Politique Internationale — You were president of the European Central Bank at the time of the 2008 crisis. The euro zone held its own. Faced with the new crisis we are now experiencing, do you consider the euro a defence? What’s your assessment of the balance of power between the dollar and the euro?
Jean-Claude Trichet — The euro zone and Europe did, in fact, demonstrate remarkable resilience during the subprime crisis and the huge financial crisis of 2007, 2008 and the years that followed. It was the first big test for the euro zone. And yes, even now, the euro is an asset during the pandemic crisis. It’s important to understand what the European currency represents. Before the creation of the single currency, the dollar was the only international currency, and had a totally hegemonic position. The dollar made up about 70% of foreign exchange reserves and an equivalent proportion of long-term international debt issuance. After that came, in more or less equal position, the yen, the Deutschmark, the French franc and the pound. None of these currencies represented more than 5% of exchange reserves; the dollar’s supremacy was overwhelming. Since the creation of the single European currency in 2000, the landscape has changed profoundly. The dollar represents about 60% of exchange reserves, but the euro henceforth accounts for 20%.
It’s a very different balance of power. The structure of the international monetary system has been profoundly changed. The ratio of the dollar to the euro is 3 to 1 (60% compared to 20%), and 5 to 1 for the euro to the third currency, the yen (20% compared to 4%). I’m convinced that that is not due to the currency — the euro — which is as credible as the dollar, but to the financial instruments themselves. In the United States, which is a political federation, there is a single Treasury. Treasury bonds are the most-traded securities in the world. In the euro zone, we may well have a single currency, but the financial instruments are fragmented. On the bond market, French government bonds, or OATs, stand alongside German Bunds. The bond market is split among several national markets that represent only a small proportion of the U.S. bond market. Therein lies Europe’s handicap: the United States’ single signature gives unique liquidity and depth to the New York market. The volume of transactions in U.S. Treasury securities is twenty times bigger than that of German Bunds or French OATs!
P. I. —The crisis spawned by Covid has obliged central banks to once again step up monetary creation. Why is their role essential?
J.-C. T. — Since Lehman Brothers defaulted, economic policy in developed countries has remained extremely accommodating. Central banks could not relax their efforts because of problems in the real economy. For a dozen years, potential growth has been weaker than before the crisis of 2008, and productivity growth has been much slower since 2005. In the end, everything including globalisation, technology and demographics has combined to produce very low inflation. Since the crisis of 2008, central banks have been fighting to avoid deflation. It’s in this context that the Covid crisis arose. They therefore had to put in place an even more accommodating policy to avoid an extremely serious financial crisis and a worse depression than in 1929. Remember the abrupt fall in all the markets when the world realised the severity of the pandemic? The central banks, the ECB, the Fed, the Bank of Japan, had no choice. They lowered their interest rates even further and increased their non-standard policies of asset purchases to prevent their economies from foundering. The central banks and governments took colossal measures. Without these actions, we would be living through a monumental depression in the real economy around the world.
P. I. — Can we continue like this over a long timeframe, with central banks playing fireman and keeping the economies afloat?
J.-C. T. — No, and we already knew that before the pandemic. The previous regime of accommodating central bank policy was not sustainable over time. Even before Covid, it was clear that a change was necessary. A few figures: the U.S. Fed already has on its balance sheet about 45% of marketable Treasury securities. This proportion is the same for the Japanese Treasury. In Europe, the proportion is smaller. But it is clear that a prolonged increase of such proportions is unsustainable in the medium or long term. Abnormally low inflation, flirting with deflation, is not sustainable either, nor should it be.
P. I. — Once the pandemic is behind us, how can we return to more conventional monetary policies?
J.-C. T. — Central banks do not control the real economy. In this area, we need governments, parliaments and above all the private sector. To escape the situation we’re in now, we have to increase productivity gains. That’s one of the main anomalies of the real economy, even though we are in a phase of considerable technological progress. We have to put structural reforms in place in order to make the advanced economies more agile, more adaptable, to resume growth. Furthermore, in those countries that were experiencing full employment before the pandemic — and that was the case for the United States, Japan, Holland, Germany and Switzerland — increases in income and salaries remained abnormally low. And that, to a certain extent, explained the low inflation. In all these countries — France was not involved, since we were unfortunately far from full employment — employees, workers and the unions preferred to settle for job protection rather than salary increases. The combination of reforms, productivity growth and strengthened bargaining power among employees in countries of full employment ought to allow the vice to be gradually released.
P. I. — The health crisis has struck a two-speed Europe and tensions have arisen. The euro zone, the European currency — aren’t they once again being thrown into question?
J.-C. T. — Europessimism is something I completely reject. Europe has demonstrated great resilience throughout all the global crises that have succeeded each other. Between 2007 and 2010, it withstood a terrible crisis that was not born in Europe; it was born in the United States with the subprime defaults and the collapse of Lehman Brothers. But Europe has managed to avoid such catastrophes. Since I was president of the European Central Bank at the time, I can tell you that there could have been seven or eight Lehman Brothers in Europe. We did not, however, have a single bankruptcy among our financial institutions – proof of the effectiveness of the European authorities’ immediate reaction. The most remarkable illustration of this solidity in the face of the storm can be summed up in two figures: fifteen and four. The fifteen countries that were in the euro zone on 15 September 2008 when Lehman Brothers collapsed remained in the euro — including Greece, which was the most vulnerable. And four new countries entered the euro right in the midst of the crisis, after Lehman Brothers: Slovakia and the three Baltic states. Thus the number of countries that were members of the zone increased by more than a quarter after the crisis was unleashed.
P. I. — What’s your analysis of the current crisis?
J.-C. T. — The pandemic is a tremendous accelerator of underlying economic, social and political change. I’m thinking of the green transition, of digitalisation, of the awareness of inequalities, of the re-examination of globalisation… And Europe itself is speeding up its construction, as the 750-billion-euro ‘Next Generation’ borrowing programme testifies. It’s the first time a massive borrowing has been launched under the European signature. Europe must strengthen its strategic capacity in a world undergoing enormous transformation. Numerous new powers are emerging in addition to the United States and China: India, Brazil, Mexico, Indonesia, Russia, Turkey, etc. At the end of the Second World War, Europe only dealt with a single power — the United States — which was its great economic model. Today, it is part of a large, worldwide constellation of emerging powers that are growing rapidly. There are even more reasons to build Europe today than there were after the Second World War!
P. I. — The health crisis has seen an increase in bank card transactions, to the detriment of those using notes or coins. In your opinion, is this a lasting trend?
J.-C. T. — Electronic currency and bank card transactions have developed enormously. There is a major difference between these instruments of payment: notes and coins are totally anonymous, whereas bank card transactions leave accounting records. Electronic currency, therefore, offers a transparency possessed neither by notes nor coins. Some thought is being given at the moment to the future of money. Some, like the Swedes, hope that banknotes will disappear completely. Even beyond a major simplification, they believe this will favour greater transparency in the fight against organised crime, dirty money, trafficking of all sorts and the financing of terrorism. Other voices argue that we need to retain significant use of coins and especially notes, that this is an element of freedom. It has become a big debate in recent years. The biggest denominations are currently disappearing; thus, the United States has dropped all notes larger than 100 dollars. Electronic currency is becoming widespread; the health crisis has driven up the ceiling for contactless payments in France to 50 euros, eliminating a large number of exchanges in notes and coins. Globally, the trend is moving in the direction of electronic currency rather than notes.
P. I. — What’s your view of cryptocurrencies? Do you see them as a risk or as a path for the future?
J.-C. T. — There are several kinds of cryptocurrency. I am totally hostile to ‘bitcoin’ and analogous currencies. First, because they are not true currencies. According to Aristotle (and no better definition has been found since), a currency has to fulfil three functions: it has to be a good accounting instrument, a good transactional instrument, and a good instrument for value preservation. This last function is absent from cryptocurrencies like ‘bitcoin’. They are speculative instruments that do not claim to preserve value. Cryptocurrencies of this sort have been explicitly created to facilitate transactions away from any intrusion by public authorities. It is, therefore, a new category of payment instrument that positions itself, de facto, in opposition to what the international community is organising to combat corruption, fraud, money laundering and the financing of terrorism. Of course, one can imagine benefitting from the considerable technological advances that have been achieved (blockchain) and which are yet to come — for example, in creating international cryptocurrencies that allow for immediate payments at very low cost, with the preservation of value assured by their being anchored in a basket of international currencies. That is the goal of Facebook’s project Libra. But the emergence of a closed payment circuit, dominated by giant platforms, carries enormous risks for competition and for data protection. For me, such a concept is only imaginable under the rigorous control of central banks. In any case, central banks cannot ignore the extraordinary progress of technology. They are all currently thinking about the possibility of issuing central bank cryptocurrencies that would be equivalent to banknotes. That raises new questions that will have to be answered: how to transpose into central bank cryptocurrencies the limitations on banknote maximums (the 100 dollar-limit in the United States)? How to reorganise the relationships between central banks and commercial banks if you can have a cryptocurrrency account at the central bank? Won’t current accounts disappear from commercial banks? One thing is sure: current and future technological advances will spur monumental structural transformations in the area of currencies and payments. They must definitely not be ignored.