: we don't really talk that much about Europe these days.
Speaker 1: I mean, I guess not in relation to the heady
Speaker 1: days of the Eurozone debt crisis. No, we don't. But
Speaker 1: also I feel like in this particular crisis, at least
Speaker 1: from some of our episodes. You know, obviously we talk
Speaker 1: a lot in the FED context, in the US contact,
Speaker 1: and of course, uh, you know, talk plenty about Hong
Speaker 1: Kong and Asia and Asian supply chains and China and
Speaker 1: so forth. It feels like we focus a little bit
Speaker 1: less on how this current crisis is playing out in
Speaker 1: the European contact. Yeah. I think that's right. I guess
Speaker 1: the implication is that maybe this has been unfair are
Speaker 1: in some respects because there has actually been something very
Speaker 1: very interesting going on in Europe at the moment. Yeah.
Speaker 1: I mean, for one thing, you know, there's a good
Speaker 1: argument to be made that Europe, at least relative to
Speaker 1: the US, if not necessarily Asian countries, has done a
Speaker 1: pretty decent job overall of suppressing the virus itself and
Speaker 1: you know, for years during the Euro Area crisis, there
Speaker 1: are always people like fiscal policy. Fiscal policy, that's what's missing.
Speaker 1: You've got to spend more. You gotta get the Germans
Speaker 1: to spend more. And uh, you know, maybe this time
Speaker 1: it looks like they're actually doing Yeah, that's exactly what
Speaker 1: I was thinking. So we had the announcement of a
Speaker 1: big deal seven hundred fifty billion euros worth by the
Speaker 1: EU to fund Um, a sort of long term recovery
Speaker 1: fund for the Eurozone. And that's a big deal because,
Speaker 1: as you point out, everyone's been talking about fiscal stimulus,
Speaker 1: but it looks like the Eurozone is finally going ahead
Speaker 1: and doing it right. And so this of course raises
Speaker 1: questions and it's a theme that we've definitely had a
Speaker 1: lot on our podcast, which is does this augur something
Speaker 1: bigger for the post crisis period. So of course it's
Speaker 1: well known that, you know, there's a lot of money
Speaker 1: being spent by governments all around the world, including the US.
Speaker 1: But the question mark is, Okay, when the cute crisis
Speaker 1: phase is over, the government's just retrench or does this
Speaker 1: become a sort of new macroeconomic stabilization model that's a
Speaker 1: theme that we've hit dozens of times, but it's particularly
Speaker 1: important in the European context, I think because people have
Speaker 1: sort of identified the lack of fiscal burden sharing is
Speaker 1: sort of a basic architectural tension or flaw within the eurosystem. Yeah,
Speaker 1: I think that's exactly right. How does the I don't
Speaker 1: want to say the intrusion of fiscal stimulus, but how
Speaker 1: does the arrival of fiscal stimulus on the scene actually
Speaker 1: reshape the way that monetary policy works? And I guess
Speaker 1: we should also mention that the e c B is
Speaker 1: also in the midst of another really important project, which
Speaker 1: is rethinking, um, how it targets inflation. So we have
Speaker 1: all of this going on simultaneously, real existential questions for
Speaker 1: the role of the European Central Bank. Absolutely well, I'm
Speaker 1: very excited. We have a fantastic guest to talk about
Speaker 1: all of this. We are going to be talking with
Speaker 1: Vitor Constantio. He is the former Vice president of the
Speaker 1: European Central Bank from two thousand and ten through May.
Speaker 1: He's now a professor at Navara University in Madrid. The
Speaker 1: perfect guest to discuss all this. So, without further ado,
Speaker 1: let's bring him in a vito or thank you very
Speaker 1: much for joining us. So are you happy to not
Speaker 1: being a policy maker in this time or do you
Speaker 1: do you miss being at the ECB during such an
Speaker 1: extraordinary moment. Well, it's always difficult to get out of,
Speaker 1: you know, executive responsibilities, and I need them. Of course,
Speaker 1: I could not say that I am happy to be out.
Speaker 1: For unfortunate circumstances of the COVID, the shock. We are
Speaker 1: again in a very important period of policy making. But
Speaker 1: fortunately Europe has been doing well I think in these
Speaker 1: episodes better than in the previous episode of two thousands
Speaker 1: tend to two thousand twelve. Just to start out with
Speaker 1: walker thing, the significance of the deal that was agreed,
Speaker 1: the seven hundred billion euros. You tweeted about it. Clearly
Speaker 1: you think it's important. What's the significance, Well, it establishes
Speaker 1: for precedents that are very meaningful. In the first place, um,
Speaker 1: it involves a decision to issue common European depth that
Speaker 1: can aviation will issue seven fifty billion of debt to
Speaker 1: fund these program and that's the first The second point
Speaker 1: is that this is going to be distributed in the
Speaker 1: form of budget transfers and not loans to the countries. Third,
Speaker 1: it's a big program to implement what it is a
Speaker 1: European fiscal policy stimulus to address a recessionary phase in
Speaker 1: the European economy, and that's also the first time that
Speaker 1: this happens at this level. And fourth, the distribution of
Speaker 1: the public transfers, which correspond to a little more than
Speaker 1: half of the seven other than fifty billion, is in
Speaker 1: a way that it is not proportional to the size
Speaker 1: of each country, but indeed benefits more the countries that
Speaker 1: have lower level of living and higher unemployment. So there
Speaker 1: is a convergence play. There is a solidarity aspect of
Speaker 1: this that it's also quite new in terms of transfers.
Speaker 1: To give you two examples on a proportional basis, Italy
Speaker 1: would be entitled to fifty billion, but they are getting
Speaker 1: eighty billion, whereas Germany would be entitled to ninety six
Speaker 1: billion in proportional terms, but are is getting only twenty seven.
Speaker 1: So these four points put together constitute indeed very important
Speaker 1: precedents and perhaps, and we all hope so that it
Speaker 1: will be a sign of things to happen if again
Speaker 1: there will be a stressful situation in the European economy,
Speaker 1: and that's a very important element for everyone. The notion
Speaker 1: that when there is a very stressful socio economic situation,
Speaker 1: Europe steps up and takes decisions to fight the the
Speaker 1: recession and does not leave behind any of the member countries.
Speaker 1: It's a big message for the future, and I think
Speaker 1: markets are really beginning to interiorize what these means, and
Speaker 1: we see that already, but it will take time, of course,
Speaker 1: perhaps for the markets, particularly Anglo Saxon markets, to overcome
Speaker 1: the lingering doubts about the European project. So you mentioned
Speaker 1: some really important things for the first time, sort of
Speaker 1: joint that issuance is happening. Also the fact that Germany
Speaker 1: is going to bear more of the burden or the
Speaker 1: idea that their economy is more robust. There will be
Speaker 1: these transfers. But people are calling this for years, like
Speaker 1: ten years now. People say Germany needs to spend more
Speaker 1: euro bonds, Germany needs to spend more. It never happens.
Speaker 1: Talk to us from your perspective, having been an ECB
Speaker 1: policy maker, about the pace that Europe operates, why does
Speaker 1: it sort of from the outside, it's like, oh, this
Speaker 1: took so long, ten years. Everyone knew this needed to happen.
Speaker 1: What is it about Europe that these things tend to
Speaker 1: unfold seemingly quite slowly over a long period. I don't
Speaker 1: even know. The initial design of our monetary union was
Speaker 1: under the influence of what was the macro economic thinking
Speaker 1: of the time, and particularly Central European economic thinking, and
Speaker 1: that maintained that it would be enough to have monetary
Speaker 1: policy as a macro stabilization tool, and that second, it
Speaker 1: would be enough for monetary policy to cater for price
Speaker 1: stability in order for the economy to work smoothly and progress.
Speaker 1: A great believe in the private sector and the market economy,
Speaker 1: and so no one was aware that facing big economic
Speaker 1: shocks as the one in two thousand and eight and nine,
Speaker 1: more would be needed. Initially, of course, because there was
Speaker 1: a big pressure on the banks UH and the banks
Speaker 1: had to be helped by the public sector. There was
Speaker 1: indeed some increase in deficits for that purpose, but very
Speaker 1: quickly since the twenty meeting in Toronto, there was physical
Speaker 1: retrenchment and as a result we had in Europe in
Speaker 1: two thousands, eleven and twelve we had a double deep
Speaker 1: second recession that no other advanced economy or region had
Speaker 1: and that was the result of this thinking and also
Speaker 1: the fear of Central Europeans that if more lacks fiscal
Speaker 1: policy in member countries would be allowed, that could result
Speaker 1: in the future to more need of assistance, and they
Speaker 1: didn't want it. So everyone was a little blocked by
Speaker 1: the initial rules and it took time then even for
Speaker 1: us at the ECB to be able to start quee,
Speaker 1: which we did only in January two thousand fifteen, as
Speaker 1: you know, much later than other major central banks. But
Speaker 1: lessons were learned from that episode. I believe, especially that
Speaker 1: the double deep the second recession was the result of
Speaker 1: too much physical consolidation in all member countries at the
Speaker 1: same time. So this time the reaction was different, which
Speaker 1: was of course also helped not only by lessons learned,
Speaker 1: but also by the fact that this was a symmetric shock.
Speaker 1: It was an act of nature which was eating all
Speaker 1: countries in the same way, and no country could be
Speaker 1: blamed for this shock, so that helped also the response
Speaker 1: to be quite different. And the third point, which I
Speaker 1: think it's also very important, we are in a very
Speaker 1: different geopolitical situation, and so in Europe, starting with German
Speaker 1: but but not only Germany. We are now more aware
Speaker 1: of the need of Europe acting to get there, to
Speaker 1: protect and expand its sovereignty, to be able indeed to
Speaker 1: stay on its own feet, as justl America said some
Speaker 1: time ago. And this awareness increases the sense of collective
Speaker 1: responsibility for the whole and that also it's a big
Speaker 1: driver behind what is happening. This new awareness that Europe
Speaker 1: has indeed to deepen its integration in order to survive
Speaker 1: better and prosper in a new international situation where the
Speaker 1: pressure is coming from Russia, from China and unfortunately now
Speaker 1: also from the US, have to be considered as real
Speaker 1: and serious. M hm. Since we're talking about that shift
Speaker 1: in mindset, if we if we zoom in on Germany
Speaker 1: in particular, I'm just curious, why do you think or
Speaker 1: what is it about either the German economy, the structure
Speaker 1: of the economy, or the German mindset that made them
Speaker 1: so resistant to fiscal spending or you know, establishing some
Speaker 1: sort of your zone wide federal type deficit for so long. Well,
Speaker 1: it was indeed their owned domestic approach for four years,
Speaker 1: which it's called or the liberalism in the sense indeed
Speaker 1: that the central bank and monetary policy taking care of
Speaker 1: price stability would be enough because the rest of the
Speaker 1: economy would work well on its own, and it has
Speaker 1: worked well for for them for quite some time. But
Speaker 1: they reacted to the shock, to the crisis, to the
Speaker 1: banking crisis very fearful of what could happen. And we
Speaker 1: saw that at the time because think for instance, since
Speaker 1: nineteen sixteen nine until two thousand nine, Germany add in
Speaker 1: its very constitutional law the principle of the Golden rule
Speaker 1: for physical policy, meaning basically that investment expenditure would not
Speaker 1: count for the physical rule. They change it into thousand nine,
Speaker 1: introducing an overall that break as it is called, on
Speaker 1: the overall structural deficit and no uh specific treatment of
Speaker 1: investment whatsoever. So they tightened the physical rule precisely at
Speaker 1: the peak of the crisis of oh eight or nine
Speaker 1: for them, and then of course this was exported three
Speaker 1: years later to the European Physical Rule under their influence,
Speaker 1: of course in a softer way than the rule they have.
Speaker 1: But it shows that they react very fearful to the
Speaker 1: shock at the time. Lessons were learned, I think because
Speaker 1: they themselves last year or rather this year, had to
Speaker 1: break in a way that rule in order to expand
Speaker 1: their own physical policy in response to the COVID shock.
Speaker 1: This text time, but lessons, lessons have been learned, and
Speaker 1: we see everywhere for many reasons, a return of physical policy,
Speaker 1: not only because of short term reaction to conjunctual shocks,
Speaker 1: but also that in the in the context of the
Speaker 1: second stagnation phase, that advanced economies are going through fiscal
Speaker 1: policy as a unsubstitutal role to play. And finally there
Speaker 1: is a recognition of that even in Germany. So do
Speaker 1: you feel this is a never going back moment, as
Speaker 1: in now we have established or now Europe has established
Speaker 1: this fiscal policy mechanism, some precedent for burden sharing. That
Speaker 1: I feel confident, at least for the time being and
Speaker 1: for years to come, this is going to be a
Speaker 1: part of the talk kit. Well, no one can predict
Speaker 1: the future. Of course, this will be operational for a
Speaker 1: number of years because it will take time to implement,
Speaker 1: and then the economy will improve and so on. But
Speaker 1: indeed these shows that there is a new awareness about
Speaker 1: the importance of keeping Europe really covisive, which is even
Speaker 1: more important in terms of having a monetary union. Now,
Speaker 1: the big cements that we have in the European project
Speaker 1: is indeed the monetary Union and the europe because it's objectively,
Speaker 1: i would say, a practically unbreakable experience. And then it
Speaker 1: means that if there are stresses, if there are shocks,
Speaker 1: they have to be coped with. This president shows that
Speaker 1: there is this collective sense of responsibility that I am
Speaker 1: sure will happen again if there is a major crisis.
Speaker 1: This does not mean that, you know, we are going
Speaker 1: to have a physical union around the corner. It's not
Speaker 1: the case. It does not mean that other institutional reforms
Speaker 1: are going to happen in the visible horizon. But indeed
Speaker 1: is a game changer and the result of the new
Speaker 1: situation and of the lessons learned from the previous crisis,
Speaker 1: and that will not, of course go go away. So
Speaker 1: we have this uh new or growing recognition of the
Speaker 1: importance of fiscal stimulus, not just in Europe, of course,
Speaker 1: but in a lot of other places um specifically the US.
Speaker 1: I feel like we talk a lot about the need
Speaker 1: for fiscal stimulus, but we don't talk as much about
Speaker 1: what that fiscal stimulus should actually look like. So when
Speaker 1: it comes to the European Deal. What is the best
Speaker 1: way to spend that seven fifty billion euros and what
Speaker 1: kind of spending I guess would promote long term economic
Speaker 1: recovery the best it it will be spent mostly on
Speaker 1: toblic investment by the Member states. And there is already
Speaker 1: a rule principle in the decision of the European Council
Speaker 1: that says that thirty cent has to be used for
Speaker 1: the purpose of grining of our economies to fight climate change.
Speaker 1: So it's already a chunk of the overall amount that
Speaker 1: has to be dedicated to investments that will help this
Speaker 1: fight and these objective that Europe has defined to reach
Speaker 1: a situation of being carbon neutral um and so there
Speaker 1: are targets, there are milestones, there is a timetable. All
Speaker 1: that is going to be very present in the national
Speaker 1: plans that now the member states will have to develop
Speaker 1: to use the money. And then there are of course
Speaker 1: other types of infrastructure needs in all countries that will
Speaker 1: benefit from from this plan, and in itself it's an
Speaker 1: element of stimulating aggregate demands. So it will be really
Speaker 1: going mostly to investment. I hope also that it will
Speaker 1: help some countries with the lower level of living to
Speaker 1: have the resources to support some segments of the population
Speaker 1: that are not so well protected by the programs that
Speaker 1: already have been put in place. I'm thinking about gig workers, uh,
Speaker 1: precarious workers, say in performing arts and other types of
Speaker 1: things that do not have a regular employment and were
Speaker 1: not the object of the peneply of measures that were
Speaker 1: put in place to help everyone in these initial stages
Speaker 1: of the crisis. So and that of course also is
Speaker 1: important for stimulating aggregate demands. So it's basically the eighth anniversary.
Speaker 1: I guess we just passed it of when Mario Droggi,
Speaker 1: who is the president of the e c B, when
Speaker 1: you were the vice president, he had his famous whatever
Speaker 1: it takes speech establishing that the ECB would, theoretically, if needed,
Speaker 1: backstop government debt. And we saw spreads on peripheral debt
Speaker 1: close very sharply, and that was sort of the beginning
Speaker 1: of the end of the Euro Area crisis. Are we
Speaker 1: ever going to get back, in your view, to the
Speaker 1: sort of boring old central banking of how we used
Speaker 1: to think about it. It's like occasionally high grades, occasionally
Speaker 1: cut rates. No one ever talks about balance sheets or
Speaker 1: anything like that or is that gone for good? And
Speaker 1: if we do have this world where fiscal plays a
Speaker 1: much more active and aggressive role, what is the future
Speaker 1: of central banking even outside of a crisis. Well, I
Speaker 1: would say that it is normal that in certain situations
Speaker 1: of recession or in the case of a monetary union,
Speaker 1: of fragmentation and beyond what would be justified by the
Speaker 1: situation of fundamental values, that in those cases there is
Speaker 1: a implicit collaboration between monetary policy and physical policy because
Speaker 1: the stance of both policies converge in those situations like
Speaker 1: the one we had before and particularly like the one
Speaker 1: we have now, because of course, this time, the phiscal
Speaker 1: policy was more important to respond to this type of
Speaker 1: shock in order to maintain income of the people suddenly
Speaker 1: unemployed or lockdown, and only physical policy could do that,
Speaker 1: and also to help firms to survive these this period,
Speaker 1: and monetary policy took care both of normalizing financial markets,
Speaker 1: avoiding a financial crisis and helping credit supply by the
Speaker 1: banking sect. So the division of labor was easy to
Speaker 1: define and the stands was convergent. But let's not extrapolate
Speaker 1: that for every situation, because the test of this sort
Speaker 1: of new relationship that people talk about. The test will
Speaker 1: come one day when inflation may increase, and then of
Speaker 1: course the central bank has to respond to that, and
Speaker 1: that's the crunch moment when we will see how this
Speaker 1: this go. But we are ears from that challenge to
Speaker 1: to happen, and the degrees of collaboration have varied among
Speaker 1: the countries. I would say that it's important to underline
Speaker 1: the following. Neither in the Euro Area or in the
Speaker 1: US there was any degree of full fledged, properly named
Speaker 1: monetary financing. What the central banks are doing, it's not
Speaker 1: monetary financing. The Bank of England did a little bit
Speaker 1: of monetary financing by giving a bridge credit to the
Speaker 1: to the Treasury, but neither the e c B or
Speaker 1: the FED really did monetary financing. So when I also
Speaker 1: to to take that into consideration, although loosely, of course,
Speaker 1: the media are calling what the central banks are doing
Speaker 1: as monetary financing, but it is not so okay. I
Speaker 1: wanted to pick up on that inflation point because, as
Speaker 1: we mentioned in the intro, the e c B is
Speaker 1: currently thinking very hard about how it approaches its own
Speaker 1: inflation target, which um I think the exact language is
Speaker 1: below but close to two percent. Do you think, I mean,
Speaker 1: there seems to be lots of confusion about why central
Speaker 1: banks around the world haven't been able to hit those
Speaker 1: inflation targets in recent years. And do you think that
Speaker 1: central bankers understand how inflation works? Yeah, good question, of course,
Speaker 1: and it would be a very long answer to address
Speaker 1: aspect for it. But yes, Now the question is starts
Speaker 1: with the following thing. You know, Milton Friedman instilled in
Speaker 1: the minds of many economists and many central banks at
Speaker 1: the time when he was writing that inflation is always
Speaker 1: an everywhere a monetary phenomenon. That's what he said, and
Speaker 1: by that he meant that inflation was determined by the
Speaker 1: development of monetary aggregates. And two in the case of US,
Speaker 1: I am three in the case of you. And so
Speaker 1: the idea that the central banks could fine tune the
Speaker 1: inflation rate, not immediately, not you know, in a very
Speaker 1: short term horizons, but you know, within two, three, four years,
Speaker 1: could indeed put inflation at whatever level they would wish. Well,
Speaker 1: things proved to be much more complex than that, because
Speaker 1: inflation depends on the overall relationship between aggregate demand and supply.
Speaker 1: Uh uh, and that is influenced by many other factors,
Speaker 1: including of course physical policy, but also including external shocks
Speaker 1: that microeconomics, particularly in the US, which has dominated the field,
Speaker 1: of course for all the reasons we know, tended to
Speaker 1: be thinking mostly in terms of closed economies because the
Speaker 1: US being so big, you know, the external sector was
Speaker 1: not so important or seen as so important. But the
Speaker 1: point is that inflation depends for long periods of time
Speaker 1: on many other things. Friedman himself was interviewed in the
Speaker 1: two thousand about Japan, where there was the beginning of
Speaker 1: the deflation, as you know, and he answered, well, it's
Speaker 1: very simple to solve it. You just have to have
Speaker 1: the central bank buying sovereign bonds. That will expand money
Speaker 1: and money aggregates and the problem will be solved. Well,
Speaker 1: it was not followed at the time, but some years
Speaker 1: later it was followed. Now the Bank of Japan has
Speaker 1: bought a little more than one of GDP of Japanese
Speaker 1: public debt and inflation has not responded. So it was
Speaker 1: wrong clearly, and we do have now, you know, many
Speaker 1: reduced form regressions to forecast inflation that take into account
Speaker 1: the import prices, which includes of course the change rate
Speaker 1: that include also possibly other cost shocks that may occur,
Speaker 1: and that include expectations and inertia. That indeed, the economic agents,
Speaker 1: both households and firms, when they decide prices, tend to
Speaker 1: have certain inertia in taking those decisions. By thinking about
Speaker 1: what has been the progression of inflation in previous years,
Speaker 1: and if you put all these elements in a way
Speaker 1: to forecast inflation, you can have relatively reliable ways of
Speaker 1: forecasting inflation where the slack of the economy is also there.
Speaker 1: Of the domestic it's also there. It's still meaningful, but
Speaker 1: of course during certain periods is overwhelmed by the effect
Speaker 1: of the other drivers of inflation. It has not disappeared.
Speaker 1: What has disappeared, and it's also in all the media,
Speaker 1: is that the initial Philip's curve, what's just a relation
Speaker 1: between in this case wages and unemployment, that simple bivariate
Speaker 1: relations as indeed collapsed UH and a more complex way
Speaker 1: of UH forecasting inflation, which the economy is also called
Speaker 1: Philip curves. Adding to the confusion of all these discussion.
Speaker 1: The slack is still there, but it's also a factor.
Speaker 1: And as you see, monetary aggregates are not there any anymore.
Speaker 1: So it has been difficult then, just by monetary policy
Speaker 1: to change inflation to the level in a period where
Speaker 1: globalization and the entry of more than one billion Asian
Speaker 1: workers with low wages in the world economy put a
Speaker 1: lot of pressure on declining prices of many industrial products,
Speaker 1: and that was a major shock that affected the overall
Speaker 1: economy of inflation in all our countries so much that
Speaker 1: the pure domestic slack was not so much in command
Speaker 1: of inflation as it was in the past. And that,
Speaker 1: as of course, is still true, and that's why central
Speaker 1: banks indeed have not the easiness the discretion to put
Speaker 1: inflation at whatever level they want within the period of
Speaker 1: say five years. But that is not imply that monetary
Speaker 1: policy had a big contribution to avoid even a worse
Speaker 1: scenario of deflation, and that was avoided in all advanced
Speaker 1: economies with the exception of Japan, and that indeed the
Speaker 1: role of the central banks has been very important, sometimes
Speaker 1: however not helped. That's particularly in Europe by what fiscal
Speaker 1: policy was doing. M M. I wanna I want to
Speaker 1: expand more talk more about inflation and the role of
Speaker 1: central banks, and thinking back to I mentioned Mario drag
Speaker 1: whatever it takes, and part of the innovation in his
Speaker 1: in the logic of that speech was that sovereign government
Speaker 1: bomb spreads should be considered part of the e CBS
Speaker 1: mandate to narrow because the widening of them were impeded
Speaker 1: monetary transmission. So even if there was some technical rule
Speaker 1: that said the ECB camp by government debt, you could
Speaker 1: get around it by saying it fits into the monetary
Speaker 1: policy transmission. Now we're seeing a potential sort of more
Speaker 1: things falling under the mandate for the goals of the
Speaker 1: central bank, including perhaps thinking about climate and inequality and
Speaker 1: other sort of economic concerns that in the past may
Speaker 1: not have been as strictly narrow as just keeping inflation targeting.
Speaker 1: Do you see any risk with this? Do you worry
Speaker 1: about the ECB specifically or other central banks taking on
Speaker 1: too much potentially? Well, yes, those are say subordinated targets
Speaker 1: to the role that the central bank must perform in
Speaker 1: our economies. They are always there. They are also in
Speaker 1: the treaty in the our case that says that without
Speaker 1: prejudice to price stability, then monetary policy should help all
Speaker 1: those others. Is that you mentioned in general and that
Speaker 1: are listed of course in the treaty itself, but there
Speaker 1: are subordinated goals and cannot be the probate dominant goals
Speaker 1: because it would make really no sense because in a way,
Speaker 1: what central banks can do, for instance, in what regards
Speaker 1: climate change is not very much. Of course, central banks
Speaker 1: have a portfolio of securities, but nowadays when they buy
Speaker 1: and that can become and should become greener and certainly
Speaker 1: avoiding the more brown sort of securities. But if you
Speaker 1: look to the numbers after that effort to make the
Speaker 1: portfolios greener, you see immediately that the overall effect on
Speaker 1: what is at stake with climate change is indeed and
Speaker 1: perhaps unfortunately, but it's indeed small. Regarding inequality, t well,
Speaker 1: it's a mixed thing because if one end, it is
Speaker 1: true that the purchases increase the price of risky assets,
Speaker 1: which are mostly held by m I income segments of
Speaker 1: the population, they also have increased the price of housing,
Speaker 1: particularly in Europe, and housing is the element of overall
Speaker 1: wealth in our economy, is that is bigger then financial
Speaker 1: wealth and particularly stocks, and that stock of housing is
Speaker 1: held mostly by the middle class, and the price of
Speaker 1: those assets has increased as I made a speech about that,
Speaker 1: and there are there there are two papers published by
Speaker 1: the ECB later and also pointed to those factors. And
Speaker 1: also there is of course the effect of expansionary monetary
Speaker 1: policy on employment, on reducing unemployment, and that is a
Speaker 1: very powerful way of also of taking care of inequality.
Speaker 1: But monetary policy by definition cannot do everything. There are
Speaker 1: trade offs, and so monetary policy has to have priorities,
Speaker 1: and it test priorities defined by the law, and so
Speaker 1: what it can take in from those other secondary objectives
Speaker 1: important as they are for the society at large, there
Speaker 1: are other public authorities that are more responsible for that.
Speaker 1: Take for instance, climate change. It's certainly for the government
Speaker 1: to step up their initiatives to take care of that
Speaker 1: big objective. So I see these as indeed a consideration
Speaker 1: which is there and should be there, but cannot be predominant.
Speaker 1: The same for instance regarding the so called zombie firms.
Speaker 1: Again it's a potential problem, but it's not for monetary
Speaker 1: policy to have as a priority to think about the
Speaker 1: fate of weak companies. Monetary policy targets price stability, economic growth,
Speaker 1: that's like in the economy, and not other things. And
Speaker 1: there are trade offs. Zombie firms are more the purview
Speaker 1: of the way banks manage their credit risk by not
Speaker 1: ever greening and not continuing to land to problematic firms,
Speaker 1: than to monetary policy, particularly at this moment. Also, the
Speaker 1: amounts of liquidity and capital in the banks imply that
Speaker 1: the keeping some weaker firms during this period is not
Speaker 1: crowding out the possibility of banks giving credit to all
Speaker 1: the good firms that have good projects and intentions to
Speaker 1: to invest and to expand. So, just to give you
Speaker 1: three examples of some subordinated the concerns that the central
Speaker 1: banks should not ignore but cannot become a priority. UM.
Speaker 1: I have a related question on the sort of modeling
Speaker 1: of monetary policy with politics. One of the options when
Speaker 1: it comes to reviewing the ECB's inflation target is to
Speaker 1: create a flexible target, which would allow the central bank
Speaker 1: to either undershoot or overshoot inflation as needed. And I'm
Speaker 1: curious to get your views on if the e c
Speaker 1: B did adopt that kind of flexible target, and the
Speaker 1: target therefore becomes discretionary, then doesn't that sort of make
Speaker 1: it a political choice to either undershoot or overshoot inflation
Speaker 1: at a particular time, and does that endanger the independence
Speaker 1: of the central bank. I think that the target for
Speaker 1: inflation adopted by central banks should be indeed symmetric, because,
Speaker 1: as we all know, when there is a supply shock
Speaker 1: to the economy that in some cases may lead to
Speaker 1: an increase in inflation, like a big oil price increase, say,
Speaker 1: monetary policy should not respond to that immediately because it
Speaker 1: cannot change that situation and it would only aggravate the
Speaker 1: recessionary effect on the domestic economy of that oil price
Speaker 1: increase that is well known, which means that in those
Speaker 1: periods of supply sharks, inflation could be accepted to be
Speaker 1: above target, and should be accepted to be above target.
Speaker 1: So it should be symmetric, and in my view, the
Speaker 1: best way to have it is what say the fat
Speaker 1: as now, which is to say, well, we have this
Speaker 1: objective one number. It's two percent in the definition of
Speaker 1: the fat, which is not headline inflation as you know,
Speaker 1: but okay, it's two percent, and then it's symmetrically interpreted.
Speaker 1: It can be slightly below, it can be slightly above
Speaker 1: according to the types of shocks that the economy suffers,
Speaker 1: and of course it cannot be kept exactly at two
Speaker 1: percent all the time. So some economists and central anchors
Speaker 1: argued that more explicit flat flexibility will be helpful, for
Speaker 1: instance by adopting a well defined branch around two and
Speaker 1: and put the numbers of the range. I am against
Speaker 1: that because that creates uncertainty and also opens the door
Speaker 1: to the possibility in for instance, situations that are clearly
Speaker 1: recessionary and inflation is weak, if it is within the banding,
Speaker 1: within the range, then it would consider to be all
Speaker 1: right and the central bank would not move policy, which
Speaker 1: is wrong. So I am against ranges. A way of
Speaker 1: also then justifying more flexibility is to go for the
Speaker 1: so called averaging inflation targeting that there is a number,
Speaker 1: there is a target, but it has to be attained
Speaker 1: over a number of years to allow precisely years where
Speaker 1: inflation is below and then years where it is above. Well,
Speaker 1: it's enticing, but again I also do not agree too
Speaker 1: much to that because it's too precise and will tie
Speaker 1: the ends of central banks perhaps too much when they
Speaker 1: say that the six years of the averaging will will
Speaker 1: come and what to do and then possibly fail and
Speaker 1: changing into averaging inflation rates inflation target would not by
Speaker 1: itself move expectations of inflation. It's just not because central
Speaker 1: banks would go for this that now everyone would start
Speaker 1: to take decisions in the economy as if inflation is
Speaker 1: indeed going to increase according to the new averaging target.
Speaker 1: It's not going to happen that way. So I am against,
Speaker 1: but I see that it may happen in the US
Speaker 1: at least, you know, it was very much on the
Speaker 1: cards before these the crisis and may come again if
Speaker 1: it comes, and if the US would adopt that explicitly,
Speaker 1: that would have a big impact on other central banks,
Speaker 1: and then perhaps the e c B would have also
Speaker 1: to adopt that. But it's not something that I favor
Speaker 1: to start with, but I of course could accept for
Speaker 1: the reasons I mentioned it's better to have one number
Speaker 1: and the notion that it is symmetric target to manage
Speaker 1: monetary policy. I thought I said something really fascinating there
Speaker 1: about how if the US were to adopt this overshoot
Speaker 1: or catch up strategy, that might have an influence on
Speaker 1: other central banks. And I just looked like, as someone
Speaker 1: who's attended all these ECB meetings starting from when you
Speaker 1: were the Governor of the Bank of portugals of eighteen
Speaker 1: years worth of meetings. How does change happen over time?
Speaker 1: Do people I think new ideas, do discussions push people
Speaker 1: into new areas? Or is it about simply the composition
Speaker 1: of the ECB changing over time as people swap in
Speaker 1: swap out roles. Lets us a little bit more about
Speaker 1: how sort of evolution of thinking works at the ec
Speaker 1: Opinions move starting in academia, for instance, and events also
Speaker 1: determine change of mind in people certainly, and for instance
Speaker 1: talking about averaging inflation targeting, there is one thing that
Speaker 1: is now in the mind of every central bank in
Speaker 1: advanced economies, which is that after this big shock of
Speaker 1: the virus, there will be scars in our economies and
Speaker 1: unemployment that will take time to be reduced two previous levels,
Speaker 1: which justifies that our economy is from a macro economic
Speaker 1: policy perspective, should be run as high pressure economies, allowing
Speaker 1: a little bit of over eating in order to correct
Speaker 1: quicker the scars in unemployment and in the productive capacity
Speaker 1: that will be destroyed during this period of the virus crisis.
Speaker 1: And these idea of allowing that a period after the
Speaker 1: crisis of you know, eye pressure of potentially a little
Speaker 1: bit of over eating is well justified by adopting averaging
Speaker 1: inflation targeting, which provides then a more explicit intellectual rationale
Speaker 1: for that way of managing and accepting these development of
Speaker 1: of inflation. And so it may happen, and that, of
Speaker 1: course then may be shared more widely than just say
Speaker 1: in the fat, if indeed the fat moves that way.
Speaker 1: But it is in my view true and it will
Speaker 1: happen that major central banks will allow some degree of
Speaker 1: you know, accommodation of eye pressure economy and potentially a
Speaker 1: little bit of inflation during the immediate period following these crisis.
Speaker 1: I have a slightly weird question, but in the current environment,
Speaker 1: it does feel like there's a lot of outrage directed
Speaker 1: at central banks for a variety of reasons. But I
Speaker 1: think one of those reasons is people feel that the
Speaker 1: central bank is sort of forcing rates ever lower, eroding
Speaker 1: people savings, possibly inflating bubbles in the stock market, things
Speaker 1: like that. Do you what's your response to people who
Speaker 1: criticize the central bank for doing that kind of thing.
Speaker 1: And also, this is the weird question, but do central
Speaker 1: banks actually have the power to set interest rates wherever
Speaker 1: they like? Well, central banks, of course influence very much
Speaker 1: shutdown rates, but now via purchases also a degree of
Speaker 1: effect over medium and long term rates, particularly because the
Speaker 1: markets are afraid of central banks and move in the
Speaker 1: direction of that those purchases more so than what the
Speaker 1: amounts that the central banks are indeed buying would objectively
Speaker 1: objectively justify. But then there is then an influence also
Speaker 1: on medium imment rates. But it's not true that the
Speaker 1: central banks totally determined interest rates throughout the spectrum of maturities,
Speaker 1: because many other factors enter the behavior of investors uh
Speaker 1: and they know that the in the end, the amounts
Speaker 1: that the central banks could mobilize everymite in relation to
Speaker 1: the size of those markets. And let's recall that what
Speaker 1: counts for this purpose in asset markets is the total
Speaker 1: stock of the assets that potentially can be moved. And
Speaker 1: as James Stubborn always said, it's the stock that counts
Speaker 1: for the development of pricing, and not just the flows
Speaker 1: of what the central banks are buying, and and and
Speaker 1: and so on. So because at any moment investors can
Speaker 1: take views about the future that will move big chunk
Speaker 1: of the stock that is there, So there is no
Speaker 1: full control of medium and long term rates that are
Speaker 1: then driven by other factors, but there is certainly an
Speaker 1: influence of course that's now become an instrument because we
Speaker 1: reached the short term policy rates that are very close
Speaker 1: to zero, and then there is this limit and the
Speaker 1: need then to intervene more along the maturity spectrum um
Speaker 1: and that's what Quee in parties doing, is doing other things,
Speaker 1: but it's also doing that. We've been talking about these
Speaker 1: sort of big picture questions about Europe, the future of
Speaker 1: central banking, etcetera. Just to bring it back to the
Speaker 1: current moment, when you look at Europe, do you feel
Speaker 1: confident that the existing fiscal package and the existing stance
Speaker 1: of monetary policy are appropriate to get the economy roughly
Speaker 1: back to where it was pre crisis in a decent
Speaker 1: period of time. Where do you think ultimately they all
Speaker 1: have to be yet furthermore done on the fiscal or
Speaker 1: not in tern front. Well, we are all dependent on
Speaker 1: the virus and on the possibility of a second wave
Speaker 1: that would then require big stimulus, both monetary and fiscal.
Speaker 1: But forgetting that for the moment, I would say that
Speaker 1: perhaps next year there will be needed a little bit
Speaker 1: more of monetary policy fiscal is already very much committed,
Speaker 1: and deficits will continue to be high next year, not
Speaker 1: as high as this year, but still high, as the
Speaker 1: i m F has forecasted amazing twenty three point eight
Speaker 1: percent deficit for the US this year and minus twelve
Speaker 1: point four for next year, and that's before the new
Speaker 1: package being discussed right now. And in Europe deficit this
Speaker 1: year of eleven percent and five point three next year.
Speaker 1: It can be a little higher than ext year because
Speaker 1: one thing is that governments gave a lot of guarantees
Speaker 1: to bank loans and there will be defaults and pls
Speaker 1: UH in many loans, and some of those guarantees will
Speaker 1: be activated next year, and that will increase the deficits
Speaker 1: next year. So the stimulus will continue, the deficit will continue.
Speaker 1: There is the new package, and that should be indeed
Speaker 1: enough for the recovery, which nevertheless will be in my
Speaker 1: view sluggish. I don't anticipate that we will reach the
Speaker 1: same level of GDP of two thousand nineteen before twenty three,
Speaker 1: meaning the end of twenty two perhaps, but certainly not
Speaker 1: before UH and perhaps even the end of twenty three.
Speaker 1: So it's a sluggish recovery. Because there has been a
Speaker 1: structural decrease of demand for many sectors of our economy,
Speaker 1: and the levels of demand for those sectors are not
Speaker 1: going to come back anytime soon to the same levels
Speaker 1: as before, and that will affect, of course, uh growth
Speaker 1: because creation of new productive capacity in other sectors will
Speaker 1: not be as quick as to upset that shock to
Speaker 1: the supply side of our economies, including international supply chains
Speaker 1: and all that. So, and also because consumers will be
Speaker 1: increasing their saving rates for a number of years. It
Speaker 1: happened in two thousand and eight after the shock of
Speaker 1: two thousand and eight, it will happen this time, perhaps
Speaker 1: even more after the experience they had this time. So
Speaker 1: that altogether creates the conditions for sluggish recovery. We have
Speaker 1: to be aware of these limitations, but certainly this recovery
Speaker 1: is going to happen, but it will take you know,
Speaker 1: at least a couple of years, if not a little more,
Speaker 1: to come back to the levels of two thousand nineteen.
Speaker 1: And of course we will never come back to what
Speaker 1: would be the trend of growth of our economies if
Speaker 1: it had continued without these big shock the same as
Speaker 1: it's happened with the shock of two thousand eight. Vitor,
Speaker 1: that was fantastic. Really appreciate you joining us, Really really
Speaker 1: enjoy getting to hear from someone of your perspective. Thank you.
Speaker 1: It was a pleasure too. That was really great. Thank you, Tracy.
Speaker 1: That was a real treat getting to talk to someone
Speaker 1: who has been so involved with policymaking and some of
Speaker 1: the biggest issues of the economy basically two decades. Yeah. Absolutely, Um,
Speaker 1: you know that's saying to be a fly on the
Speaker 1: wall of you know, room of the ECB meeting, and
Speaker 1: he's sort of been in well a lot of them,
Speaker 1: hasn't he. According to our colleague Lorcan, who knows the
Speaker 1: e C be better than basically anyone else I know,
Speaker 1: he never missed a meeting in eighteen years, so wow,
Speaker 1: that's quite a record. But I do think it's interesting
Speaker 1: to talk to him at this particular juncture because, of course,
Speaker 1: as we've been discussing, it does feel like the very
Speaker 1: nature of central banking and monetary policy is beginning to change.
Speaker 1: It feels like there's there's sort of a handoff from
Speaker 1: monetary policy to fiscal stimulus. But at the same time
Speaker 1: there's the question of how monetary policy is going to
Speaker 1: interact with that stimuls Yeah. I think what's interesting to
Speaker 1: about this moment is that, so obviously, the COVID crisis
Speaker 1: comes along and throws everything into disarray and policymakers scrambled
Speaker 1: to new tools. But I think what's really striking is
Speaker 1: that the sort of intellectual um groundwork for a change
Speaker 1: was in the works pre COVID. You know, this idea
Speaker 1: of okay, more us a consistent um active role for
Speaker 1: fiscal policy. People have been talking about this for a
Speaker 1: while and that's been a theme of some of our conversations.
Speaker 1: So it's kind of like the intellectual um, you know,
Speaker 1: terrain was shifting, and then we got the moment with
Speaker 1: the COVID crisis where suddenly it's like, okay, we have
Speaker 1: this has to go beyond papers tweets, to talk and
Speaker 1: to actually start thinking about how we're gonna put this
Speaker 1: into practice. And so you know, that's sort of it's
Speaker 1: a moment for multiple reasons. Yeah, that's true. Although one
Speaker 1: thing that strikes me whenever we have these conversations with
Speaker 1: economists is just how much of economics is still uncertain. So,
Speaker 1: for instance, why is inflation not necessarily behaving the way
Speaker 1: a lot of people expect it to. Or why is
Speaker 1: the Phillips curve flat? Uh? Where should the natural rate
Speaker 1: of interest be? Is there such a thing as the
Speaker 1: natural rate of interest? I feel like these are all
Speaker 1: really big questions that listening to VI Tour, you can
Speaker 1: tell that they govern a lot of his thinking and
Speaker 1: presumably a lot of other central bankers thinking, But there
Speaker 1: are so many uncertainties swirling around them. Yeah. I was
Speaker 1: really glad that you asked that question about a sort
Speaker 1: of theory of inflation, so to speak, because it's such
Speaker 1: a profound question because if you have all these central
Speaker 1: banks and they're like targeting you know, the East the
Speaker 1: US as a dual mandate, but technically the ECB just
Speaker 1: has one mandate, uh, the inflation mandate. But if you
Speaker 1: set out this mandate, okay, you have to hit this,
Speaker 1: and yet no one can really articulate what drives inflation.
Speaker 1: That just to be against to like such a core
Speaker 1: question about like what are what are central banks even doing?
Speaker 1: If the thing they have to target they don't know
Speaker 1: how to get there. Oh yeah, absolutely, I find inflation
Speaker 1: as a subject just really fascinating. Also how they measure it.
Speaker 1: I think a lot of people in Europe right now especially,
Speaker 1: would argue that living costs are going up even though
Speaker 1: inflation is still persistently under target. But it okay, getting
Speaker 1: slightly off track. That is a topic for another All
Speaker 1: Thoughts episode. It could be a serious Actually, oh yeah,
Speaker 1: let's do an inflation series. Yes, yeah, they'd be a
Speaker 1: good one. Um, okay, just you know, like just what
Speaker 1: Vitour said about, Oh, Milton Friedman, who is sort of
Speaker 1: the godfather of how modern economists thought about inflation for years,
Speaker 1: and he's like, oh, if Japan doesn't have inflation file
Speaker 1: the government debt, it just works. It really sort of
Speaker 1: shows how much work there is to be to be done.
Speaker 1: Still on this topic, Yeah, that was a good annectote. Okay,
Speaker 1: shall we leave it there? All right, let's leave it there.
Speaker 1: This has been another episode of the All Thoughts Podcast.
Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at
Speaker 1: Tracy Alloway. You can follow me on Twitter at the Stalwart,
Speaker 1: and you should follow our guest Vitoor Constantio. He's on
Speaker 1: Twitter at v m R Constantia and follower producer Laura
Speaker 1: Carlson at Laura and Carlson, all of the Bloomberg Head
Speaker 1: of podcast Francesco Levi at Francesca Today and check out
Speaker 1: all of our podcasts under the handle at podcast. Thanks
Speaker 1: for listening.