On 11 December 2024, former European Central Bank President Jean-Claude Trichet spoke at the iBanFirst Business Summit in Paris. His insightful speech focused on controlling inflation, the disparities between Europe and the United States, and Europe’s future development in an increasingly competitive world.
Here are the key takeaways.
After years when inflation seemed to be a thing of the past, the pandemic and the post-Covid economic recovery brought it back with a vengeance. Trichet explained how the central banks have responded to this challenge.
To everyone’s surprise, the central banks of nearly every developed country tackled inflation through successive interest rate hikes. These measures did not spark major negative reactions as initially feared.
In October 2024, inflation in Europe stood at 2% (compared to 2.6% in the US). This is a notable success compared with the first oil shock in the 1970s. “Back then, we let inflation soar and it settled at 14%. It was only brought under control after Paul Volcker became Chairman of the US Federal Reserve and set short-term interest rates at 20%. Today, the ceiling is 5%”, emphasised Trichet.
Jean-Claude Trichet noted “a certain scepticism” about the possibility of stabilising things at around 2%, highlighting: “If we take core inflation — in other words underlying inflation — the US was at 3.3% and Europe was at 2.7% in October 2024. Core inflation, which excludes volatile components such as energy, indicates the level we will see stabilisation in the medium term. The central banks’ work is still ongoing, especially in the US. But we can legitimately say that extraordinary work has been done to take back control of inflation”.
The battle against inflation is not yet won. Jean-Claude Trichet stressed several key points:
The growth figures don’t often lean in Europe’s favour, but Jean-Claude Trichet called for a more balanced analysis by taking “a global perspective over the medium term”.
The Former Bank of France governor offered a sharp critique of U.S. fiscal policy: “[Fiscal policy in the US] is unimaginably expansionary and [is creating] a degree of artificiality in the growth disparity that is emerging. This cannot be overlooked. This artificiality can also clearly be seen in the large deficit in America’s current accounts. The Americans are therefore asking the rest of the world to finance them, whereas in Europe we have a balance of current payments surplus overall, if all factors are included. In reality, it is Europe that is financing the rest of the world. This should never be forgotten when absolute figures for the US and Europe are compared.”
Average growth is forecast to be 2.1% in the US and 1.3% in Europe by the end of the decade.
This is because “in Europe, our economy is less dynamic and financing for start-ups is less readily available”. To explain this difference, Jean-Claude Trichet added: “vast, easy to integrate immigration, which was the trademark of Latin America, is boosting US growth”.
Jean-Claude Trichet acknowledged that there is much to be done in Europe, but he also questioned the need to constantly compare with the US, “which I’ve done myself”, he admitted.
He highlighted a major difference: the US is a fully-fledged political federation, while Europe, despite the remarkable progress that has been made, is still far from achieving this model. “We’ve made amazing progress, but we don’t have a common army, a common diplomatic service or a common Treasury”, he pointed out. “What do you see at the bottom of dollar-denominated instruments? A single signature: the US Treasury’s. In Europe, what do you see at the bottom of the euro? You’ve got the German Treasury, the French Treasury, the Italian Treasury, the Spanish Treasury, and so on”.
This structure means that the European markets lack depth and liquidity compared to the US. And this is not “because the dollar is a superstar performer by comparison with the euro, but because the euro is a single currency; one that is being used in an environment that is not federal”, hammered home Jean-Claude Trichet. He continued by saying: “The difficulty of having an economy that is theoretically completely unified, with a single currency, but without going as far as being a political federation explains why we don’t have a single market for commercial banks”. Or investment banks. “We don’t have a single capital market, which is incredibly paradoxical as Europe was created based on the concept of a common — and then single — market”.
Jean-Claude Trichet was convinced that “we will have to move towards fully-fledged political federation”, although this needn’t look like the US. “This would give us a seat at the global negotiating table.”
Jean-Claude Trichet disputed the idea of a general lack of productivity in Europe.
Ireland, Luxembourg, Belgium, Denmark, the Netherlands, and even Germany and France have “an output per hour worked that is very similar to, or higher than, America’s”.
He believes that Europe’s low GDP per capita is mainly due to countries that are still catching up. Another consideration is that the balance between work and leisure is different on each side of the Atlantic. “In France, we are world champions when it comes to leisure, so this understandably makes a bit of a difference”.
Trichet was “very struck” by the gap in market capitalisations between Europe, where there are surplus savings, and the US, where there has been a constant deficit since 1991.
“In 2017, the US was 1 standard deviation from the mean. This rose to 2 in 2020 and 3 in 2023. Right now, depending on the Trump effect, etc., it’s approaching 4 times the European level. This hasn’t been seen since the Second World War”. He concluded by saying: “It seems to me like a bit of a bubble effect”.
To access the full speech and Trichet’s responses to participants' questions, watch the replay of the iBanFirst Business Summit 2024.