Growth - Put the House in Order - Trichet, Jean-Claude

Put the House in Order

An Interview with Former European Central Bank President Jean-Claude Trichet


As the president of the European Central Bank from 2003 to 2011, Jean-Claude Trichet was a key player in the efforts of central banks to manage the global financial crisis and the subsequent European debt crisis. As the current chairman of the prestigious nonprofit think tank Group of Thirty, he retains a ringside seat on global efforts to encourage structural reforms in the advanced economies aimed at increasing financial stability and laying a strong foundation for future growth. In April 2015, The Boston Consulting Group’s president and CEO, Rich Lesser, sat down with Trichet near London to discuss the challenges still facing the global economy and, in particular, the Eurozone.

I'd like to start with your perspective on the current state of the world economy. Do you think we are finally past the financial crisis?

I think we’ve made a lot of progress on the private financial side. We are certainly in a much more resilient, robust, and solid situation. But when the crisis moved from being a private finance crisis to becoming a public finance crisis, the epicenter of the crisis crossed the Atlantic, after having been in the U.S., and came to Europe. The euro area in particular was the epicenter of this episode of the crisis. There, also, a lot of hard work has been done.

But I would not say that the crisis is over. We have done a lot, but a lot of hard work remains to be done, particularly in the structural area, where our advanced economies in general—particularly Europe but not only Europe—have to continue working hard on their own real economies. Because if we were truly out of the crisis, you would not need the central banks to do all the extraordinary efforts they are still doing today. It is still very much the case that central banks in Japan and Europe are pursuing active nonstandard policies. Nonstandard policies remain also in the other countries, including the U.S. That demonstrates to me that a lot of hard work remains to be done.

What do you think the prospects are in the years ahead to accomplish the structural reform agendas in the key global economies?

I expect—and I hope very much—that the democracies of the advanced economies will fully understand that to pave the way for a much better future for their citizens’ children and grandchildren, a lot of hard work and hard structural reforms—which are not popular—have to be made. We will see. I think it’s the responsibility of the central banks to be very clear on that because, everything taken into account, they are giving time to our societies, to the executive branches, to the governments and parliaments. If this time is not utilized to put the house in order, we will only pave the way for the next crisis.

It’s clear that all these very accommodating policies—which are absolutely necessary at the present time—have also their own unintended consequences on markets, on possible bubbles, on possible further difficulties. Again, it remains a very, very serious situation. I think the message should be very strong coming from the private sector, coming from the central banks, coming from our society as a whole: “Put the house in order,” if I may.

How do you look right now at Europe? There's been so much economic stimulus resulting from lower oil prices, lower inflation, and, obviously, low interest rates. How do you see the outlook for Europe in the short term and in the medium term?

In the short term, I think that we have this very favorable environment that you just mentioned. In particular, the price of oil has benefited Europe a lot because we are not oil producers. The bulk of this lower price of oil is for activating the real economy—and the same, of course, for the accommodating policies of the central bank and the decrease of the value of the euro on the exchange market.

We are also close to the end of the legacy of the crisis of sovereign risk. Apart from Greece, which is a special case obviously, the other countries are now growing and creating jobs, and the derivatives are now good also in these countries. When I look at the projections of the international institutions, I see they are revised up and up and up. That is the case, for example, of the last projection of the IMF, which has revised up its projections for 2015 and 2016, compared with a month ago. That is something which captures pretty well, it seems to me, the present situation.

That being said, this is conjuncture; it is not the structural, long-term position—which brings us back to the theme of structural reforms. By structural reforms, in Europe, I mean not only national structural reforms that are overdue in most countries, but also reforms at the level of the governance of the euro area as a whole. Because it’s very bold to have a single currency without having a full-fledged political federation with a federal budget. We have to be very, very serious about the economic and fiscal governance of the euro area. From that standpoint, a lot of things still have to be done.

If you have one piece of advice to give to government leaders and to corporate leaders in navigating the volatilities and uncertainties of today’s world, what would it be?

I would say, first of all, sound management. It seems to me that, for the private sector as well as for the public sector, sound management—even when it is not fashionable—is rewarded in the long run. My own experience in Europe is absolutely clear: those countries that have won against mass unemployment were very wisely managed as regards, in particular, their fiscal position and, of course, also their structural reforms.

Wisdom, even in episodes and periods where it is not the global fashion, is rewarded—particularly in periods of crisis or stress. We will have a lot of stressful periods. They are a part of today’s world. It would be very naive to assume that we have been in a shaky episode but we will be back to a very normal, calm situation. We won’t have calm! The world is changing so rapidly that you have earthquakes everywhere—on the side of the real economy and on the side of the financial economy—and it’s normal. We have to accept that. Therefore, wisdom and preparing for the unexpected on a more or less permanent basis are the new rules.

Thank you so much, Jean-Claude, for spending the time with us.

It was a real pleasure, a real pleasure. Thank you.

About Jean-Claude Trichet