Ex-ECB President Trichet: “We are more vulnerable”

In the 25 years since the ECB was founded, the euro inflation rate has remained close to the target of two percent for most of the time. Recently, inflation got out of hand. Former ECB President Jean-Claude Trichet talks about the reasons in an interview.

tagesschau.de: Mr Trichet, the European Central Bank was founded 25 years ago today. You were president of this institution for eight years, even in turbulent times. When you take stock: How has the ECB developed over this period?

Jean Claude trichet: In this period, which spans a quarter of a century, we have shown that, firstly, we have fulfilled the responsibility that the EU Treaty gave us. The primary mandate is to ensure price stability. If I look at the annual inflation rate since the start of the euro up to now, then we have achieved what we promised the population, that is, the people of the euro zone, namely price stability. During this period, the average inflation rate of the euro was better than the best average inflation rate of the previous single currencies in the 40 years before the euro was introduced. This is almost paradoxical when you compare this result with the expectations at the time. They were very negative and pessimistic.

Secondly, during my term of office we had to deal with the biggest crisis since the Second World War, i.e. the collapse of the American investment bank Lehman Brothers and the real estate and financial crisis. In this crisis, the ECB has shown great resilience.

And thirdly, we have proved that the major European integration project in the area of ​​currencies, ie the European Monetary Union, has developed very successfully. When I took office in this institution, we were twelve member states. When I left we were 17. And today we are 20. At the very beginning there were eleven. So this expansion from 11 to 20 proves that there is something very powerful at the bottom of Europe. And all this under extremely difficult conditions. This is the greatest reward for the ECB itself, for those who have made the ECB what it is today and for those who are currently in charge. The people of Europe support us. I am absolutely amazed to see that today 79 percent of the people in the euro zone have faith in us, in the euro. This compares to the skepticism at the beginning, not only here, but also in the USA and Great Britain. This is truly the greatest reward in a democracy.

One crisis after another

tagesschau.de: How strong was this skepticism during your term of office?

trichet: Very pronounced. At the time, our fellow citizens were not yet convinced that we would actually be able to deliver price stability. For them it was a new venture, starting from scratch – which it was – and they expected us to deliver on our promises. And then there was the so-called subprime crisis, that is, the real estate crisis in the USA, the financial crisis with the collapse of Lehman Brothers, the sovereign debt crisis, all during my tenure. My successor Mario Draghi then had to deal with the possible danger of deflation, as there were very strong developments in this direction of constantly falling prices, not only in Europe but also in the rest of the world. And (today’s ECB President, editor’s note) Christine Lagarde not only had to deal with it, but also with the consequences of the Corona crisis. Mario, Christine and I had to overcome enormous difficulties and challenges that were not purely European in nature, but global phenomena. And we have proven that the ECB is resilient.

tagesschau.de: Many critics at the time did not expect that the euro and the ECB would be successful. What do you tell them today, 25 years later?

trichet: We started something that has never been tried before anywhere in the world. It was a real first, namely to unify important currencies like the Deutschmark, the French Franc, the Italian Lira and all the others. They put it all together and said, this currency that’s coming out is going to be just as good as the best of the individual currencies. Among the best was of course the D-Mark. We did it. This is really a great success.

The ECB has recently hiked interest rates seven times

tagesschau.de: Has the character of the ECB changed in dealing with the many crises?

trichet: I do not think so. Since we started and today, our goal has been to deliver price stability. This mandate has priority. However, in the face of adverse circumstances, the ECB has also had to prove that it is an anchor of stability, not just price stability but financial stability as well. In addition, it should also present itself as a good institution that serves the population. The EU treaty requires that we must first achieve price stability. When that is achieved, we can also support other goals of the European Union, such as supporting the economy. That is possible, but only after we have delivered price stability.

tagesschau.de: If we look at the entire 25-year period, the ECB has achieved this target of an average annual inflation rate of around two percent. If we only look at the past few years, however, inflation is significantly higher and has at times reached record levels of up to around ten percent. Has the ECB underestimated the severity and persistence of this inflation trend?

trichet: Well, for one thing, all the developed economies in the world are having to deal with this surge in inflation that has suddenly come back sharply after we had more deflationary pressures for about ten years. Secondly, when I compare the central banks in the US, Europe and all the other countries, the European Central Bank has done a good job. She had to make sure it made sense to act first. Because the supply shock, i.e. the lack of sufficient supply, was much greater in Europe than in the USA. This is partly because of the war against Ukraine, but also because we are more vulnerable. Because in Europe we do not have sufficient supplies of energy and food. So this is a particular problem in Europe. When the ECB then decided to act, it raised interest rates seven times, and several times very sharply. Of course there is always criticism. Some say she does too little, others think it’s too much. I think the Governing Council reacted very appropriately and correctly.

“ECB will achieve two percent inflation in the medium term”

tagesschau.de: Some critics say the ECB was too hesitant.

trichet: No. I disagree with the argument. For one, the ECB had to first evaluate whether the supply shock and demand shock were sustained or not. And as I said, the supply shock was greater in Europe than in the US. And that is a very important aspect to consider. Second, the ECB first had to make it clear that it was changing its forward guidance – the guidance for market participants on how the ECB would act, which was put in place during the period of deflationary pressures. Of course, this took some time to warn all investors and savers and make it clear that there is a new situation in the world now. But once that was done, the ECB was very quick and quickly raised interest rates. If you look at the overall situation, they did very well.

tagesschau.de: How confident are you that we will achieve lower inflation rates again in the eurozone?

trichet: In this context, let me first point out something important: The ECB defines price stability in such a way that the inflation rate should be two percent over the medium term. The US Federal Reserve has the same goal, as do the British and Japanese central banks. But we were the first to start with this definition. The two percent target was initially only announced by the ECB. Then the others followed. This is important because it means something: All four are central banks of G7 countries that issue convertible currencies and have a place at the heart of the international monetary system, i.e. in the currency basket of the International Monetary Fund. They’re on the same level now, targeting 2 percent inflation over the medium term. This is the most important reform that has actually taken place in the international monetary order since the dismantling of the Bretton Woods system in the early 1970s. And I am proud, as are Christine and Mario, that this started here at the ECB and is now anchored in the world. I’m sure that the ECB and the other central banks will return to two percent inflation in the medium term – for the good of the people and for the sake of stability. Price stability is particularly important for the poor because they cannot protect themselves against inflation.

tagesschau.de: The ECB is now a quarter of a century old. Given the many problems, will we also see the 50th anniversary?

trichet: Yes, of course! I can only underline it once again: the enlargement of the euro zone from eleven to 20 members is an important part of the European project. It is absolutely clear that this project will continue. Europeans want to be on the global stage and not be ignored. The ECB will celebrate its 50th anniversary and European unification will make a great deal of progress over the next 25 years. I’m absolutely sure with this.

The conversation was conducted by Klaus-Rainer Jackisch, hr