Author(s): Jean-Claude Trichet
Date published: Sep 2019
SUERF Policy Note, Issue No 93
by Jean-Claude Trichet1
Former President of the European Central Bank
Download: SUERF Policy Note, Issue No 93 (0.46 MB)
When reading academic works, published observations, articles signed by specialized journalists as well as articles for a large public, coming particularly from non-European countries, there is often the remark that the euro had been a disappointment. The single currency economic performance is supposed to be very poor, particularly in comparison with the USA. The impact of Economic Monetary Union (EMU) on public opinion in member countries is deemed negative, dividing countries and eroding confidence in the European project.
I think that this is a wrong view, which does not represent reality, is deeply misleading and can drive foreign governments, leaders, economic agents and market participants to make wrong decisions. The fact that there is a significant international view which is not correct does not really surprise me: the existence of a negative bias against the single currency has been observed since the inception of the euro.
I will make the three following points:
Overall, the success of the euro and of the euro area in terms of credibility, resilience, flexibility, popular support and real growth during its first 20 years is impressive. It justifies reasonable optimism as regards the long-term success of this unique, ambitious, historic endeavor of the Europeans. To consolidate this long-term success, a lot of hard work remains to be done as is always the case when a bold historic endeavor is in the making. The single market with a single currency of the United States of America was not achieved in a short span of time. Neither in 20 years, nor even in 40 years! From the Coinage Act of 1792 to the Federal Reserve Act of 1913, there is a maturing process of around 120 years. And since the issuance of the first federal note in 1914 and today, an additional period of 105 years.
In January 1999, the euro started from scratch. The exchange rate was USD 1.17 for one euro. There was no doubt for most of the observers and economists outside continental Europe that the euro would not stand at par with the dollar in terms of credibility, medium and long-term capacity to keep its domestic and international value. The idea that a currency born in particular from the merger of the Dutch guilder, the DM, the escudo, the peseta and the lira would overtime inspire a high level of confidence, appeared then to be very presumptuous.
At the time I am delivering this Lecture, the euro-dollar exchange rate is approximately at its entry level (USD 1.12 today versus 1.17 at its inception). The overwhelming majority of economists and market participants have no more any doubt on the capacity of the euro to keep its international value. During part of the first 20 years of the new currency, remarks were made on the fact that the euro was much too solid and too strong, which was highly paradoxical for a currency deemed to lack credibility at its inception!
The international credibility and success of the new currency are confirmed by facts and figures: the euro is by far the second international currency after the dollar. According to the ECB2, it represents 23% of the “international debt outstanding” (62% for the US dollar, 2.4% for the Japanese yen).
In terms of “global payment currency”, it represents 35.7%, approximately ten times the percentage for the yen and not so far from the dollar (39.9%).
It amounts to around 20% of foreign exchange reserves, approximately one third of the dollar foreign exchange reserves and four times the yen reserves.
The euro is the unchallengeable second most important international currency. I would only add that the International Monetary System is called to change structurally with the growing presence and use of the renminbi which is likely to contribute to significant changes both for the dollar and for the euro.
The international credibility of the euro is echoed by its domestic, pan-European stability. The ECB made clear from its inception that it had a definition of price stability that would be the yardstick to judge its capacity to deliver stable prices: less than 2%, quickly clarified in 2003 as “less than 2% but close to 2% in the medium run”.
Since its inception from 1999 up to 2018, the average euro inflation is around 1.75%. It is an impressive result over around 20 years, in line with the definition of price stability.
This does not mean that inflation should be close to 2% every year. The delivery of price stability has to be judged over a medium/long-term period. For instance, the most recent period was marked by threats of deflation and years of very low inflation, which the ECB fought with determination. When I left the ECB at the end of 2011, average 2011 inflation rate was 2.72%, significantly higher than 2%. What counts from the Central Bank standpoint – whatever external and domestic circumstances are – is to take the right decisions aiming at stabilizing medium-term inflation expectations and effective inflation in line with our definition of price stability.
In very turbulent times, the euro, as a currency, and the euro area proved remarkable resilience.
At the inception of the euro, a significant global analysis, outside continental Europe, was not only that the single currency would not inspire confidence, but also that it would be short-lived, as a kind of audacious experience deserving respect for its boldness but incapable to sustain the difficulties of hard times. In this early view, the capacity of the currency to hold in the worst economic and financial circumstances would appear as a miracle. This explains why so many eminent economists predicted the end of the European endeavor after the start of the financial crisis and, particularly, after the start of the sovereign risk crisis, the epicenter of which was in the euro area.
It was clear that the localization of the sovereign risk crisis epicenter in the euro area was due to specific European errors as well as the localization in the USA of the epicenter of the subprime and the Lehman Brothers crises were due to mistakes made in the USA. I see six main reasons why the euro area had to cope with this specific sovereign risk crisis:
The underlying concept of the euro area was EMU, namely Economic and Monetary Union. The “Monetary Union” was undoubtedly there: one single currency, one exchange rate vis-à-vis other currencies, one single credibility, one inflation for the whole single currency area. The “Economic Union” had lacunae in its design and was poorly implemented before the crisis. All taken together, the economic, fiscal and financial governance of the whole euro area was suboptimal.
That being said, many highly pessimistic external observers missed three points when the sovereign risk crisis erupted in 2010 and 2011.
The first mistake was to consider that all member countries were in a crisis situation. As a matter of fact, out of the 15 countries members of the euro area at the time of the Lehman Brother bankruptcy, 5 (namely one third) had very serious economic, fiscal and financial problems. The paradox of the euro area was that the area included both the worst public signatures in the eyes of market participants (for instance Greece, Portugal, etc.) and the best ones (Germany, Netherlands, Austria, etc.). The euro, as a currency, was reflecting the average situation of the euro area and not only the part of it which was in crisis, which represented a minority. Seen from this standpoint, the remarkable resilience of the euro, as a currency, was not a miracle.
The second mistake was to underestimate the capacity of the euro area to be flexible, to correct its weaknesses in terms of economic governance and to demonstrate both solidarity at the level of the area and strong national capacities to adjust in the crisis countries. In the crisis, the Stability and Growth Pact (SGP) was reinforced, the Fiscal Stability Treaty was signed and ratified, the Macroeconomic Imbalance Procedure (MIP) was set up, Banking Union was created and the European Stability Mechanism Treaty signed and ratified. All four first weaknesses mentioned earlier were addressed. Ireland, Portugal and Spain, in particular, demonstrated a real capacity to adjust.
The third mistake was to neglect the attachment of people in the euro area to the single currency. It is this popular support that explains the capacity of the euro area to adapt and to prove a remarkable resilience.
To make a long story short, let me mention the fact that 15 countries were members of the single currency area on September 15, 2008, the very day of the bankruptcy of Lehman Brother. All 15 are still members today, including Greece. And 4 new countries (Slovakia, Estonia, Latvia and Lithuania) came in, after the start of the global financial crisis, so that the euro area includes now 19 countries. Is there a better refutation of the fragility of the area than a significant expansion in a period of major financial crisis?
1.4. Popular support
The conventional wisdom was, and still is, that popular support is dramatically lacking for the European integration project. This belief was reinforced by the unexpected success of a political populist persuasion in the UK and in the USA. It appeared quite natural that a political wave characterized by nationalism, protectionism and xenophobia would be present in continental Europe and would have also a strong anti-European Union component, as was the case in the UK for instance.
It is unchallengeable that the frustration of public opinion, generalized in the advanced economies, is also present in the European Union and in the euro area. But the paradox is that this dissatisfaction is directed significantly more towards national governments, parliaments and national institutions, than towards the European institutions (Commission, Council and European Parliament).
The surveys “Eurobarometer” are particularly interesting3. 42% of citizens members of the European Union “tend to trust the European Union”, significantly more than those who “tend to trust their national governments or parliaments” (35%). This is even more impressive when comparing the percentage of citizens who “tend not to trust”: 48% for European Union compared to 59% for national governments and 58% for national parliaments.
Comparisons are also remarkable when directly comparing confidence in the European parliament with confidence in national parliaments: 48% versus 35% for “confidence” and, overall, 39% versus 58% for “no confidence”. This means a difference of +9% for the European parliament and -23% for the national parliaments. The same difference is observed as regards comparison between the European Commission and national governments: 43% versus 35% for “confidence” and 39% versus 59% for “no confidence”, namely +4% for the Commission and –24% for national governments.
Finally, it is equally noteworthy that the support to the European Union is presently higher than during all the period starting with the great financial crisis. The bottom line is that nothing is satisfactory: our fellow citizens are giving a weak confidence level to all institutions whether national or European. Still the confidence vis-à-vis Europe and its institutions is significantly higher than confidence in national institutions.
As regards the euro, the support given by the European citizens inside the euro area to the single currency is high and much higher than the perception of global observers. 75% of citizens of member countries approve the sentence: “A European economic and monetary union with one single currency, the euro”, while 20% are against the sentence. The fact that the question is pertinent is confirmed by the response of the UK citizens (28% approve, 59% disapprove). The present proportion of 75% in the euro area member countries is the highest in the survey since its inception in 2003.
One of the most frequent errors made by observers outside the euro area was that the euro was rejected by public opinion. I was often confronted to the view that the Greeks were massively in favor of leaving the euro to avoid the economic adjustment (“austerity”) and that the Germans would massively take advantage of the crisis to get back to their previous national currency, the Deutsche Mark. Nothing could be further from the truth! The Greeks were massively in favor of preserving their euro-participation (67% are approving the previous sentence on the euro). And the Germans were (and are) strongly in favor of the euro (81% are approving that sentence in the last survey).
As said before, this popular support, so far away from the conventional wisdom outside Europe explains largely the remarkable resilience of the euro and of the euro area.
2.1. A real economy growth
Even if the average global observer can be reasonably convinced that, all taken into account, the single currency was a success in terms of stability and credibility, that the euro area demonstrated strong resilience in exceptional circumstances and that a surprising but unchallengeable popular support is accompanying this historic European endeavor, there is a negative dimension which will immediately be presented as the ultima ratio: the euro and the euro area are supposed to be indisputable real economy failure!
Comparing the euro area to the United States, the economic weakness of the single currency area appears at first look unchallengeable. But it is because of two optical illusions.
First, the nature of the comparison of the real growth figures: usually done in absolute terms, not taking demographics into account. Then the comparison is always to the advantage of the USA which benefits from a yearly positive demographic growth differential of around + 0.7%. Second, in the most recent period, real growth in the euro area was hampered not only by contagion of the global financial crisis in 2007–2008 but also by the sovereign risk crisis in 2010–2013, the euro area being at its epicenter. The recovery started in the USA mid-2009 while the sustained recovery in the euro area started several years afterwards, in 2013.
The correct judgment should, in my view, start with the setting up of the euro – January 1999 – up to now, namely the same period of almost 20 years already mentioned. It seems the most pertinent period of time for three reasons: first, it corresponds precisely to the period of the euro; if the euro is responsible for economic failure, it should be visible in that period. Second, it is a period sufficiently long to cover more than an economic cycle. Third, the starting point and the endpoint are sufficiently far from the start of the global financial crisis for the period not to be too influenced by the various steps of the crisis on the real economy of the USA and of the euro area.
That being said, where do we stand?
To be sure that my comparison between the USA and the euro area would be as sure and correct as possible, I will rely upon IMF and World Bank figures. According to the IMF4, the 1999 GDP per capita of the euro area was around USD 22,300 compared to USD 34,500 in the USA. According to current estimates, the respective GDP per capita in 2018 was around USD 40,100 and USD 62,600. The dollars are current dollars over the period.
These IMF figures suggest multiplication of the GDP per capita by 1.80 in the euro area and 1.81 in the United States. The difference is very modest and does not suggest a significant advantage for the United States. In any case, it does not confirm at all the growth failure of the euro area that is often part of the conventional wisdom.
These results are significantly depending on the chosen starting year. The period 1998-2018 is more favorable to the USA, while the period 2000-2018 is more at the advantage of the euro area. The bottom line is that there are no IMF figures that would suggest that the growth capita of the euro area as a whole is significantly different from the US growth per capita since the setting up of the euro.
Data have always to be examined carefully. Even if an overwhelming majority of the GDP of the euro area was set up at the inception of the euro (the first “11” and then “12” with Greece), the additional 7 (Slovenia, Malta, Cyprus before the Lehman crisis and Slovakia and the three Baltic States after the Lehman crisis) are contributing positively to growth of the whole area despite the fact that they are small economies. The reason is that they started from lower levels in terms of GDP per capita. But this cannot explain the significant difference I am stressing between perception and reality of the euro area growth per capita.
The results from IMF data are confirmed by the World Bank data on real growth per capita in the euro area and in the USA. To make a long story short, World Bank data on real growth per capita from 1999 up to 2017 are the following: annual growth of 1.1% in the euro area and 1.2% in the USA, namely the same order of magnitude on both sides of the Atlantic.
It is also suggested from time to time that countries outside the euro area did better, and even much better, than countries inside the single currency, since its inception. It is always possible to find a very bright European economy out of the euro area: Norway or Switzerland, for instance. But I had the curiosity to compare the euro area with the UK over the 20 first years of the euro. Contrary to common belief, the IMF data are giving an advantage to the euro area vis-à-vis the UK in terms of growth of GDP per capita, whatever the starting year is. If we trust the IMF figures, the catching up process of the euro area vis-à-vis the UK is visible. At the inception of the euro (1999), the GDP per capita of the euro area was around 21.6% below the UK level. In 2018, the IMF estimates put the euro area around 6% below the UK level.
This overall encouraging situation of the euro area in terms of real growth per capita does not mean that the Europeans can rest on their laurels. The GDP per capita of the euro area remains significantly lower than in the USA (36% lower) and a vigorous catching up process should be at stake. The euro area has to do better and much better in many areas. Due to lack of appropriate structural reforms, unemployment, particularly youth unemployment, is still much too high. Europe and the euro area are not innovative and creative as they should and as the USA – and also China – are in terms of High-Tech and IT new businesses. Also in the domain of education and universities of excellence at a global level, the euro area is at a disadvantage in comparison with both the United States and the UK.
2.2. Economic convergence between member states must make further significant progress
If growth per capita in the euro area is comparable to the growth per capita in the USA since the inception of the euro, another dimension of the euro area must be examined, namely convergence between members countries in terms of nominal evolution of inflation and interest rates, of synchronization of the timing of business and financial cycles, and of real convergence in terms of growth and standard of living. From this stand point, according to the IMF5, the situation of the euro area is nuanced and depends on the convergence criteria analyzed.
If there is no doubt that the single currency offers additional new economic opportunities and additional new potential for growth to all member countries, it clearly doesn’t mean that belonging to a single currency is a guarantee to attaining the highest-level GDP per capita. As the USA example suggests strongly, a State’s economic success still depends heavily on the quality of the economic management, on the progress made in terms of productivity and on the level of investment in that State. For instance the State of Mississippi has not the same standard of living as Massachusetts (respectively USD 33,558, USD 71,456 in 2017, according to the US “Bureau of Economic Analysis” in chained 2012 US dollars), even if the USA has a single currency, together with an achieved political federation, a federal budget and a functioning single capital market. By the way, according to 2017 IMF figures, the Portuguese or the Greek standards of living (respectively USD 23,116, USD 23,027) are displaying approximatively the same gap vis-à-vis Germany (USD 46,747) than Mississippi vis-à-vis Massachusetts. This is only comparing average standards of living. A full-fledged comparison, taking also into account the level of unemployment, would accentuate the differences observed in Europe because unemployment is comparatively high in Greece a relatively low in Mississippi.
Still there is an important issue in inequalities in Europe, inside each country and between member countries (like, in the USA, within and between States). Economic convergence inside the euro area must be improved, being understood that it is convergence towards full employment with the highest possible GDP per capita which is the goal. Reinforcing convergence inside the euro area is of the essence and calls for consolidated and strengthened economic, fiscal and financial governance of that area.
The long-term goal of Europeans should be to run optimally their single currency economy, avoiding the kind of sustained divergences that created the sovereign risk crisis and, at the same time, give all their chances to member countries and to the area as a whole to catch up in terms of job creation and standard of living.
The success of the euro, as a currency, and of the euro area in terms of credibility, resilience, flexibility, popular support and real economy success does not mean that the Europeans should or can rest on their laurels! It is exactly the contrary. They have a lot of very hard work to do to make a full historic success of their extremely bold strategic endeavor. The first 20 years are, in my view, demonstrating that they were right in engaging on what is probably the most audacious economic and monetary structural reform ever attempted in times of peace.
A long-term historic endeavor is necessarily history in the making. I see many avenues for European progress in the years to come. President Macron6 listed recently major multidimensional reforms for the medium-term future of European Union.
First, indeed, one should not forget that European Union has many other dimensions than the economic and monetary ones. Culture, domestic and external security, fight against terrorism, control of the borders, monitoring of immigration, and defense are all areas where it is obvious that there are no pertinent national solutions but possible European correct responses at the level of the continent. It is also comforting to note that there is a large popular support to make progress in these fields, according to the Eurobarometer survey: for instance, a “common defense and security policy” is approved by 76% against 18%; a “common foreign policy” is approved by 65% against 26%.
Second, in the specific domain of Economic and Monetary Union, I see six major recommendations to improve both responsibility and solidarity within EMU and to reach the ultimate economic goal for all national economies and for the single currency area as a whole: sustained growth, full employment and catching up the most advanced economies in terms of standard of living.
The European Council has taken a decision in principle to set up a budget. I understand from statements of Heads and Ministers that this budget will probably materialize by concentrating on the third and fourth possible functions (financing in particular pan European investments and structural reforms, and therefore helping a better convergence between the member countries).
I would personally advise not to forget the importance of the anticyclical cushion (second possible function) from the economic standpoint, even if we are still far away from a consensus on that matter.
In conclusion turning to one of the founding brain of the European Union, I will quote Jean Monnet. I think what he said is not only true for Europe but also true in some respect for the constituency of Central Banks and for the international community as a whole, in a period of extraordinarily rapid structural changes: “Premature ideas do not exist, one must bide one’s time until the right moment comes along.”
About the author
Jean-Claude Trichet is presently Chairman of the Board of Directors of Bruegel Institute (Brussels) and European Chairman of the Trilateral Commission. He is a member of the Institut de France (Académie des Sciences Morales et Politiques) and Honorary Chairman of the Group of Thirty (Washington). He was a member of the Eminent Persons Group (EPG) on Global Financial Governance set up by the G20 Finance Ministers and Governors in 2017. In addition to his service as President of the European Central Bank (ECB) from 2003 to 2011, Jean-Claude Trichet was Governor of the Banque de France (1993–2003) and Undersecretary of the French Treasury (1987–1993). He also served as President of the Paris Club (debt rescheduling) (1985–1993), President of the European Monetary Committee (1992–1993), President of the Group of 10 Central Banks Governors, and President of the Global Economy Meeting in Basel (2002–2011). Moreover, he was President of SOGEPA (Société de Gestion des Participations Aéronautiques) (2012–2013) and Director of Airbus Group (2012–2018). He was named “Person of the Year” by the Financial Times in 2007 and ranked fifth on Newsweek’s list of the world’s most powerful in 2008. Born in Lyon in 1942, Jean-Claude Trichet is an honorary inspecteur général des finances and ingénieur civil des mines. He is a graduate of the Paris Institute of Political Studies (Sciences Po), the University of Paris (in economics) and the National School of Administration (ENA). Jean-Claude Trichet has been awarded honorary doctorates by several universities.
SUERF Policy Notes (SPNs) focus on current financial, monetary or economic issues, designed for policy makers and financial practitioners, authored by renowned experts. The views expressed are those of the author(s) and not necessarily those of the institution(s) the author(s) is/are affiliated with.
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