Europe has lurched from one crisis to the next since 2007, with Jean-Claude Trichet, former president of the European Central Bank, suggesting we are now living in a “permanent time of crisis”.
Crises can “come at any time without early warning”, he noted, with central banks stress-testing to ensure they can cope with any kind of new dramatic event.
“There are so many structural changes in the world today – not only economic and technical, but also AI and so forth. We will have a lot of shocks," he said.
“I myself have experienced, throughout my life, a succession of terrible shocks that we have forgotten today – the debt crisis of Latin America, Africa, the Soviet Union, Asia – [all] absolutely terrible [but] now forgotten. So be prepared for anything.”
It has not always been like this. Upon the inception of the euro in 1999, there was a period “without crisis” in which ECB policymakers had to undertake the “immense challenge of creating credibility and authority for a new currency that was starting from scratch”.
But since then, the world has moved from one crisis to another, the “most dramatic” of which was the permanent threat (and materialisation) of deflation during 10 years after the great financial crisis.
One of the most significant moves by central banks to bring stability has been an agreement to target inflation of 2% over the medium term. First set out by the ECB upon its inception in the late-90s, this was then followed by the UK and latterly by the US and Japan in 2012 and 2013 respectively.
As a result, it means the four major central banks of the major currencies – the dollar, euro, yen and sterling – have the same definition of price stability.
“This is something that is extremely important in my opinion and not taken sufficiently seriously by academia,” said Trichet.
“It seems to me that at the moment I'm speaking, it is remarkable: because since the explosion of Bretton Woods [in the 1970s], it is the most important and dramatic change in the international monetary system that we have had.
“That makes me a little bit more optimistic about our capacity, despite all the challenges, to maintain stability – both price stability and financial stability.”
Optimism was the key message from Trichet at the Amundi World Investment Forum, although the former ECB president noted that there are threats to the status quo.
For example, he agreed with former Federal Reserve of St Louis president James Bullard that it was imperative central banks’ 2% inflation target is maintained throughout the world.
“There was no negotiation in Basel that concluded that 2% was exactly what we needed. I trust that it is the case. It was decided independently by all the major central banks I mentioned. This is a major advance. We should keep that,” he said.
The other is that central bank independence “must be maintained”, despite pressures from governments to act in certain ways.
“The time horizon of governments is much shorter than the mandate of the central bank, so you have a permanent tension, which is normal, and that is the reason why there is such a strong consensus for central bank independence,” he said.