C. Peter McColough Series With Benoît Cœuré

Friday, February 15, 2019
Kai Pfaffenbach/Reuters
Speaker
Benoît Cœuré

Member of the Executive Board, European Central Bank

Presider
Michelle Caruso-Cabrera

Chief International Correspondent, CNBC

Benoît Cœuré discusses the European Central Bank, financial regulation, and the international role of the euro. 

The C. Peter McColough Series on International Economics brings the world's foremost economic policymakers and scholars to address members on current topics in international economics and U.S. monetary policy. This meeting series is presented by the Maurice R. Greenberg Center for Geoeconomic Studies.

Click here to view the slides that were presented during this event. 

CARUSO-CABRERA: Hi, everyone. It’s a pleasure to be here. Thanks so much for coming. Our featured—I’m Michelle Caruso-Cabrera. Long-time CNBC chief international correspondent, CNBC contributor, and member of the Council. Honor to be invited to interview Benoît Cœuré. Been a member of the executive board of the European Central Bank since January 1st of 2012. His responsibilities are international and European relations—that’s tough—market operations, and the oversight of payment systems. And he’s also the chairman of the committee on payments and market infrastructure. And before that, he served in various policy positions at the French treasury.

The way it’s going to work this morning, he’s going to have some short remarks with slides, then I’ll do a Q&A, and then we’ll take questions from the audience.

Welcome.

CŒURÉ: So good morning. And thank you very much, Michelle, for your kind introduction. I’m very honored to be here today. I’ll try to be as short as possible, so that we have ample time for discussion.

Last time I was here at the Council on Foreign relations was nearly two years ago. And the title of my remarks was “The Perils of Isolation.” I’m not sure that much has changed since. And I’m definitely sure that I haven’t been very successful in changing anything to the situation, which I guess is proper. I mean, central bankers are not there to impact on political developments. We are sitting on the fence and trying to understand what’s going on to calibrate our policies.

And what I would like to do today in my short remarks is to dig deeper into one particular dimension of the discussion which has gained quite a lot of traction in Europe recently, which is about the global role of the euro as a currency. And there has been a growing perception in Europe the shift in global governance that we’re seeing is a reason for us, Europeans, to strengthen the global role of the—of the—of our currency, the euro, meaning that we should actively promote its use in financial markets and in international trade. And that has come mainly from the European Commission and from ministers, not from the ECB. And that has been a lively debate.

And the background for this debate, as you can see on this slide, is the declining role of the—declining international role of the euro. So that—since 1999, since the euro was introduced. And it’s—so it’s an index summarizing the international role of the euro across a number of dimensions, which you can see in a very fine script here. That’s the use of the euro in—as an issuance currency, as a reserve currency, in international trade, et cetera, et cetera. We put everything together, we build an index, and you can see that the role of the euro globally has actually decreased since roughly 2005-2006. And in particular, throughout the global financial crisis and the eurozone crisis. So the euro, in that sense, has not lived up to the expectations that were created when the—that were raised when the euro has been introduced back in ’99.

And with the euro’s role shrinking, as you can see here, and with global governance changing, there is a perception that the EU is more exposed to the risk, that the monetary power of others is not used in its best interest or has been used against it. And I guess that’s the starting point for the discussion in Europe. And these concerns, as you know, extend beyond Europe. As is very well known, China has been also planning to expand the international—the global role of its currency the renminbi. They joined the basket for the special drawing rights at the IMF back in 2016. They recently launched its first oil futures contracts denominated in renminbi. So, so-called petro-yuan. So what’s new in that discussion, in a sense, is that it’s not confined to the U.S. and to Europe, but it’s extending to a broader range of emerging market economies.

So we at the ECB, we don’t take a view on foreign policy questions. It’s not for us to decide on the role of Europe in the world, or on who uses the euro globally. And we do continue to see the global role of the euro as being primarily a market-led process. But we have to understand what’s going on. And it may have an impact on our monetary policy. That’s what I want to explain now.

So I want to raise two points. The first point relates to understanding the facts, understanding this declining trend and what can be done about it. And the second point is about the implications for the ECB monetary policy, as being the central bank for the euro zone. And I will be longer on the first point than on the second point. And there is a full version of my talk, which is on our website, where we will find the monetary discussion in some more detail. But I want to spare you a detailed monetary policy discussion so early in the morning and focus on the big—on the big picture.

So to my first point, which is understanding the facts, on that slide you can see a number of measures of the international role, use of the major currencies—euro, dollar, yen, and renminbi. And for most measures, you can see that the euro is the second-most used international currency, that’s for sure, after the dollar. But it’s clearly also lagging the dollar by quite a wide margin across all these measures. And on the face of it, that’s puzzling. Traditionally, the use of currencies was thought to be closely associated with economic size. And the U.S. and the eurozone are, after all, roughly the size economically in terms of, say, GDP.

And the next slide shows that it’s not just a matter of size. The U.S.—so the blue—the blue line is the U.S. share of global GDP. It has been declining since World War II, and even faster with the rise of China, at the end of the chart here. So the U.S. accounts for a much smaller share of the global economy today than after World War II, and yet the U.S. dollar is by far the leading global currency, as we know. So that suggests that it’s not all about size, and there might be—or, there must be factors specific to the eurozone that explain why the global role of the euro has not risen as much as was expected in 1999.

And what I would like to suggest today is that three factors are closely related to the broad shortcomings in the way our monetary union was designed so that the lack of emergence of the euro as an international currency is also related to the shortcomings in the design of our monetary union, which we are trying to address. And the first shortcoming relates to the ability of the currency to provide stability and safety. Stability can mean different things to different people—that’s something I’ve learned to—I’ve learned to know in my seven years at the ECB. That stability is very much in the eye of the beholder. So it has different meanings across Europe.

It also has different meanings across market players. For an investor, for instance, it has to be—currency has to be a reliable store of value, obviously. U.S. Treasurys are such a store of value. Whenever international investors look for safety, they turn to U.S. Treasurys. And the euro area doesn’t have that. We don’t have a single safe asset, or common safe asset which international investors could turn to in case of an adverse shock to the global economy. There is no European treasury. We have nineteen different fiscal policies. And the idea of the euro was always that a credible set of fiscal rules would ensure that all national sovereign debt could be safe, but that didn’t work very well, as we know. The debt crisis in Europe has exposed the flaws in the fiscal rules and in the overall design of our monetary—of our monetary union.

So just to give you an illustration, which is the next slide, you see that the number of AAA-rated euro area sovereigns has fell from eight to three through the crisis. AAA-rated euro area sovereign debt amounts to just 10 percent of euro area GDP, while in the U.S. it’s more than 70 percent of U.S. GDP. And this you can see on the slide. So we’ve learned the lesson. There’s been a lot of progress in improving the governance framework of the eurozone. As you know we have European Stability Mechanism that can provide a safety net to countries. We have a single supervisor for banks, a single resolution fund for banks. So bank supervision is now in many—in many aspects more integrated in Europe than it is in the U.S., in terms of banks being registered the same way and supervised the same way.

But there is still a lot of work to do, and obviously from these charts the conclusion is that we need to further strengthen the fiscal damage of the eurozone. We need some fiscal policies. And we need to progress towards having a single safe asset in the eurozone. We know that’s going to be very long. It is a political discussion. So the ECB doesn’t have much to say about how to do it and when to do it. It has to be a political discussion between member states and with their parliaments. We know it will be a long and bumpy journey. And that means that in the meantime governments need to make their national sovereign debt safer by committing to credible fiscal rules.

So that was the first shortcoming—lack of a common safe asset. Second shortcoming of the eurozone is the segmentation of capital markets. And I don’t need to be very long; it’s pretty obvious. Deep and liquid financial markets are a key ingredient of an international currency. And the U.S., again, is the leading proof of that. There is ample research—empirical research around showing that financial deepening has been the most important contributor to the increase in the share of dollar-denominated assets. That is, the dollar taking over the sterling as a global currency has been largely due to the depth and liquidity of U.S. denominated capital markets, say, between the two world wars of the last century.

And we don’t have that in Europe. Capital markets are still fragmented. The crisis has shown how fast the fault lines could emerge when hit by an economic shock. Various legal and institutional barriers hinder the creation of the single European market for capital. There is a project of the Capital Market Union, so-called CMU, and at the ECB we very much see it as a—as a key priority for the next commission and for the next parliament.

And the third and final factor that has likely held back the international role of the Europe relates to the ability of Europe to speak with one voice on international affairs. So I will venture, with a lot of prudence in that direction—that is not central bankers’ territory—but, again, there is still empirical evidence showing that the U.S. dollar has benefited from a substantial security premium. That is, nations that depend on U.S. security—that depend on the U.S. security umbrella hold a disproportionate share of their foreign reserves in U.S. dollars.

And that’s not new. During the late 19th century, for instance, the increasing importance of French franc in the international reserves of Russia, in the years after the Franco-Rus alliance in 1894, have reflected the same—the same kind of patterns. So that extends way beyond monetary union—an economic and monetary union. Europe already exists global leadership in competition, in trade, in regulation in many aspects. Maybe in data privacy now, that’s coming. But initiatives to foster cooperation and security and defense and to speak with one voice on all international matters might help foster the global outreach of the euro too. But of course, that’s not for the ECB to detail.

So when you take these three factors together—stability, financial depth, and international coordination—then it’s easy to see that there is a close alignment between those policies that would buttress a stronger role for the euro and the policies that are anyway needed to make the euro zone more robust. And so we—at the ECB, we continue to see the international role of the euro as a market-led process, but we support efforts to help overcome the shortcomings in the design of our monetary union, which in turn will foster a greater global role for the euro.

And my final point relates to what this means for the ECB, for our monetary policy. And I will be short here, and I will conclude. Here we can learn a lot from the Federal Reserve’s experience. There are different dimensions that are relevant here. And I’m not going to expand very much, but I would like to mention two of them. The first one relates to the extent to which the exchange rate affects domestic prices. So what we—what economists, we call the exchange rate pass through, the extent to which movement in the exchange rate would have an impact on domestic prices.

In the U.S., exchange rate movements typically have less of an impact on prices—on domestic prices, simply because imports are already priced in U.S. dollars. So a stronger global role for the euro will do the same for the eurozone. It would somehow insulate our monetary policy from global shocks. And that was good news and bad news. It is good news because central banks can focus on domestic sources of inflation. But it’s also bad news because one channel through which monetary policy has been effective is the exchange rate channel, the international channel, and that channel could become weaker. So it’s hard to see how the two dimensions would balance here. But it’s likely consequence of having a stronger international role for the euro.

And the second impact on monetary policy relates to interest rates, and more generally to spillovers and spillbacks between financial systems in different places. In principle, international currency issuers enjoy greater monetary autonomy. Central banks in small, open economies are more heavily exposed to spillovers from outside. But international currencies also are not isolated from foreign spillovers. When your currency is being held by foreign central banks as a reserve currency, that implies that foreign central banks may purchase a substantial amount of public debt to accumulate foreign exchange reserves, and that will have an impact or spillback on your monetary policy—or, on your monetary conditions and financial conditions. You remember the savings glut discussion which Ben Bernanke launched. So the implication is that a role of currency as a reserve currency internationally can have a significant impact on domestic financial conditions. So there are spillovers and there are spillbacks.

And the conclusion here is a—or, the question here is that a stronger global role for the Euro might have—might lead to larger spillovers and spillbacks. And then the ECB might be called to increase its activities as an international lender of last resort—that is, to have more swap lines, for instance, with various central banks in different places. And we see already this kind of demand addressed to us. But, of course, we have to see how it fits with us having a domestic mandate, which is price stability in the eurozone, and with us being sure that swap lines are used for monetary policy purpose and not for other purposes, such as trade policy, industrial policy, which may be the place in other places. And I’m not giving names here.

So these were my initial considerations. It is a very lively discussion in Europe. And it’s a good way also to reflect on the role of the eurozone in the global economy looking forward. You might wonder why I’m spending so much time on the long—what appears as—to be a long-term issue, when there is so much going on in the short term in Europe and around Europe. But I guess that’s because we should never lose sight of the fact that the euro is a long-term project. From inception, many implementers have predicted the demise of the euro in the years to come—that’s for the last twenty years. And we’ve survived. And the—if you look at the polls, you have two-thirds of European citizens who actually support the euro as a project, and that’s the highest number ever. So that has kept increasing throughout the crisis, and even though the recent political developments. So never underestimate the strength and the resilience of the single currency project. That’s my conclusion. I’ll stop here.

CARUSO-CABRERA: Thanks so much for your presentation.

Overarching question: Based on your presentation, should we—is the goal that the euro should replace the U.S. dollar as the world’s reserve currency—asks the ethno-centric America, which is redundant. (Laughs.)

CŒURÉ: No. I mean, you will find different views across the board in Europe. So politicians might have different views. My view, as a central banker, is that this will be a market outcome. I mean, you can’t force anyone to buy euros, right? I mean, that’s an outcome of market forces. That’s an outcome of decisions taken by portfolio managers. But what I’m trying to say here is the better the governance of the eurozone, the better the ability of the eurozone to provide stability, the larger global role for the euro. And that’s something that we—that we want to see anyway. So it will come as an outcome of policies that are needed anyway to make the eurozone stronger.

CARUSO-CABRERA: Are you advocating for a single fiscal policy? Are you advocating for a single European bond? And then when you add the layer of stability—I mean, to translate that into really blunt terms—can a country win a war? If they can win the war, their currency survives, the other currency doesn’t necessarily, right? I mean, it sounds like you got to have a single European army if you really want to—were to ever match the U.S. dollar.

CŒURÉ: You certainly need a stronger European voice on security methods. Now, it’s not for me, in my professional role, to say what the best way to do it. But on the—on the first aspect, yeah, we need better fiscal—we need a bit better fiscal framework in the eurozone.

CARUSO-CABRERA: A single?

CŒURÉ: That has to do both with having a single safe asset that could be the competitor or substitute for the U.S. dollar, which we don’t have. That will take a lot of time, for good reasons, because when you think about it you will need to have the right political structure supporting it. You need accountability. You need to decide whether that would be voted by the European Parliament or by national parliaments. I don’t know. That’s a political discussion. So it will take a lot of time to get there. And meanwhile, we need better national fiscal policies. So the best way to make debt safer is to have good fiscal policies.

CARUSO-CABRERA: Right, because if not then you’re back to the old argument that I’ve been listening to for—gosh, it feels like a decade now—Germans don’t want to pay for Greeks, right? I mean, that’s what a single European bond would end up being, right?

CŒURÉ: Well, not necessarily. There are different ways to do it. It’s also a lively discussion on, I mean, how to make—how to produce these safe assets. There have been very sophisticated solutions. I’m not a strong believer myself in very sophisticated solutions. (Laughter.) If you want to appeal to the—to the Chinese investor, you need it to be plain, and simple, and easy to understand.

CARUSO-CABRERA: Yeah, we have KISS—keep it simple stupid—is a saying here in the U.S.

CŒURÉ: Exactly.

CARUSO-CABRERA: Eurozone growth rate is at a four-year low, and hardly got going in the first place. Did you guys pull back from QE too quickly?

CŒURÉ: No. I mean, we’re not—I mean, first, we’re not pulling back from QE I the sense that QE hasn’t stopped. I mean, we are reinvesting quite substantially. We are reinvesting in the—more than 20 billion euros per month, because we haven’t started balance sheet normalization, as you know, and we are not close from starting it, obviously, also given what we see outside. So we are reinvesting very substantially, and that keeps exerting a very substantial pressure—downward pressure on bond yields in Europe.

So QE is still there, in a different way. We have been looking at the data. We are looking at the incoming flow of data. The slowdown is clearly stronger and broader than what we had expected, which also implies that the recovery will be shallower than expected. And the inflation path, the path of inflation towards what we want—where we want it to be, that is 2 percent—close to—close, but below, 2 percent—that path also will be shallower. And we have to adapt to that.

CARUSO-CABRERA: Any chance that there’s some aspect of QE that comes back, or you actually become more aggressive? And there’s reports of, you know, an LTRO program coming back in some form or fashion.

CŒURÉ: So we do have different instruments. We have the right instruments. We have QE and currently reinvestment. We have possible liquidity tenders targeted or not targeted. It’s all possible given—but it has to serve a purpose. So I can see that there is a big discussion in the market of adding a new, as we call it, TLTRO, targeted long-term refinancing operation. It is possible. We are discussing it. But we want to be sure that it serves a monetary purpose. So it has to be useful to maintain credit conditions, to support credit in the eurozone where credit is needed. And if we are convinced, we’ll do it.

But one—for instance, just to illustrate—one reason that has been pushed by—put forward by bank to have this new liquidity tender is, oh, it’s difficult for us to meet the net stable funding ratio. It’s going—it’s going to be difficult for us to meet all these liquidity requirements that are around. That’s not a good argument, because that’s not a monetary policy argument. So banks should stand on their own feet, and they should build their liquidity buffers by themselves.

CARUSO-CABRERA: There are reports that you could replace Mario Draghi as the next head of the European Central Bank when he departs in October. Is that true? (Laughter.)

CŒURÉ: I don’t think there is much I can say about that. I mean, that’s—it’s very early down the road. That’s a decision to be taken by European leaders at best in June, maybe even later, given that the whole political process and the set—the set of decisions that they will have to take, of personal decisions they will have to take, is quite complex. And it starts—it doesn’t start with the ECB. It starts with the European Commission. And these—

CARUSO-CABRERA: Wait, wait, it’s not a meritocracy? It’s a horse-trading game? She asked coyly. (Laughs.)

CŒURÉ: It’s—I mean, again, that’s for—that’s for European leaders to discuss. But there will be a package of appointments, and the package of appointments has to reflect the diversity of Europe. That’s also a political precondition. So what I’m saying here, that that’s a discussion that will start in earnest after the European elections. It hasn’t started yet. So I don’t know.

CARUSO-CABRERA: The point I was trying to get at is that there are other things that happen politically in Europe—inside the European Commission, et cetera—and the based on nationalities, the genders, et cetera, of everybody involved in those situations, then that leaves scope for decision about who gets to run the ECB, right? I mean, it actually isn’t necessarily a meritocracy. It’s more a political horse-trading situation.

CŒURÉ: It’s a balance of different arguments.

CARUSO-CABRERA: (Laughs.)

CŒURÉ: And I’m obviously not part—and the governing council of the ECB—is not part of that discussion. I mean, the central bank governors are political appointees, and rightly so. So I don’t have anything to say about that.

CARUSO-CABRERA: Would you like the job? We’re very ambitious in America, you know. (Laughs.)

CŒURÉ: I was asked—so, I was asked on a TV show do you want—so would you accept that job? And my answer was, who wouldn’t?

CARUSO-CABRERA: Yeah, right.

CŒURÉ: Of course. But as I said, it’s totally way beyond my pay grade and it hasn’t started yet. So I don’t know.

CARUSO-CABRERA: I asked you about whether or not the ECB pulled back too quickly on QE. There’s been a lot of discussion here in the United States about Jay Powell, head of the U.S. Federal Reserve. And what I think—some people may argue with this phrase—but reversal of policy. You know, the unwinding of the balance sheet was on autopilot. Now it’s not. What’d you make of watching that all happen over—and now it’s—the markets are back off to the races as a result. What’d you make of that as you watched it over from Europe?

CŒURÉ: Well, I’m certainly not in a position to comment or to pass judgements on what the Federal Reserve is doing. So they have a data-drive process. They had to react to new data, and they reacted to the data. So what I see from very far away is them being in a date-driven process.

CARUSO-CABRERA: There seemed to be real consternation here and debate about whether the unwinding of the balance sheet—and I’m assuming most of the audience understands what this is about, right? The Federal Reserve went out and bought all kinds of bonds. So they were a huge buyer. That’s what helped lower interest rates. And now they’re not doing that as aggressively, beginning to unwind it in fact. And to some in the markets, it was obvious that that would cause tumult, you know, within interest rates—if you have a huge buyer that’s stepping away. And the central bank seemed kind of flummoxed that it was—people thought it was having such a large impact. What’s your assessment of what happens when the unwinding of QE happens in general?

CŒURÉ: So I am—if I may answer, as you are inviting me to do, in general—I don’t want to comment on the Fed, obviously. But in general, I don’t see the balance sheet normalization or the unwinding of QE as being, per se, a source of volatility because it can be communicated, and it has been communicated very well. In the U.S. we are—in Europe we have forward guidance that works very well, explaining well in advance what we are going to do, or what we expect to be doing. And that has been really communicated well in advance to markets.

So my take on what happened, say, in November and December is more global uncertainty kicking in, global uncertainty being mostly a political uncertainty on the U.S.-China relationship, on Brexit, on a number of events which are political discussions, political decisions to be made. That’s something that markets don’t know very well to handle, because you can’t put numbers on it. You don’t know very much about the risk distribution around these kind of political events. And so this conjunction of political decisions, political uncertainty has created quite a lot of anxiety in global markets. I don’t see it as being primarily related to balance sheet normalization.

CARUSO-CABRERA: Final question before we go to the audience. Looks like there’s going to be meetings next week in Washington, D.C. between the Chinese and the U.S. on trade, again. What’s the European view of how we are dealing with China, and our concerns about intellectual property theft, subsidization of the state-owned enterprises—which is clearly prohibited in the European Union?

CŒURÉ: So two thoughts. I mean, at the—at the higher level, I mean, the whole trade discussion, as we—as we see it, now being—I mean, shaping up between the U.S. and China, but also between the U.S. and Europe and in other places, from a—from an economic standpoint, I would see it mostly as self-inflicted harm. That’s an additional shock, that’s additional uncertainty under the world economy that really we didn’t need. And we see the primary reason for the slowdown in the global economy, including a slowdown in Europe which is a consequence of the slowdown I the global economy, being primarily the outcome of that political uncertainty that wasn’t there, and that has been created ex nihilo, and that has quite a harmful political impact on the—economic impact on the global economy. So that’s really something that we could have—that could have been avoided. That’s the first thing.

Then when it comes to China specifically, there are lots of common interests, common objectives between Europe and the U.S. towards China, which you mentioned. I mean, intellectual property is important. Procurements, market access generally, et cetera. So what I can—and I’m not—I mean, as you know, in our system trade is being done by the European Commission and not by us. But as a—as an economist—(laughs)—what I can only wish is that the U.S. and Europe can work as closely as possible together to reform the WTO and to form a common stance on these issues. So the priority, instead of fighting against each other, they should spend their energy building that kind of common line on how the global trade relationship should look like. Because there are lots of common interests.

CARUSO-CABRERA: Benn Steil, first question.

Q: Benn Steil, Council on Foreign Relations.

IN your opening remarks you talked a bit about the sustainability of the euro. I remember well before the euro was launched in ’99 there were really two broad camps on this question. One which said that Europe needed a political, fiscal, banking union of sorts to support the euro. Another camp that said, well, that may or may not be desirable but all you really need is a credible no-bailout rule. Fast forward, of course, we did have bailouts during the crisis, so we haven’t had a clean-cut test. But we do have some evidence from—on this side of the world, and that’s where I’m curious about your views. The United States, for example, has no fiscal, monetary—or, fiscal, political, or banking union with any countries in Latin America. Yet, Panama, Ecuador, El Salvador are completely dollarized. They have no currency. Puerto Rico went through a horrific financial crisis. Nobody ever talked about these entities de-dollarizing. Indeed, we’ve never had an instance of de-dollarization. So what does—what conclusions do you withdraw from that with regard to the sustainability of the euro?

CŒURÉ: Well, I’m not sure there is any possible comparison between eurozone member states and Panama or Puerto Rico, because that’s about monetary sovereignty. So the whole purpose of the euro in the first place was for a number of countries to regain monetary sovereignty. They started from the place you are describing, in a sense, being pegged to the Deutsche mark and following very closely decisions taken by the Bundesbank. And the sense was that they wanted to regain monetary sovereignty. So if they—if they pull out, they would lose monetary sovereignty.

That is not something that is well—understood well enough in the European discussion, that pulling out of the euro and even pulling out of the EU, just to mention another discussion, does not necessarily bring you more sovereignty. In many aspects, it can also be a loss of sovereignty because you become the smaller country, or even a small country, and you have less leverage on the—on global discussions. That’s true in the monetary domain and that’s true in other domains as well.

CARUSO-CABRERA: Gentleman way at the back there with the mustache.

Q: Good morning. John Chamberlin, Observatory Group.

So the ECB has roughly quintupled its balance sheet. So has the Fed, and so has the Bank of Japan. All of them have approximately a 2 percent inflation target. None of them has reached the inflation target. How do you think about inflation? Is this a structural shift? Is the 2 percent target realistic in any of those countries, and in particular the eurozone? Thank you.

CŒURÉ: So I wouldn’t call it a structural shift, but more a series of structural shocks that we’ve seen that have taken inflation away from its path, from its target. And these are shocks are different natures. I mean, technical shocks, technical change, globalization, shocks that are internal to the eurozone as well, which have repeatedly pulled inflation out away from its convergence path towards 2 percent. That doesn’t necessarily mean that in the long term the basic model has changed. And that’s why we—for instance, the ECB staff continues to forecast to project convergence toward 2 percent. But there are clearly things that we haven’t understood, or that have been surprising.

So for instance, the lack of transmission from wages—from nominal wages to prices has been a surprise. You see quite robust nominal wages in Europe. The compensations for employee are running at, say, 2.5 percent. That’s the current trend, which is quite strong for—against European standards. And that doesn’t seem to have much of an impact on prices. But this we can understand. That’s because firms are absorbing the increase in costs through their margins because there is a lot of competition and became of the global slowdown they’re in a position to pass the increase in cost to their prices. So this we understand. That cannot last forever. So at some point—I mean, margins cannot be compressed—cannot be compressing forever. That’s not possible. So at some point, they will pass cost increases to the—to prices. But it’s happening certainly more slowly than expected. And obviously also commodity prices have been going up and down, as always, and that has blurred quite a lot the inflation path.

Q: Thank you. Willem Buiter, Citigroup.

The global role of the U.S. dollar has been used—some would say abused—by the U.S. government in the pursuit of geopolitical and national security objectives, including the imposition and enforcement of U.S. sanctions. Is this an additional reason for trying to boost the global currency role of the euro?

CŒURÉ: Well, in the mind of those who are responsible for these kind of matters, I’m sure the answer is yes. (Laughter.) We are not—we are not—or, the ECB is not in charge in international sanctions.

CARUSO-CABRERA: What do you think about using the U.S. dollar as a weapon, which is the way some people describe that?

CŒURÉ: Well, that’s clearly one of the—one of the reasons why that discussion has emerged recently in Europe, that’s for sure. But we—that’s not—as you—as you can very well understand, that’s not the way we want to see it at the ECB, because we want to focus on the monetary discussion. So we want to understand how this will impact our monetary policy and whether it’s good or bad for the stability of the system. So we don’t want to enter into that particular discussion, but it’s clearly there. It is there. It’s important.

Q: Nick Bratt with Lazard.

Over the last eighteen months, we’ve seen a substantial increase in gold holdings by certain major central banks, including the Chinese. How should we interpret them?

CŒURÉ: I don’t—I mean, I can’t—I can’t really comment on what the Chinese are doing. I would see—I would see the continued importance of gold, against all economic reasoning probably, as a symptom of the anxiety—of the prevailing anxiety in the global economy, and of the lack of convincing and strong mutual insurance systems in the global economy. So the global—as the global financial safety net, as it’s called, around the IMF and with different regional arrangements, et cetera, it is there, but it’s not seen as fully credible, in particular in the emerging market economies. And so they have to build insurance for themselves. And that’s for an extent reserves. And that includes gold. So I’d really see it as a symptom of anxiety more than anything else.

CARUSO-CABRERA: And right here.

Q: Thanks. Megan Greene from John Hancock.

My question is twofold. Everybody knows that on average major central banks cut rates by five hundred basis points in the face of a recession. So how much credence do you give to the argument that you need to get rates up at least into positive territory so you can actually cut them at one point? And the second part is, in the face of a recession, what is your laundry list of responses? I know cutting rates, TLTROs, but what else is on the list?

CŒURÉ: So on the first question, I’ve never been a big fan of hiking rates so that you can cut them later. There was a nice quote by—I guess by Jason Furman—who once wrote that it’s like—it’s like walking in the woods with a backpack full of stones so that if ever you see a bear you can dump the stones and run faster. (Laughter.) Why wouldn’t you walk faster in the first place? So we’ve got to do what is right at a given point in time. And probably the best way to avert a future recession is to do what is right today, instead of waiting for the recession to materialize. So I’m not a big fan of that kind of argument.

On the second one, which is about the toolbox—the toolbox that we have—we’ve got negative rates. We’ve got generally rates being very low. We’ve got rate guidance, which as I said we think has been extremely effective, and that can be adapted if needed. We’ve got asset purchases, which we’ve stopped in net terms, which we keep reinvesting, and that’s quite substantial across the board in the eurozone. We’ve got liquidity operations—LTROs, TLTROs. We’ve instruments that we’ve never used, which are contingent or somewhere on the shelf, but which are there to be used, such as the Outright Monetary Transactions, which come with conditionality conditions. But they are there, they can be used if the conditions are met.

And the history of what we’ve done since the start of the eurozone crisis is that when faced with different conditions, different challenges, we’ve always been able to find instruments which would answer these particular challenges within our legal mandate. So what’s important is that we remain within our legal mandate, because that’s about being accountable to the European people. So we talked about political pressures. That discussion is very often framed as you’re bending to pressures from that capital or this capital, et cetera. No. It’s just about remaining within the boundaries that have been set by the European people and that the ECB mandates. And this is not going to change. But within that mandate, we’ve been able to act when needed. And I see no reason why it would change in the future.

Q: Thank you. Niso Abuaf, Pace University.

As you would know, holdings of assets by other countries is also a function of the current account deficit of that specific country. The United States has ample amounts of that. You haven’t mentioned that in your presentation. And the second point is that holdings of euro assets would also be a function of the total return expectations. And, again, you have not mentioned that in your slides. I was wondering if you could weave those aspects.

CŒURÉ: Well, that’s absolutely correct. But, I mean, given the shorter—given the time limits, I wanted to focus more on the long-term drivers of the global role of currencies. And I would see that more as shorter-term drivers, in particular the return differentials clearly are related to point in time positions in the business cycle and different stances of monetary policy. So it is important, but I would see it as a more short-to-medium-term dimension.

Current account deficit, it’s—I mean, is that—it’s a long discussion. It’s a long discussion. It has been going on since one century, at least. (Laughter.) I don’t have a very firm view on that, but the way the global financial works I don’t see—I don’t see—I don’t see currency allocation being tightly related to the—to the constellation of current account deficits and services because there is quite a—quite some disconnect between the capital account and the current account, the way our capital markets work today. So I think it’s probably less important than it used to be. I may be wrong.

CARUSO-CABRERA: I once had a producer beg me not to talk about current account deficits. God, please, the audience will turn away. (Laughs.) Eye-glazing. Not that it’s a bad question, I just—question right here.

Q: Thank you very much. If you go back to the ’70s, the U.S. dollar was about 85 percent or more of, you know, the reserves held by foreign central banks. It’s now 60-65 (percent) or so. The loss of 20 percentage points has not really changed materially the impact of U.S. international affairs. So does it really matter that you are at 20 percent or 25 percent? And do you really aspire to being anything bigger? Why bother?

CŒURÉ: Well, that has been, by and large, the ECB position of the last twenty years—(laughs)—that we didn’t bother much about the global role of the euro. What I’m trying to explore here is what would be the circumstances of a larger global role for the euro. But as I said, it’s not a policy target for the ECB. It’s not.

CARUSO-CABRERA: It stems from—we talked earlier—it stems from—you said there is a vigorous debate within Europe about this issue, correct? I mean, that’s why you’re talking about it today? OK. Right here.

Q: Thank you. Ebrahim Rahbari from Citi.

Some of your past work has focused on the dollar in a slightly different context. Some of the ECB work suggests that the euro-dollar exchange rate is particularly important, and some of your speeches emphasize that it matters a lot of what’s driving some of these exchange rate movements. What I was wondering is in light of all the downside surprises that we’ve seen in the eurozone, the euro-dollar exchange rate has been pretty stable. And what seems to be the most popular explanation for that is that monetary policy in the U.S. has made this major dovish tilt, for instance. And in light of that interpretation, I wondered whether you think that means that the stability in the euro-dollar exchange rate is, quote-unquote, “unwarranted,” or whether you think that it is reflecting, you know, the natural shock absorber function, perhaps, that the exchange rate should have for the eurozone, or more generally fundamentals.

CŒURÉ: It’s an absolutely fascinating question, but I don’t really want to comment on the exchange rates on stage. So I will be happy to know the answer, but I’m not going to comment. (Laughter.) Sorry. Sorry for that. You can understand why.

CARUSO-CABRERA: Back there, back of the room.

Q: My name is Andrew Gundlach from First Eagle.

In response to the gentleman’s question in front of me about inflation, you said it was shocks and not structural. If you look at the future of the auto industry, an electric vehicle has something less than a hundred parts in its engine, a piston engine is well over a thousand parts. A lot of those are produced—so that’s nine hundred parts that are going away eventually, we can argue over what period of time. That’s obviously Germany and Italy, but also the French auto industry is not unimportant. Do you think that is going to be a structural deflationary force that the ECB will have to deal with? And over what time period do you think it plays out?

CŒURÉ: So I think it’s an important—it’s an important question. And we—I don’t think I’m in a position to answer it yet. There are a number of questions which are more broadly related to the energy mix in Europe, and globally, and to the consequences of climate change also globally, which increasingly we see as being relevant for monetary policy. We used to think of all these issues as being very long-term issues which were way beyond the horizon at which monetary policy is effective. But it’s coming closer. It’s coming closer because things are accelerating, both in the field of climate change and also in terms of changes to the energy mix. And we’ve seen a number of supply shocks and bottlenecks which have been related to changes in energy consumption. So the DSL shock on German GDP being just one recent example, shocks related to the introduction of new norms—new emission norms, emission standards for German cars. And that has had a sizable impact on German GDP.

So we see a number of relative prices changing because of climate change generally and because of changes in energy consumption. And increasingly we see it as being relevant for monetary policy. So I would expect that we’ll spend more resources discussing and understanding these issues in the future. But I don’t think I’m in a position yet to answer precisely your question. But it is important.

Q: But is there a difference between deflation brought by credit busts versus deflation brought by technological innovation? I guess that’s my question, because central banks treat it as the same thing. And the Austrians now taught in political science departments would argue differently. And the Keynesians would argue that essentially for current policy deflation is deflation. I’m just curious how you see it.

CŒURÉ: So I wouldn’t say that we’re treating the two—the two—these two forms of deflation the same way. I mean, if deflation is—if it’s debt deflation, to put it that way, if it’s—if it’s something that’s hampering the functioning of the financial system, then the circumstances are likely to be much worse than in the cast of technology-driven deflation. And we know very well, because we’ve been there in Europe. We’ve been there. We’ve seen how much—we’ve been very close to debt deflation, and we’ve seen how harmful this could be for the European economy, in an economy which is mostly bank-based, as we know, different from the U.S. So it is a very important difference. We’ve seen the difference, yeah.

CARUSO-CABRERA: Is there—if we could go back to the future of the ECB—we observe here such different—cultural differences towards money, et cetera. And, you know, the Germans are famously hawkish. If a German were to end up running the ECB, would that mean the ECB would be more hawkish? Is that how it works? I mean, is that person so important? Or would—

CŒURÉ: You know, monetary policy is decided by a—what we call a governing council, which is six executive board members, plus nineteen governors, maybe more in the future. Some of the—so we also have a rotation, as in the FOMC, but I’m not going into the details because they’re all speaking, and what matters at the end is conviction and the persuasion, and the strength of what you say in the council. And so the balance of views in the council is not going to change.

CARUSO-CABRERA: So that’s still one voice versus a whole bevy of what could potentially be much more dovish positioning from everybody else? Speaking hypothetically. (Laughs.)

Right here, question.

Q: If I may, I’ll ask a second question. Nick Bratt with Lazard.

Does the ECB spend a disproportionate amount of its time focusing on Italian—Italy’s problems? And could you put them in perspective for us, please?

CŒURÉ: No, we’re not spending more time on Italy than on any other eurozone economy. I mean, once weighted by size. (Laughter.) So we are following—I mean, we—there is really nothing I can say about Italian politics. We take politics as they are, as they come. And there is nothing we can—we should comment about that. We have been spending quite some time generally on European banks. And so Italian banks are part of that, but they’re not the only part of that. And the—we have been public in different—all of my colleagues have been public saying that we see Italian banks as being now well-capitalized and liquid. I mean, the liquidity buffers are very adequate.

But that see a profitability issue in the European banking sector. Costs are too high. Profitability is too low. And there are too many banks. And so there is a need for consolidation. And that’s not true only in Italy, but also in some other large European economies. And legacy assets have to be dealt with, disposed of over time. And as you know, the supervisory arm of the ECB has published plans, has given guidance on how to deal with non-performing loans. So that applies to Italy, but that applies also to other European economies.

CARUSO-CABRERA: We have a lot of people here in the U.S. who are also looking for the kernel or the seeds, you know, of the future destruction of the euro. And so for a long time, obviously, it was Greece. And now, I think the germ of this question is, is Italy a long-term threat—or, is Italy a threat? The situation in Italy a threat to the euro?

CŒURÉ: You know, the answer is—the answer is no, for the reason I suggested earlier, that the single currency project is a long-term project. And whenever it is being challenged from the inside or from the outside, you see—you see how much political energy, in terms of finding new ideas, in terms of willing to reform, and in terms of getting together and overcoming now domestic interests, you see how much of that has been—has been delivered by the European Council. So whenever there is a threat to the integrity of the eurozone project—of the euro project, we’ve always acted. So the ECB has acted within our mandate, and that the series of decisions we’ve taken after 2012, that that was what we could do within our mandate. But politicians also have access to protect the integrity of the eurozone.

I mean, I was—I think that’s public information—I was in a Euro Group meeting in June—end June 2015, where the majority of finance ministers wanted to—wanted Greece to leave the euro at a given point in time. That was the prevailing view in the Euro Group. It moved up to the European Council, and the European Council decided to support Greece, with conditions—very tough conditions, very difficult conditions. But still, the European leaders always gave priority to protecting the integrity of the project and moving up, moving forward. So I see no reason that it changes.

CARUSO-CABRERA: What do you say to folks who say the euro would have been better protected if Greece had been kicked out?

CŒURÉ: No, not at all.

CARUSO-CABRERA: OK.

Right here.

Q: Tara Hariharan. I work for NWI, a hedge fund.

So we didn’t talk at all about Brexit and how the ECB views the preparations in Europe for Brexit disruptions. If you could say a few words.

CŒURÉ: So we’ve been—we’ve been mandated by the European Commission the European side by her majesty’s treasury to work closely with the Bank of England to map financial stability risks in case of a no-deal. And we’ve been working very actively throughout 2018. And we’re still working. (Laughs.) We’re still very much—we’re still talking very closely with the Bank of England. And we’ve come—so we’ve done it in four areas—cleared derivatives, uncleared derivatives, insurance, and data—access to data in the financial industry. And when we delivered our conclusions to the treasury and commission, the conclusion was that risks were really concentrated around clearing, that there was a need for a solution to maintain the possibility for European firms to clear derivatives and swaps in London, and that for all three other areas, in particular—including uncleared derivatives—the industry was pretty well prepared. There was a need to facilitate migration, novation, the transfer of contracts. But there was—we didn’t see major financial stability risks there.

And meanwhile, the—since then, the commission has acted, and we now have equivalents for U.K. CCPs. So the bottom line is we believe that the financial section is well prepared for Brexit—for a no-deal Brexit. We—of course, we are mindful and concerned by the economic impact, which can, of course, interact on the financial system. But we don’t see the financial system as being the main area of concern in case of a no-deal Brexit, because it has been very well prepared by the industry, and because authorities have acted to provide equivalence where needed.

CARUSO-CABRERA: A few minutes left. Joyce, do you want to ask a question?

Q: Chang from JPMorgan.

The maturities for the LTROs fall below one year in June. So what is the thought on putting in a more liquid operation, like a two- to three-year maturity, given the focus on the net stable funding ration?

CŒURÉ: So, as I was trying to say earlier, we—there might be a scope for another LTRO or TLTRO. And I’m not commenting, I mean, going into the details, because this we haven’t discussed yet. If there is a monetary policy case for doing it, that is if that is useful to support credit supply in the eurozone. NFSI in itself is not a good reason.

CARUSO-CABRERA: Thank you very much. Anything I should have asked you, you expected me ask you? You’re happy it’s over? OK. (Laughter.)

CŒURÉ: Thank you.

CARUSO-CABRERA: Thank you so much. It was a pleasure. (Applause.)

(END)

Top Stories on CFR

Sanctions

For many policymakers, economic sanctions have become the tool of choice to respond to major geopolitical challenges such as terrorism and conflict.

China

The Trump administration has declared China a currency manipulator, but what that means for the ongoing trade war is far from clear.

Women and Economic Growth

The education gender gap costs the world between $15 trillion and $30 trillion in human capital. U.S. aid programs need to equip girls and women to participate in the modern digital economy.