Ulysse Gosset

Welcome to this special edition of the Talk of Paris on France 24.
All of Europe is rallying together to find a solution to the financial tsunami which is shaking the very foundations of banks throughout the world.
Will Europe be able to stay united to struggle together against this crisis?
The stakes are very high, as beyond financial bankruptcy, recession is lurking.

Ulysse Gosset

Bonjour Jean-Claude Trichet.

Jean-Claude Trichet

Bonjour.

Ulysse Gosset

You are with us from Frankfurt, headquarters of the European Central Bank, which is maintaining its prime lending rate at 4.25%, despite the wishes of many governments. We'll bring this up later.
First, your analysis of the crisis. This is a real earthquake. In your mind, is this more serious than the crash of 1929?

Jean-Claude Trichet

Well, we are living in a period of exceptional uncertainty.
We are experiencing a market correction of a great, great magnitude since a long period of time with episodes of very high levels of turbulences, very high levels of volatility.
And it's an ongoing process.
We have to take all appropriate decisions to counter the threats we are facing in this situation.
So I will not qualify what we are experiencing by looking back to before the Second World War.
But I would say that since the second world war, we are experiencing events in global finance and in the finances of the industrialised countries that have no precedent.

Ulysse Gosset

How long will this purge last, according to your impressions today?

Jean-Claude Trichet

Again, since the very beginning, our judgement had been that it was an ongoing process.
And that it has been an ongoing process triggered by a generalised underassessment of the quantity of risks in global finance and also an under-pricing of the risks themselves.
And we were public on that.
My colleagues from the central banks and myself—the ECB, publicly, in written statements,
myself in reporting on the G10 meetings of the central bank governors in Basel—we said that we were observing abnormal under-pricing of risks and abnormal underassessment of risks.
And that we had to be prepared—and when I said we, I meant the private sector as well as the public sector—be prepared for a correction.
That being said of course, it's an ongoing process.

Ulysse Gosset

How long could it take to purge the system?

Jean-Claude Trichet

Again, we will see how long it takes. It's an ongoing process and we have to be alert, permanently.

Ulysse Gosset

Should we fear now a recession for the beginning of next year?

Jean-Claude Trichet

For several months now at the ECB, we have said that the second and third quarters in the Euro area would mark the trough of the cycle.
And then we said that there is a probability of a progressive, gradual recovery.
But we also had to take into account that the risks were on the downside.
And we said that very clearly, that the risks were on the downside.
Today, I am saying, on behalf of the Governing Council, that we consider that the risks for growth are on the downside.

Ulysse Gosset

But Ireland is already in a recession.
And some {coupure} will be the first to suffer from a recession and the last to come out of it.
What are your views?

Jean-Claude Trichet

I again state that we have risks for growth that are on the downside.
I will not qualify the period to come.
In other words: weak growth, with risks on the downside. As you know, my reasoning comes with 320 million people in mind.
And 15 countries—not 1 or 2 countries— but 15 countries and 320 million people.
But again. Growth is weak and risks are on the downside.

Ulysse Gosset

Let's look again at your decision not to lower the European Central Bank's interest rates. This decision has prompted a lot of reaction. Why did you decide to maintain the status quo?

Jean-Claude Trichet

We assessed the situation...As you know our decisions at the Governing Council are based upon the assessment of the risks for price stability.
As I am used to saying, we have one needle in our compass: the risks for price stability.
It is what our fellow citizens are expecting from us. They are attached to price stability.
They want price stability.
And it is, of course, essential for sustainable growth and sustainable job creation—and it holds particularly true in a period of high levels of volatility and financial instability.
If we had an un-anchoring of inflation expectations we would have an increase in volatility
in all markets. So our assessment, to sum up, is that the upside risks for price stability
have decreased, but that they have not been eliminated: they have not disappeared.
And that's the reason why we considered that although the upside risks are decreasing, it was appropriate to maintain the rates as they are.

Ulysse Gosset

Jean-Claude Trichet, you know that your orthodox financial methods are not always well understood. Let's listen to a question from Denis McShane, member of the British parliament. Let's listen to it together.
Interprète de Denis McShane
Jean-Claude Trichet hello, this is my question. Even though I have agreed with you in the past on the need to have fairly high interest rates to maintain the stability of the Euro, everything today has changed.
And we need a boost to the economy, so we need to cut rates a little bit. Do you agree or are you still as rigid as you have always been on this issue?

Ulysse Gosset

Your answer Jean-Claude Trichet?

Jean-Claude Trichet

I would say to Denis that we have never been rigid. We have always taken the appropriate decisions, again: to maintain price stability and be credible in maintaining price stability.
At this moment in time I wouldn't say that we are rigid: we are assessing the situation.
Our fellow citizens are asking us to deliver price stability. And we, again, we considered that the upside risks are diminishing but that they still exist, and we took our decision based on that.
But let me say one thing. If we were not credible in delivering price stability, the interest rates (medium- and long-term, two years, five years, ten years) would increase, and that would reduce growth and stifle job creation.
And I would say that if inflation expectations were not properly anchored, there would be increasing and more volatile inflation, and we would be adding to financial instability.
So I think that what we are doing is ensuring the European economy continues to be solidly anchored, in order to anchor stability—and not only price stability, but through price stability, sustainable growth and job creation.
Let me remind you that we have created more jobs since the creation of the Euro than the United States of America. One shouldn't forget that.

Ulysse Gosset

Well, some people still don't understand why the American Federal Reserve continues to want to lower rates (there is talk of a new cut in rates in the US at the end of October), even though they are already as low as 2%, while the ECB maintains its rate at 4.35% [sic].

So how do you explain the difference?

Jean-Claude Trichet

Denis was asking a question a moment ago.
The interest rates in London are at 5%. They are lower in the US. They are at 4.25 here.
I could name a series of countries where interest rates are higher than 4.25. Each central bank has to deal with its own economy, with its own characteristics, taking into account its own shocks and features.
And we are all in full agreement over the fact that we have to solidly anchor inflation expectations, but according to a variety of circumstances. And, again, I think it is very inappropriate to just compare the nominal figures.
You have to compare everything.

Ulysse Gosset

Have you been happy, so far, with Europe's reaction to the crisis?

Jean-Claude Trichet

I think that with the current exceptional circumstances, where the level of uncertainty is exceptionally high, in such circumstances, up to now, it seems to me that the European authority have reacted correctly, promptly, and in a way which was appropriate.  This is true for the central banks, and not only for the ECB, I’m speaking about the 27 countries of Europe.  I think that the Bank of England, for instance, did a very good job. We were all up to exceptional circumstances.  I would say also that governments have been prompt and I called on them to take responsibility, because there a lot of things that we can do, but there are things that we cannot do.
We can do a lot of things in the liquidity area but if there is a solvency issue, governments might have to step up. They did do just that, and I consider, really, that we are in a situation where, given the exceptional circumstances, we have had appropriate decisions from the public sector.

Ulysse Gosset

But when you see Ireland deciding on a plan on its own, and Germany and France fighting about what to do next, don't you see some cacophony in Europe?

Jean-Claude Trichet

No. I would say, on the contrary, that each government, with its own parliament, according to their circumstances—difficult circumstances—have taken decisions. In Ireland, in Germany, in Belgium, in the Netherlands, in Luxembourg, in France, not to mention in other countries.
And they have been decisive and prompt.
It was what the situation called for.
And I really do not believe that the Europeans have not been prompt and appropriate in their response.
It would be a little bit paradoxical, when the difficulties emanate from the other side of the Atlantic, to say that the Europeans are particularly clumsy.
They are not. And I expect that they will continue, of course, to act according to their responsibilities.

Ulysse Gosset

Still, today, don't you think Europe should be really united and have a common reaction to the crisis?
Jean-Claude Trichet
Again, Europe in the Euro area has a central bank. 15 countries have a single monetary policy.
A single handling of liquidity and we saw what that means.
The governments have to cope with a lot of issues specific to their countries.
The commission does a fantastic job. And I want to pay homage to Mr. Barroso and Joaquín Almunia.
The president of the commission is very good. And we have an excellent commissioner.
And I also want to say that with Jean-Claude Juncker, the president of Eurogroup, we have had, with our mutual independence maintained, a very confident relationship.
And that is absolutely essential. We are in circumstances that are very demanding. Very demanding.
And we must have this quality of cooperation and contact, with of course a completely independent central bank.

Ulysse Gosset

What would you say is your priority today?

Jean-Claude Trichet

I would say: let's continue to do what we have been set up for.
We have to solidly anchor confidence in Europe, solidly anchor expectations on inflation.
Deliver price stability. Be credible in the delivery of price stability.
And through that solid anchoring of confidence, pave the way for sustainable growth, sustainable job creation, and financial stability.
And these various elements do not contradict one another.
It's a whole package, if I may say so.

Ulysse Gosset

You said that the current situation is the worse seen since the Second World War
You don't want to compare them to the 1929 crisis.
How can you restore the confidence of the general public when nobody knows—even you don't know— where we are headed?

Jean-Claude Trichet

No, I can tell 320 million fellow citizens: "You can trust that you will have price stability in the medium-term. You can trust that we will deliver. You can have confidence.”
And that is a very important element for confidence given the present situation.
Because it is their main concern at this moment in time. And we can also say that through this solid anchoring, through this steady position of the ECB, and its governing council, through this responsibility that we take, again, we pave the way for passing through this demanding period, in the best way possible, with of course, maximum financial stability.
I think that the idea according to which we are an anchor of confidence is fundamental in the present circumstances.

Ulysse Gosset

Last question before the end of part 1. There is a summit in Paris this weekend: the G4. Are you in favour, like Nicolas Sarkozy, of meeting with the G8 meeting on the crisis?

Jean-Claude Trichet

We will see, again, what happens. In any case we have {coupure} at the level of the "Gs" that are already programmed. Of course, I'm referring to the ministers' and governors' G7.
The Financial Stability Forum allows us to agree on a methodology for drawing the lessons from the crisis.
And, again, we have to be up to exceptional responsibilities. So we will see how things evolve. And in any case I stand ready, of course.

Ulysse Gosset

Thank you very much.
We are at the end of part 1 of the programme. Let's catch up on the latest news with France 24. And see you soon, in a few minutes.