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ECB: looking back, looking ahead

11/12/2019

The assessment of the era of Mario Draghi can be done from different perspectives. In terms of approach, the interpretation of the mandate of the ECB has been gradually extended. The toolkit has also been broadened. Monetary policy used to be interest rate policy. Now it is also about negative interest rates, targeted refinancing operations, forward guidance and QE. A third perspective is the huge efforts which have been undertaken. In terms of results the score is largely positive (coming to grips with the sovereign debt crisis, creation of new jobs) but inflation remains too low. The new president is confronted with very limited monetary policy leeway so we can expect that the role of fiscal policy will be emphasized even more strongly than before

TRANSCRIPT // ECB: looking back, looking ahead : November 2019

FOCUS

François Doux

William De Vijlder, hello.

William De Vijlder

Hello.

François Doux

You are the Chief Economist at BNP Paribas. You have known all the Presidents of the European Central Bank. Looking at Mario Draghi, how would you view his term of office?

William De Vijlder

On balance mainly positive, but not 100% positive. So the answer is nuanced, as is often the case. What is most striking when we look at Mr Draghi’s time at the head of the ECB is the creativity that he showed, and the creativity that the Governing Council showed, most notably in the interpretation of their mandate.

When I was preparing for this interview, I looked back at his first speech as President, when his interpretation was fairly strict. The focus was essentially on inflation, and what we have seen gradually emerge is the growing awareness that there are, of course, many factors that can contribute to inflation or contribute to the risk of deflation.

François Doux

Over and above the creativity of interpretation, there are also actions and the use of monetary policy instruments.

William De Vijlder

Exactly. We have gradually seen an extension of the range of instruments used. Once upon a time, monetary policy meant interest rates. But then TLTRO was added, the famous Forward Guidance was added, giving indications of monetary policy intentions over a longer or shorter period. And obviously we have also seen quantitative easing, and of course negative interest rates.

François Doux

Negative interest rates have in effect created a rather new and rather complicated situation. We often talk about the efforts made in Frankfurt and by the Governors of the European Central Bank; what is your point of view?

William De Vijlder

I think that as far as their efforts are concerned they are beyond criticism. Admittedly, some might be tempted to say that they have tried too hard to increase inflation. This is an on-going debate between economists, but in any event, the effort has been substantial and assiduous to encourage a resumption of growth and then hope that inflation follows suit.

François Doux

Let’s cut to the chase, William de Vijlder. The results: the sovereign debt crisis, inflation, job creation, where are we with all this?

William De Vijlder

This, effectively, is where the report card is a little more mixed. The control that the ECB exercised in the sovereign debt crisis was clearly a success. Everyone thinks back to that famous speech in London, which has become a sort of shorthand for all that followed, because it was so very important.

In other words, without the ECB, without Mario Draghi, the world would be a pretty different place today. The other extremely important factor has been the highly accommodating monetary policy that has contributed to very significant job creation. But I would say that perhaps the tragedy of the ECB is that inflation has yet to recover. Why do I call this a tragedy? Because everything suggested that they could pull this off: economic activity was growing, wage growth was accelerating and so we expected inflation to follow on. And then there were shocks coming a bit from all directions, which stopped the inflationary momentum in its tracks.

François Doux

Let’s also move on to the challenges facing Christine Lagarde. Monetary policy works alongside fiscal policy. So in terms of encouraging European governments to play their part, how do you see Mr Draghi’s performance and Ms Lagarde’s challenges?

William De Vijlder

Well, there is still a lot of work to be done. I think that this has been a source of frustration for Mario Draghi too. Despite arguing, at every press conference after every Governing Council meeting, despite his insistence on the need for structural reform and so on.

I looked back at his very first speech, when there were several paragraphs on this topic. So we are forced to conclude that not every country has done what they have needed to do, so the scorecard is mixed.

The other important point, which he raised explicitly at the 12 September meeting, is that fiscal policy now has a very important role to play in completing the picture for the European cycle, completing the work of monetary policy. And so, here in particular, with this need to have a central fiscal capacity, as he repeated at his last press conference, if there is one thing I hope for it is that Christine Lagarde will really stress this central structure to win governments over to the idea. Clearly it is up to governments to take the decision, so she needs to convince governments that this is what we need, the final piece that completes the impressive edifice that is economic and monetary union.

François Doux

I would just refer people listening to or watching this podcast to the fact that we have had negative interest rates. We can see the scale of the fiscal policy and structural challenges that lie ahead. To close, William De Vijlder, the challenges for Christine Lagarde, over and above this fiscal policy question, what might they be?

William De Vijlder

I think another area relates to the ECB’s communications policy in terms of objectives and in terms of instruments. Is this not a good time to review this area? This is something that we have to recognise; Mario Draghi did not want to do, or didn’t have the time, I don’t know, but it is an analysis that the Federal Reserve, for example, is now carrying out. I think it would be good if the ECB conducted the same exercise.

François Doux

But I think that the two banks talk to each other across the Atlantic.

William De Vijlder

Oh, yes.

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