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Right now, let's sit down to Bloomberg's Washington, DC Bureau. European Center Bank President Christine Leguard speaks exclusively with Bloomberg TV's Francine LACOI.
Let's listen in.
So your focus is on inflation, on data, is on Europe. Is there anything to be alarmed about what's happening in Europe economically?
Well, first of all, very nice to be here with you, Fasin, and with all of you here. So what in my position as head of the European Central Bank, what I focus primarily on is prices, price stability, inflation and how it's evolving over the course of time.
At the moment, we are not totally unhappy.
With what we see because it looks very much that inflation is on the right track. Of these inflation you know, we come from very high numbers, as high on average for the whole of the UR area as ten point six percent, and the latest reading we had for the inflation in September was one point seven So you know, those those numbers are relatively reassuring. They are only a number, and we are not looking at one data point, as
I have said repeatedly. We're looking at a lot of data to make sure that this disinflationary process continues to be to be well on track. But you know, we also have to be cautious, and you know, we cannot jump to conclusion that, Okay, done deal, we've broken the neck of inflation.
No, And I think caution.
Leads us to look at all the data that are coming in whichever form it takes, whether it's survey indicators as we had a lot of that in September, or whether they are more model derivated, as when we have projection exercises, and we will be looking at that and continue to be data dependent. But of course courses are not jumping to conclusions.
So when you look at inflation, could it actually could you achieve your target a little bit earlier than expected?
That would be my hope. You know, if.
Our target is two percent medium term, and I'm absolutely confident that we will reach that target sustainably in the course of twenty twenty five, is it going to be early in twenty twenty five, is it going to be very late in twenty ten to twenty five. I think really will be determined by data, by the state of the economy, by energy prices, by the transmission. You know,
we look at three components. We look essentially at inflation outlook, we look at underlying inflation, we look at transmission of.
Our monetary policy.
And on the basis of that sort of three pillar analysis, we can assess whether we are definitely on track. And when do you think it's a little bit sooner?
I mean, so we of course have Bloomberg look at every single word.
No, I know, so I'll be quite not.
First quarter or second quarter? Or is it just too soon?
I think it's too soon to say, because I wouldn't be loyal to our principle of data dependency if I was to tell you it's going to be on such time in the course of twenty five. I think we all governors of the Governing Council, and I'm sure you will be hearing lots of them in the next few days because they will be on air very much. I think we are all confident that twenty five is the year when we reach our target on a sustainable basis and with the medium term caveat that I have mentioned.
But we have to be attentive to everything. We have energy prices that are low at the moment relative to where they could be. We have services going slightly down, but not much. We are still at three point nine percent in the last reading. And we have to pay attention to domestic inflation. That is the segment of inflation that is proving resistant.
And domestic inflation is largely based on services.
Services, It itself largely labor intensive, and we have to, as I said several times, we have to be very sharp in our analysis of the nexus between wages, profit and productivity. That three pillar platform will be very indicative of where services prices, which will inform domestic inflation.
You can have a situation where not all inflation indicators fall at the same time in the next couple of months. Would you still feel comfortable if only some of them reach two percent with the trend going that way?
You know, if you want to have an average of two percent, and you know that, for instance, the inflation of goods at the moment, at least based on the information we have is point four. By necessity, you will have other components of your inflation measurements which are higher than two percent. Because we think in terms of you know, average number based on the proportion of products services in the in the inflation basket, if you want to call it that way. So not all elements will have to
be at two percent. We will need to have headline inflation at two percent. That's the target that we have set for ourselves. But when you have a point, I think is we need to be as granular as we can in the analysis of inflation of services because that is the one that is tricky and resistant, and we have to pay attention to what is sort of structural, what results from latest developments, What those latest developments indicate. Are those elements sort of what we call late commerce.
For instance, if you think in terms of insurance, insurance generally is the premiums are renewed on an annual basis. Those are the ones that we call late commers, because they will increase their prices at the end of the year. We need to do the same analysis with wages. The beauty of Europe is that it is diverse, right, Okay. In some countries they renew the collective bargaining agreement on an annual basis, so there is a relative regularity in the increases.
In other countries they.
Will renew the collective bargaining agreement every.
Two or three years, and there is a catch up element.
So we have to really we have to do that granular analysis which will inform where it's coming from, how long it's been in the making, what is the catch up element about it, and how lasting it is.
For the future.
So we need to look at information from the past which is relatively stable, to see how it informs our assessment of the future.
We do all that.
So if you look at the economic blueprint that we're seeing for the moment in Europe, so inflation is coming down, wages are arising, the economy seems to be holding up, but what's happening with consumers?
I would qualify one.
I agree with you, maybe except on wages, because I think that wages is at a bit of a pivotal moment where and it goes back to my granular assessment. If you look at compensation per employee, it is beginning to go down a bit. If you look at negotiated wages, depending on whether you include the one off payment catching up or not. It's also moving in the direction of
lower growth than what we have seen. So that leads us to think that this wage increase that could have led to second round inflation is probably beginning to abate now. But coming back to you, you consumer point that that's a really interesting.
European phenomenon. I think our.
Narrative, the narrative that we gave in September, which is the fact that recovery will be driven by consumption because the real income that households have or that corporates have to invest has improved over the course of time.
That still holds.
The timing of that is being extended. And the European consumers certainly in general, do not have the same propensity to consume.
Than the US consumers.
And it's often said that, oh, as long as the US consumers consume, the economy will do fine. The European consumers are not on the same page of active consumption, I would say, And if I look at Q two, consumption has actually gone down a bit, although real income disposable income had increased, and saving in Q two again
had increased. So it's as if, on average, the European consumer was sitting there looking at his real income increasing, looking at the world out there, looking at the war at the doorstep of Europe, looking at developments in the Middle East, looking at the political uncertainty around and thinking well, I might be better off saving a bit more, and who knows, I might cut a good deal with my bank because the banks are still offering not generous, but
possibly attractive rates for time deposits. Rather than consume, consume, consume.
Do interest rate cuts help with that?
Do they?
Should they actually? Or is it transmission mechanism taking longer than expected?
I don't think so. I think. I think gradually.
Reduced interest rates are being transmitted, and our monetary policy is traveling to financing, to the activity, and ultimately to inflation. So it should It should the encourage spending, whether by we have consumption or investment. But on investment we're not seeing much at the moment.
Either.
Are you expecting it to pick up or are there are particularly weak countries that give you worries.
There are countries that currently are not performing spectacularly.
When are you expecting them to pick up again?
Well, I think a revision of the business model and a collective endeavor to to to support the economy would be helpful, including you know, public spending.
But there's no real sign of that coming in some of these countries.
Well, Necessity Floire, I don't know how you translate.
That necessity usually leads to something. The overarching point let me madame aguein when you look at monetary policy. So the markets really expect quite a lot of incremental interest rate cuts until April? Are they right?
It's you know, it's their analysis. As I said, inflation dese inflation well on track? Have we broken the neck of inflation?
Not yet?
Should we jump to conclusion or should we not be a bit cautious and as data dependent as we have committed to be?
I think is our determination.
Markets have their own way of looking at things, and they you know they have They're playing with other people's money, and the more they make, the better, I guess.
So my objective is price stability markets.
I mean, markets could derail a bit of of of that if they mispriced things. Do you just ignore markets or do you try?
And no no, I don't no, no, no, no, no, We don't ignore anyone. We look at what colleagues do around the world, what impact it has on us. By necessity, we have to factor in our models what markets anticipate in terms of rate curve and and but it's not to say that we are market dependent, far from it. But it's it's it's a component that we have to that we take into account.
What would it take you to do fifty bases point cuts?
I don't want to speculate.
I think the I think for me, the direction of travel is clear and what what we have done, you know, starting in June is I think the sensible approach and one that we that should be continued with that caution element about it. Not jumping to the conclusion that, oh, because we've done twenty five, will do twenty five in each and every time. No, or because we think that it is going to be done or up this will
do fifty. I think that's you know, that's not called for given how we are trying to really be solid in our analysis and be both data dependent but also applying judgment and trying to look forward.
And we need.
To scrutinize and be as granular as we can because we are getting closer to the point where hopefully the economic situation will be in the right equilibrium.
But to jump to conclusions and to you know, you will.
Have people the whole week saying, oh, it should be fifty, it should be twenty five inches. No direction of travel clear pace to be determined on the bays of backward and forward looking element, using the three criterias and applying judgment. I think that's how I see it. But it's a collective endeavor in Europe.
You know.
I'm lucky to have plenty of very smart governors around the table and my executive board members.
Everybody has a few everybody does have a view. When is the right time to start thinking about being less accompositive. I don't know how often you can ask about the neutral rate.
It just gets very often and invariably. I don't know, because it's that it's not an elusive concept, but it's one that is first of all, pretty complicated to articulate, and that there is based on multiple factors including productivity, aging, the.
Impact of climate change, and all the rest of it.
So if you were to ask me today, where is it, the honest an sways, I don't know. I think fair to say and credit to the research of the CB, which is not the line adopted by either myself, the Executive Board or the Governing Council. But I think their conclusion is that it's going to be lower than where it is today, and it's probably going to be higher than where it was anticipated to have been prior to COVID, So anywhere in between.
That's a big rains.
I know it's a big range, but it's it's it's not like a mirage, but it's something that you can see, perceive and identify the closer you are to that element because it's you know, it's it's an equilibrium where you have the perfect economic conditions. Employment at at potential, growth at potential. We have to but we are not there for sure, and we are still restrictive and will continue to be for as long as it's needed to get to that point.
I know that your mandate is on inflation, but we had the drug Ey Report of Competitiveness. It was pretty old.
Drug is former presidency.
So he comes into your ear, your fault. I mean he was pretty alarming actually in what Europe needs.
No, I think that he was alarming in his diagnosis of where Europe is at, and I think I said he was. It was alarming and fail or just I forgot what I used, because I think that he has conducted in his position as retired President of the CB, retired governor of the Banca Italia, retired Prime Minister of Italy. He had this sort of paramount vision, holistic vision, if you will, of how Europe functions, what's missing, where are
the gaps? And he had, you know, a great team of economists and other experts who helped him and fielded his considerations and thinking, which is why I think his diagnosis is severe, but just is suggestions for the future in terms of what needs to change, what needs to
be done, what reforms must take place. This is not alarming or unless you say alarming, because he set the alarm bell saying now is the time to get on with it, please, And he's better equipped than anybody else to do that because he's been there, has done it, He's seen the procrastination in play in those European Leaders Council meetings, and I think he's I really like his report.
I don't agree with everything that he says, and I think that our job now, and the job of the Commission and the job of the European leaders is to filter out what can be done expeditiously without bumping into resistance and obstacles and territorial wars and turf discussions, to move the needle and to make sure that both on productivity, whether there's a huge big lag on a better energy sovereignty, on the fluidity of a labor factor and capital there
is real progress for my money. You know, in my position, I would want those three components to really be addressed because it would make a difference for the fact that we have against inflation.
I mean, there are a couple of I guess concrete points.
Right.
There's a huge cross border possible banking merger that could or couldn't happen. He mentioned, you know, the joint issuance of view bonds.
What would make you know what he said on the latter point, because it's a controversial one. Yes, basically the issuance of European bonds. We did it once with COVID, and you have a whole bunch of European leaders who say, oh it was one shot deal with not never again. So it's a highly controversial element of his report, which is why it's being picked up by media and others.
He himself said at the Brugal Institute, which is pretty thorough and deep into these matters, he said, you can read my report, take my report, move on with it and take ownership without that chapter, forget about the debt issue. And so if it's going to be a battle between the Nordic and the Southeast, and forget about that, but do the rest.
I think he's right.
Would you be in favor of bank consolidation to almost you know, signal that actually Europe means that two.
Particular I think productivity is the key, the key battle, but it's not directly related to what we do. That what is directly related to what we do because of monetary policy transmission notably, and because of the financial stability, without which price stabilities will be an illusion is number one capital market union and banking union. Banking union. You can think of three pillars. Two have been built and the third one is missing. So that's what you know.
The edis, which is the European Deposit Insurance Scheme does not exist yet, so every country is on its own and that needs to be addressed. My colleague archaem Nagel actually this morning committed a nice OpEd on that, and I'm delighted that he did. And capital market union, you know we have in some areas, you know, post market infrastructure, we have twenty seven different backbone that doesn't work or it.
Does no, no, I shouldn't say it.
Works, but it works. It is suboptimal by long by a long way. And one of the strength of the US market has to do with the capital market that is vibrant, deep, liquid, and I think much more easily accessible than it is in Europe.
It is the I guess, the window for Europe to get its act together narrowing. I mean we also sit if you're a European between the US and China the IMF. Also, you could argue.
That it's a strategic place.
To be in as long as as long as it is solid and strong enough to stand with its own sovereignty and its ability to keep.
The savings at home. That's one example.
There is so much European savings that travel the world because they don't have an instrument or a market in which to invest.
But what are you optimistic about going forward? I know there's you know, we talk a lot about terroriffs, we talk a lot about trade also being rebuilt now because of geopolitics instead of economic advantage. That must make it harder for Europe.
Well, first of all, there is a lot of trade that takes place within Europe. It's not necessarily well accounted for, but there's a lot of good services movement within Europe that can be improved significantly. And you need to look at the LITA report in addition to the Drug Report and recall it a from a Prime minister as well
makes the case for better European integration. Remove some of the obstacles, do away with some of these multiple licenses to operate, the prior authorization here, prior authorization there, and have a real integrated deep market one of the largest in the world. But we just we keep procrastinating about
little boundaries everywhere. So that integration will increase, in my view, the trade that is within Europe, and I think it will also encourage investment in Europe because investors look at the general terms the tax regime, but they look first and foremost what is the market where will I sell?
Is there? Deep? Is there?
Deep and wide market? What scale can I get as a result of my investment. So I think that a lot is in our hands. I don't like restrictions to trade. I'm a former trade secretary for my country in France, and I just know how much trade can bring in terms of competition, in terms of added innovation, in terms of elasticity. I think trade is helpful, but the trade conditions have to be fair. They cannot be constantly subsidized in a very or pack and.
Unfair way. I was going to.
Ask you as so. We recently had in view with a US presidential candidate who said tariffs was his favorite word. I imagine because of also your background, former IMF, former trade minister, this is not your favorite word. What is your favorite word?
I think fair trade is a key boost for growth, for employment, for innovation, for productivity, and I would say that it's something that we should not throw away because in any period of time where this country, the United States, has thrived, we're periods of trade, not periods of I'm going to retire behind my boundaries and play at home.
I mean, there was a big UK media outlet that called the US economy the greatest economy on Earth? Right now? Would you agree with that? Where does it leave the rest of the world.
I think it depends where you are on the social ladder. I think you have to go further than look at the you know, the sort of aggregate numbers are the average numbers. It depends on where you're on that line. If you are at the bottom of the ladder, if you are if you have a small job, not much by word of income. I'm not sure that you think of you being in the first and best economy in
the world. So everything needs to be considered. But it's a case that the US, for instance, has very high productivity, has a very vibrant tech sector, and has had it for a long time, so it has capitalized on it since the beginning of the twenty first century, and that there is a lot of catch up taking place at the moment. But I think you cannot look at that in isolation. You have to look also at the people.
And I think if you look at the genico efficient, which is probably not the best way to measure inequality, the US is not.
Doing so well from that perspective.
So it's also a question of spreading and distribution so that all people can benefit.
Sorry I'm being political, Now forget it.
Do you worry about central banks being political or being dragged into the political sphere.
No, because I think there is a huge.
Resistance to that in the decisions that we make, despite what is being suspected here or there.
In any you know, place in the world.
And I think for those central banks which have the privilege of independence either by virtue of the treaties or the tradition. It's critically important to hang on to it and to and to defend it because the credibility of an institution like a central bank really is a factor of how independent it is visibly the politics.
And it's precious, It's very precious.
But do you think that that you'll come under attack more not you personally, but just central banks. Donald Trump said J. Powell had the easiest job because it's a flip of a coin every every every month.
He should come and visit us.
And you know I have I have thousands of hard working people, economists, jurists, computer scientists, and I can assure you that they work super hard every day, not just once a month, and they are extremely conscientious and determined to really do the best job they can to deliver the right monetary policy and secure what is our common good, which is our currency. So we defend the euro, and we fight for the euro, just as the Fed defends
the dollar. It's for the dollar. I'm sure I don't want to speak for J. Powell, but I'm sure that's how he sees his job.
Where do you we're just kicking off imfrol banquet? What are you most looking forward.
To, Oh, seeing my friends, that's the first one. And I'm not saying that just jokingly. I think that there is huge value in meeting people who are equally concerned, who have the common good at heart, and who will you know, inform each other of where they see things, what obstacles they are, how we can better cooperate. And it's some people say, oh, it's a big talking talking shop.
Yeah, but it's better to chatchat than to World war, as Churchill would have said. And corporation.
With the caveats, with the difficulties, with the temptation of protectionism and all the rest of it. But corporation is at the very center of keeping keeping some sanity in this world.
I mean, the world is so complex. If there is only one thing that you would like to figure out this week, what would it be? One question?
Peace?
If you ask me one word, that's the one that I would use. Because when I was i'm f managing director, I have seen the destruction and the disaster that that war can bring about. And I have seen countries that have gone through programs that were just graduating from programs, falling back into poverty, into into economic.
Disaster because of war. So yeah, the world as it is.
If there was one thing that I could achieve because I have a magic sticket, would be peace.
Do economics come into play?
Though?
It feels different this time.
The war that we the wars that we have out there, and it's not just Ukraine and the Middle East, that many other theaters of operation like Sudan for instance, not much talked about. That bring uncertainty and that undermine the confidence that people have. We were talking about the European consumer being uncertain. I think, you know, the uncertainty is fueled by the lack of confidence.
You know, what will the future be like.
With those wars on the horizon and the political uncertainty about addressing them and resolving them.
Christine Lager, thank you so much for your time today and we wish your successful IMF week.
Thank you and to you two