Joining us now the President of the European Central Bank, Christine Leguard, who stopped traffic here the bison stopped walking around the fields over the importance of this speech. I was talking to our wonderful Bosler covering the New York Fed and he's here supporting the US team. And the first thing he said, Philip Lane, So the speech that you put together here that we're going to dive into here in the next thirteen minutes, how was it constructed off of your team with doctor Lane.
It's a little bit more complicated than that. Typically my speech is works as follows. I picked the theme, which in this case was not complicated because Jackson Hall has indicated that we have to concentrate on the shifts, and they are major shifts.
So I pick the theme.
My team produces a first draft that I then look at, correct changes, am we reconstruct a bit.
Then I pass it on.
To Philip, and Philip looks at it, brings new things into the substance, will amend this or that. Then it comes back to me again and I will polish it one more time. Then I share it with a few more economists in the team. I don't take all their comments, because if I did, it would not.
But legendary for that, that's called on the guard.
No, right, that's true.
Yeah, because everybody wants to have their little thing in there, and before you know it, it has no line, no rational, no logic, no conclusion.
And I don't want that.
We'll extend this to a one hour interview. There'll be some logic to this discussion today. The rules of the road, folks, for all of you on radio and television. Is it an academic conference. We don't focus so much with any central banker about what are you going to do at the next meeting. It's about the architecture of the speech.
And this is an.
Exceptionally original speech off of the pandemic. Where do we go from here? I want to go back four months to your speech in New York where in Wyoming, and this is Ernest Hemingway's Wyoming. You talked about suddenly sun also rises. There is gradually and then it becomes suddenly. What is the tension you see now? What is the fear you have that the gradual now could be suddenly painful?
We are facing major shifts. I'll mention three for you. One is there's a complete change in the labor market.
There's a complete change in the energy future that we are facing, and there is a complete shift in how geopolitical forces organize our economies, not to mention in the background the climate change impact on our economies, our life, and the imperative that it becomes, as we have seen during the whole summer, for instance, in terms of major heat waves, major hurricanes, and so on and so forth.
So you've got these three key shifts and the background of climate change, and we need to address each and every one of these three, which we inherited from the pandemic, which we inherited from the major supply chain disruptions, which we inherited from the geopolitical tensions that we see developing between the United States, Europe, Japan, and many other countries around the world, in particular China.
I was talking to Alex Weeber out of Frankfurt on this speech, and I want to take the sixty thousand foot nature of the speech, and I can't imagine Draggy doing mactrechet giving the speech. It's original to you. But if I look at clarity, flexibility, humility, your backdrop out years is exactly the same as your backdrop on September sixteenth, which is the original structure you have is to pick two nations, the tension between Germany and the tension with Portugal as well.
How do you get to.
These lofty goals given the fractious original nature of the ECB.
I would disagree with that.
I think the ECB and the weight has been constructed, is intended for collaboration, for controversies, for debates, but at the end of the day, for large consensus. And this is how I have been operating at the ECB. The fact that monetary policy is really European monetary policy is a plus. We are bound by the same currency, the Euro. We exchange the same banknotes, maybe digitally one day, but this is what brings us together and is part of
the culture. Now, then you have the fiscal situation, Then you have the debt situation. Then you have different markets and different constraints locally in you know, in the twenty member states. But the European Central Bank brings all those national central banks together, not without pain, not without you know, discussions, as I said, controversies occasionally and not always by unanimous consensus.
There is the Senate occasionally there is descent absolutely, and you know we have to learn how to live with it, and we are.
My job is to measure how.
Profound the descent is, and who expresses and shares it to a point that he or she will not be prepared to compromise and to move to the consensus.
A single sentence in this original speech breaks in established regularities. Do you have an operative theory right now, whether it's again to September or it's out six months a year. Is there a set of economic theories you're working with or is it ad hoc each and every day out of this pandemic one.
It is deliberately decisively data dependent, which forces us to react meeting by meeting. We cannot given the fact that regularities are no longer regular and we have more irregularities than regularities, we cannot exclusively rely on inflation outlook as determined by models. We have to bring into our reasoning and our considerations other elements, other measurements, including underlying inflation as we see it empirically now as we anticipated coming up.
We also need to measure the impact of har monetary policy, how fast does it produces financing tightening, and what consequences will it have. So in a way, the break of this regularity forces us to have a larger spectrum of indicators and to think in a mode much broad away about the consequences of what we decide.
One thing that's fascinating here, Joan Randa in Frankfort really emphasizes to me with the deterioration in economic data. I'm sure you've been more than brief down it in Europe and frankly around the world China as well. There's this waiting between conventional monetary dialogue and to use an American phrase, OMG,
there's a growth slowdown. Is you go into your sequence of data dependent meetings, what is the waiting now to growth or real economy economic data versus a monetary policy which with a process almost that you say is under threat right now.
First of all, I would not put in the same bag Europe and China when it comes to clarity and comprehensiveness and transparency of data. We are totally transparent. We aggregate our national data at the regional level and we have very solid institutions that are in charge of those data. So I would challenge anybody who argues that our data is not correct and not reliable, that is as reliable as it can get. Point number one, point number two.
The best way to have the highest level of confidence is to look at a series of information data model produced, empirically provided anticipated by financial analysis. That that's the best job that we can do at the moment in order to deliver on our stability mandate, which is to bring infection back to two percent in the medium term, which we will do.
I can mention this with China, but what I can mention is you are original and that you have real world export import experience. I believe I met you when you were French trade minister. That's right, newly appointed at whatever.
Two thousand and five, two thousand and five.
A few years ago, folks, Christine Leguard is simple as I can say the statistic in your speech today of real imports declining thirty percent.
If we get what Gorgyeva and Leguard.
Are both talking about, which is a regional blackism, a fragmentation, how close are we to that.
It's a worrying situation.
If you look at the number of protectionist measures that are being engineered implemented around the world, If you look at the volume of trade, whether it is pure volume or momentum. It is either stable or on the decline.
And the fragmentation is something that is much talked about that we are not beginning to see in terms of investment, in terms of market penetration by various companies around the world, and the control of FDI for indirect investment in many countries, including in Europe, is not being sc rutinized in a
much much thorough way. So we are seeing not deglobalization, let's you know, not kid ourselves, but a much more guarded, much more careful target of supply chain development, of setting up foreign investment abroad, and the purpose of those investments are different.
There was a.
Time when you were setting up facility in a place where costs was lower. Now you set up an investment. You set up a facility because you're going to penetrate that market and you're not relying on input output.
You mentioned tit for tat inflation.
Is that where you confront at the next meeting, and frankly, at the meetings into twenty twenty.
Four, we will be very very attentive to wage developments because obviously one of the strongest portion of the economy where prices are going up is services and services is intensive. Services is generally less interest rate sensitive than others, where capital expenditures, of course are more sensitive. So wages as they develop will matter enormously, which is why it's critically
important that inflation expectations remain anchored at two percent. If trade unions and business associations appreciate that in relatively short order inflation will be back to two percent, they will not want to fuel more inflation by having wage or margin increases that would not be consistent with that.
The language of this is accommodative restrictive. Dominie Constumate Missoula would say, there is super restrictive. Talking about the US Central Bank, how do you gauge the parlor game of interest trate trajectory? Now, giving your new theme here, how do you take the minutia of analyzing up and down the restrictiveness? Just as one example with these larger thoughts of we need to change behavior and economics.
We take all that very seriously.
If you pick the example of the financing tightening, we'll look up and down the stream of you know, all financing channels from you know, credit lending, money markets, sovereign bonds, the whole gambit of it to appreciate how much tightening is produced by our restrictive monetary policy, and we have to factor that into what I have called my three criteria. If you will, inflation outlook, underlying inflation transmission, and strength of the transmission of monetary policy.
You ends this speech, and folks, really for those of you in economics, this is truly an original speech from the ECB today and from Christine lecard Caines. The difficulty lies not in the new ideas but escaping the old ones. Which one are you trying to escape September sixteenth. I mean not to bring a meeting in the focus here, but you need a new idea on September sixteenth?
What's it going to be?
I think what I meant using this particular quote is that we cannot just stay in the same box all the time and assume that the models that we have been using for number of years are going to produce the result that will guide us towards the right decisions. And I think by adding, as I said, underlying inflation, strength of the military policy transmission, we bring new ideas and new principles into our thinking and our collective considerations.
One final question, if I could, on a beautiful day in Wyoming, you have to fly back to Frankfurt and sell this speech to a very original set of nations in Europe. What will be the response, not only the response at your meeting in September sixteenth, but the simplistic statement of between the hawks and the doves. How will there be a uniform response or will this engender an immediate heated debate in Frankfurt.
I took the precaution to discuss that with some of them, and I think that's the general principles of those three shifts, the responses that we must provide, and the new key principles of clarity, humility and transparency. Sorry, clarity, flexibility and humility will stand and I think will be appreciated and respected by my colleagues on the Governing Council.
No. I look forward to September fourteenth, truly in a historic day.
I can't guarantee the same beautiful landscape as well.
The hills are alive with the sound of music.
Chrystia, thank you