eco TV

EcoTV – February 2020


TRANSCRIPT // EcoTV – February 2020 : February 2020

Hello and welcome to the February 2020 edition of EcoTV, the video magazine of BNP Paribas economists.

At the top of this edition, monetary policy is being called into question. The Fed and the ECB are both undergoing strategy reviews. What does this mean for their inflation targets? Louis Boisset will provide his insights.

In the Chart of the Month, our chief economist William De Vijlder will talk about the outlook of other economists and their individual forecasts. His peers are rather optimistic with regard to the eurozone. What conclusions does William De Vijlder draw from this?

To conclude, we will talk about the new currency, the eco, that will replace the CFA franc in eight African countries in 2020. We will ask Stéphane Alby Three Questions about the eco.

Enjoy the show!



François Doux: Day after day, the economic and monetary environment is changing. Inflation is low, but there are still wage pressures. Monetary policy is also very accommodative. How do the central banks see all this? How might they react?

Louis Boisset, hello.

Louis Boisset: Hello François.

François Doux: The central banks are in the midst of strategy reviews. What does this entail?

Louis Boisset: They are overhauling, at least in part, their monetary policy tools and targets. The central banks are trying to adapt their policies to meet new international challenges at the macroeconomic level.

François Doux: Why now? Have the stakes changed?

Louis Boisset: The last strategy review by the European Central Bank (ECB) took place fifteen years ago, in 2003. A lot has happened in the meantime, so it is necessary to conduct another review. Why? Because growth is lower today due to probably the slowing in productivity gains.

The environment is also marked by lower inflation and interest rates. In particular, the natural interest rate – the theoretical real interest rate at which inflation rate neither rises nor falls – is also lower. This significantly constrains the impact of monetary policy action. It means there is less room of manoeuvre in case of an economic downturn.

François Doux: The ECB is following the lead of other central banks.

Louis Boisset: Exactly. The Fed, for example, launched its own strategy review in mid-2019. Other central banks in the advanced countries are also conducting reviews. The Bank of Canada, for example, regularly reviews its inflation targets.

François Doux: What will the ECB’s strategy review entail?

Louis Boisset: For the moment, we have relatively few tangible factors to go by. The ECB’s new president, Christine Lagarde, is leaving time for discussions not only within the Governing Council, but also with parts of civil society, which is new. The main focus is likely to be on the ECB’s mandate of price stability. Revisiting ECB communication tools will probably be discussed as well. Other subjects will be given secondary importance, including the fight against climate change, in which the ECB would like to play a greater role.

François Doux: Concerning price stability targets, the Fed seems to be doing the same thing.

Louis Boisset: Yes, they’re fairly similar. Based on recent statements, Fed members will be spending a lot of time discussing targets. The Fed has a dual mandate that targets both price stability and employment maximisation. The ECB’s review may be slightly more ambitious. The president and the Governing Council are likely to cover a few more subjects, notably structural ones.

François Doux: Yet what can we expect from the ECB’s strategy review? Maybe it is too ambitious to have concrete results?

Louis Boisset: That is a question worth asking, especially since certain subjects risk creating discord within the ECB’s Governing Council. Signs of dissension have already be seen in late 2019. Fighting climate change, in particular. Is it up to monetary policy or fiscal policy to tackle climate change? This is a very gripping issue that might trip up the ECB president in the months ahead.

François Doux:

Lots of ambitions and calling things into question. In any case, we are bound to see some passionate debates in Frankfort and elsewhere in the months ahead. Thank you, Louis Boisset. We will be back in a moment with William De Vijlder to talk about the eurozone economy.


Chart of the Month

François Doux: The Chart of the Month looks at growth in the eurozone.

William De Vijlder, hello.

William De Vijlder: Hello François.

François Doux: Your outlook calls for annualised growth of 0.7% in the first quarter and 1.1% in the fourth quarter. This chart shows the forecasts of other economists as well as your own. It is based on a survey of 35 economic forecasters. What is your take on this? Do other forecasters also expect eurozone growth to accelerate?

William De Vijlder: Yes they do. That is what this chart shows based on a Bloomberg survey. The median is 0.9% for Q1 and 1.1% for Q4. The reason why I brought this chart is because we typically look at the median or average growth. What I find interesting here is the distribution. What is striking, when we look more closely, is the blue bars, which show the distribution for Q1. On the far left, for example, we can see that three forecasters are forecasting growth of 0.6%, and 11 are forecasting growth of 0.9%. If we compare the blue bars of Q1 with the dotted red line of Q4, what is striking is that the distribution flattens out and then shifts to the right.

This clearly shows that economists expect the economy to perform somewhat better in the second half of the year.

François Doux: Why?

William De Vijlder: Because of a combination of factors. First, uncertainty has declined, with the US-China trade agreement and then Brexit. That is the first factor. Second, the monetary environment is providing real support via extremely low interest rates. The financial markets are performing well, which implies very good financing conditions for companies. There has also been some fiscal support. Another extremely important factor is the improvement in exports, and order books are also beginning to pick up. All of this is part of a global movement. With Europe’s very open economy, it obviously stands to benefit more than the others.

This is why forecasters expect the economy to hold up better in the second half.

François Doux: So median growth of 0.7% in the first quarter and 1.1% in the fourth quarter.

One last question. Is the configuration the same for the United States?

William De Vijlder: Yes and no. Yes, because once again a majority of forecasters expect growth to be stronger in the second half, for largely the same reasons as those that apply to the eurozone.

In contrast, the tail to the left is also getting longer. This is very important. Indeed, 4 out of the 75 forecasters contributing to the consensus forecast are looking for a recession in Q4 2020. Although we do not agree at all with this scenario, it illustrates why it is useful to look at this type of chart.

François Doux: Place your bets! Thank you, William De Vijlder. In a moment, we will head for Africa with Three Questions for Stéphane Alby on the end of the CFA franc and its replacement by a new currency, the eco, in eight countries.



François Doux: Eight African countries will change currencies in 2020: Benin, Burkina Faso, Ivory Coast, Guinea Bissau, Mali, Niger, Senegal and Togo. I have 3 Questions for Stéphane Alby.


Stéphane Alby: Hello.

François Doux: These eight countries are saying goodbye to the CFA franc and hello to the eco. What will change, other than the name?

Stéphane Alby: The main reforms concern its governance. France will no longer have a seat on the monetary policy decision-making and management bodies in West Africa. Above all, the operations account will be closed. This is particularly important: until now, BCEAO, the central bank of the West African States, had to deposit at least 50% of its foreign reserves in operations account at the French Treasury. Yet these reserves were highly liquid, freely accessible and yield-bearing.

In the future, BCEAO will manage its own reserves like any other central bank.

François Doux: Second question, Stéphane Alby. What will not change for these eight countries?

Stéphane Alby: The fundamentals remain the same. The peg to euro will be maintained at the same parity level, and the French Treasury will continue to guarantee the unlimited convertibility of the new currency. It will be a smooth transition. Yet the reforms are needed because the system has not be overhauled since the early 1970s.

By conserving the guarantee of convertibility, the authorities are seeking to protect the future currency from any speculative attacks. I would like to add that the system has already shown proof of resilience against shocks in the past. The French Treasury has only had to intervene once in its history of more than 60 years, and that was to inject hard currency into the region in the early 1990s.

François Doux: My third and last question: Some of the English-speaking countries of West Africa, notably Ghana and Nigeria, might also join the eco. What are the next steps? Should we expect any major upheavals?

Stéphane Alby: Not in the short to medium term. The eco that will be launched soon is very different from the currency being considered by the members of ECOWAS, the Economic Community of West African States, which is based on a flexible exchange rate system. Major obstacles will have to be overcome before the new currency can be launched, starting with the lack of macroeconomic convergence between these countries, especially in terms of inflation, which is much higher in the non-WAEMU countries. The integration of Nigeria, a regional giant, is also problematic. For the WAEMU countries, abandoning the euro peg is a major macro-financial risk for these economies, which have borrowed heavily in foreign currencies in recent years. In the short term, in contrast, we can imagine the integration of small economies like Cape Verde, which could integrate the eco at a fixed exchange rate.

One last factor: we can also expect to see changes and movements in the other CFA franc used by the countries of central Africa. Despite fairly advanced discussions, at this stage we still do not know the content of any future reforms. In any case, the year 2020 will mark a turning point in the history of the CFA franc.

François Doux: Thank you, Stéphane Alby. For our viewers, WAEMU stands for the West African Economic and Monetary Union. That’s right, isn’t it, Stéphane?

Stéphane Alby: Yes, that’s right.

François Doux: Thank you for this update on the eco, which will be launched later this year.

Tune in next month for another edition of EcoTV.

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