Jean-Claude Trichet spoke at the LSE on Monday afternoon.
Much of what he said was a combination of a couple of speeches he gave last week, the central message being that the eurozone needs to monitor member countries’ fiscal and macroeconomic policies and competitiveness more closely, and that there needs to be a sharper stick with which to beat countries that fail to behave themselves.
Disappointingly there wasn’t much new on the disagreements between the ECB and Berlin on a new bailout for Greece. Mr Trichet is sticking to his guns – no compulsory restructuring of Greek debt.
He reiterated that “It has to be, in our opinion, a voluntary concept … Avoid whatever would trigger a credit event, avoid whatever would trigger a selective default or a default … This is our message to governments.”
And he added that “we are in the presence of a systemic aspect of the situation. I think that our advice [not to trigger a credit event or impose a default on bondholders] speaks for itself. In any case it is very strong advice for those who are taking these decisions.”
One interesting thing that the speech did throw up was the differing views on inflation of the ECB and the Bank of England.
Looking at basically the same problem – higher short-term prices of raw materials – the majority view at the ECB and the Bank come to very different conclusions.
For Mr Trichet, rising commodity prices need to be dealt with before they get embedded in inflation expectations.
“The central bank must prevent increases in the prices of raw materials from being incorporated into long-term inflation expectations, which could trigger second-round effects on wages and prices,” he said.
At the last inflation report press conference, Mervyn King said that: “Clearly if there are very unexpected movements in price levels, whether they be energy prices or commodity prices, or even the exchange rate, they will have effects on inflation.
“And if they are thought to be temporary effects, then it would not be sensible to react to try to offset them, because that would create excess volatility, undesirable volatility in output. And the remit says we should not do that.”
Other members of the MPC are more worried about inflation expectations than Mr King appears to be, although the majority are still voting for no change in rates.
There are good reasons why the ECB might be more concerned about inflation than the Bank. As Silvio Peruzzo at RBS points out, in Germany there is little sign of slack in the economy, unemployment is at the lowest since the post-reunification boom, and there is “much more scope for high short term inflation to get embedded into inflation expectations.”
On the other hand commodity prices for the Bank of England are “much less important when the inflation situation is dominated by underlying weak demand,” Mr Peruzzi adds.
It is a good point, but not everyone would agree. In the UK spare capacity indicators don’t suggest all that much slack, though unemployment is about three percentage points above its pre-crisis levels. UK inflation is significantly higher than in the Eurozone, even taking into account a hike in value added tax.
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