Didier Le Menestrel

Politically incorrect?

Who remembers today how the previous governor of the European Central Bank, Jean-Claude Trichet, fought incessantly for eight years against the inflation that was supposedly lurking at the doors of the Euro? The Frenchman left in investors’ memories the image of a European leader entrenched in his convictions, not very capable of being audacious or even pragmatic and constantly recommending more rigor and discipline in the name of a budgetary and financial orthodoxy that was difficult to implement.

Mentioning the second (1) governor of the EBC enables us to value the vision and action of his successor Mario Draghi at the head of the institution since November 2011. Admittedly, the economic backdrop is different, but isn’t it always for the person governing monetary policy for an economy representing more than 15% of global wealth production each year?

On June 5th, Mario Draghi was therefore listened to even more eagerly than usual, given the extent to which the financial community was expecting an announcement concerning “non-conventional” measures from the financial institution he leads.

Before arriving at “non-conventional”, a quick redefining of what is “conventional” is necessary.  The traditional scope of a central bank is that of short-term rates(2) and it is in this field that the conventional policy is implemented. It consists primarily of setting the key rate at which banks refinance themselves. In theory, by steering this rate, the central bank steers the way liquidities are spread in the market and ultimately, in the economy of the region concerned. Long-term rates, theoretically, adjust themselves depending on these short-term rates and arbitrage moves with other global bond markets: in a word, they are only partially steered by the central bank and are generally an affair for the financial markets.

This traditional way of functioning of central banks reached its limits with the financial debacle in 2008 and above all, in Europe, with the persistent crisis dogging its currency. Since this period, money has not been circulating well despite low interest rates, and faced with the reality of the difficulties, the ECB like the FED, has been inventing new ways of intervening. These “non-conventional” measures aim to “force” money to circulate. There are numerous possibilities… In any event, creativity is allowed in this traditional universe in order to facilitate the functioning of an ailing system by stepping out of the usual transmission channel for monetary policy.

The contrast with the political world is striking. While Japanese, European and US central bankers have shown remarkable imagination since 2008, in contrast, the French political class has remained surprisingly “conventional”. Installed in dogmatic postures seen thousands of times, worn out by the application of ill-suited recipes, it could ask itself the question: when “conventional” reasoning is faltering, why not try “non-conventional” reasoning? The example of Matteo Renzi in Italy favours this direction, without mentioning the success taking shape in the UK after four years of accelerated liberalism. In order to abandon inefficient remedies and experiment with other ones, the political class could take inspiration from central bankers. And maybe also take up poetry reading and follow René Char who states: “Impose your chance, embrace your joy and go towards your risk. In watching you, they will get used to it”. “Impose ta change, serre ton bonheur et va vers ton risque. A te regarder, ils s’habitueront. »

Didier Le Menestrel

(1) Wim Duisenberg was the first governor of the ECB from 1998 to 2003
(2) This designates rates of less than a year. In fact, there are three distinct short-term rates for which the ECB intervenes: the deposit rate, the refinancing rate, the incremental borrowing rate.