For the first time since 2019, the European Central Bank (ECB) cut interest rates, bringing it down from 4% to 3.75%. Former ECB President Jean-Claude Trichet joins Catalysts to react to discuss how inflation in Europe compares to the United States and what the ECB’s latest move could signal for the Federal Reserve.
“The euro area is made of 20 different economies. It’s not as simple as in the US, of course,” Trichet says. He explains that these economies decide on wages and salary increases on a multiyear basis, which “creates some kind of hysteresis both, I would say, with interest rates being high and inflation being high when you are still running with the previous negotiations with wages and salaries. And then, of course, it amputates the standard of living and the purchasing power.”
As all eyes are on the Federal Reserve’s next interest rate decision, Trichet says that the data coming from both Europe and the US are pretty similar as the two try to tackle inflation. He adds, “It seems to me that we are two ships that are going in the same harbor… But of course, the weather is not the same in Europe and in the US. So, the decisions are not exactly the same, but the goal is the same.”
For more expert insight and the latest market action, click here to watch this full episode of Catalysts.
This post was written by Melanie Riehl
Video Transcript
Jean Claude, when we talk about uh the fact that ECB you stressing the fact that it’s important to remain data dependent.
It sounds like going forward issue.
Uh Lagarde was asked a number of questions just about wages.
And I guess my question to you is how difficult is that to analyze and the ultimate impact that it’s having here more broadly speaking on the economy, specifically inflation?
Well, uh uh first of all, of course, you have to remember that the Euro area is made of 20 different economies.
It’s not as simple as in the US, of course.
So you have any time to be sure that you are capturing, what is the reality in the Euro area, which is again a little bit more complicated than in the US.
1st.
2nd, uh you have a lot of uh economies uh which are uh deciding on their wages and salary increases on the basis of a multiyear basis.
And of course, that creates some kind of both I would say with uh interest rates uh being uh high uh and inflation being high uh when you are still uh running with the previous negotiations for wages and salaries.
And then of course, it amputates the, uh, uh, standard of living and the purchasing power of the, uh, I would say, uh, wages and salaries.
And at all the moment you have a catching up exercise.
So you go in the past, you augment wages and salaries to take account of these losses of, uh, uh, purchasing power.
And then of course, uh, you, uh, have a much lower inflation so you’re giving a lot of purchasing.
So that, that is the moment where the ECB has to be cautious.
As I said, uh prudent and cautious and uh look exactly at what happens in order not to lose the good path they have towards their goal.
And their goal again is 2% over the medium term.
Jean Claude, let’s end by bringing this back to the Federal Reserve here in the United States is the ECB teaching the fed what a soft landing could look like here.
I think that the US did also quite a good work obviously.
And when I look at the, we don’t have yet the May figures for the US.
But in comparing May figures in Europe and April figure in the U SI don’t have such a big difference headlined 3.4 versus 2.6.
So 0.8% uh of difference and co 2.9 in Europe 3.6 in the US 0.7% of difference.
So we, we came both for it from a very high level uh 11 interest rate increases in the US.
10 increases in Europe by the ECB have done quite a job obviously, and I explained the difference between the US and Europe in terms of would say this inflation by the fact that obviously due for a good part, I have to say to a fiscal expansion regrowth in the US was largely superior to regrowth in Europe during the, the last period of time.
So of course, it complicates the life of the United States, but it seems to me uh seen from a distance, you clearly have two central banks with the same goal, 2% in the medium term, uh which is remarkable by the way.
Uh And I, I would stress the fact that we are in a totally different world today than we were at the moment of the first and the second oil shock years ago with uh I would say Paul Volcker uh embarking on uh getting back to price stability.
Now, we have the same price stability on both sides of the Atlantic.
And uh again, it seems to me that uh we have two ships that are going in the same harbor, the same harbor is in the medium term.
But of course, the uh weather is not the same in Europe and in the US.
So uh this is, are not exactly the same, but the goal is the same.
All right, fair enough.
Jean-claude always really appreciate your insights.
Thank you so much for making time for Yahoo Finance.
That was Jean Claude C. He is the former ECB president joining us on their rate cut from this morning.