New Year’s letter to ECB President Lagarde (Finrestra podcast episode 10 transcript)

Listen to this episode on Spotify, Apple or YouTube!

Transcript:

“Dear President Lagarde,

I wish you a happy and healthy 2022!

And maybe also a career change?

You see, I follow you on Twitter, and I have the impression that this central banking stuff isn’t really your thing.

For example, you tweeted about your friends 13 times in 2021.

You tweeted about women issues 19 times.

Climate change? No fewer than 25 times.  

Inflation?

Just 11 times.

I hate to bring this up on the first (working) day of 2022, but the primary objective of the ECB is still price stability.

With inflation close to 5%, it seems that talking and tweeting about the ECB’s secondary objectives is more important than delivering stable prices.

Within a year’s time, your economists have doubled their projections for inflation in 2022.

So you’ll understand that people don’t believe you when you say that inflation will go down this year.

If you do choose to stay ECB President in 2022, I wish you a firm hand.

On New Year’s day, the 20th birthday of the euro, you called the euro a “beacon of stability and solidity around the world”.

To keep it that way, the ECB will need your strong leadership.

Kindly yours,

Jan Musschoot

Hello and welcome to a special episode of the Finrestra podcast.

I wish you a happy new year! Stick around till the end, because I’m giving away 250 euros.

New year, new month, so here’s a quick recap of the European financial news of December.

Santander has to pay almost 68 million euros to Andrea Orcel. Santander had offered the former UBS banker the role of CEO, but withdrew its offer.

In other legal news, a French court has reduced a 4.5 billion euro fine for UBS to 1.8 billion euro. The Swiss bank was found guilty of money laundering.

Dutch green bank Triodos will set up a multilateral trading facility for its shareholders (technically certificate holders). Since the beginning of 2020, shareholders cannot sell their certificates. It is expected that trading will resume at a price that is 30 or 40 percent lower than before the pandemic.

There was also consolidation and divestment news.

BNP Paribas has agreed to sell its American subsidiary Bank of the West for 16.3 billion dollars. Listen to episode 9 of the Finrestra podcast for our take on this transaction.

ING announced that it is leaving the French retail market.

Cooperative bank Crelan acquires AXA Bank Belgium. The deal had already been announced in 2019, but was waiting for approval by the ECB. The new bank will be the fifth largest in Belgium.

Regular listeners know that I usually do an in-depth analysis of one topic after the news. However, today I want to tell you a bit about Finrestra and my plans for 2022.

I started this podcast because there are not many podcasts focused on European finance. My original goal was to do a weekly interview. But I quickly found out that this is easier said than done. Weekly episodes require more time than I have. And it hasn’t been easy to find people who want to come on the show. So I want to thank my first guests Uuree Batsaikhan, Koen Vingerhoets and Rik Coeckelbergs again!

For 2022, there will be two episodes per months. I hope that from February onwards, I will be able to interview a number of very interesting guests. Stay tuned!

If you’re listening to this podcast on Apple or Spotify, you may not know that there is also a Finrestra YouTube channel, where I post short videos about financial topics. For example, I have a series of bank profiles, including of Santander, Triodos, BNP Paribas and ING, which were all mentioned in the news recap. I also want to create more videos with short stories about European finance.

But neither the podcast nor YouTube pays my bills, and this is where you can help me. Don’t worry, I’m not asking for money, I’m giving you a chance to win money!

Finrestra stands for Financial Research and Training. So far, we have mainly worked for Belgian based clients. But I want to expand my activities to the rest of Europe. If you share my YouTube video with my two courses for 2022 on LinkedIn and tag a friend before 25 January, you can win 250 euro. I’ll put the link in the description.

This has been another episode of the Finrestra podcast. You can find my on twitter @janmusschoot. You can mail me at jan dot musschoot at finrestra dot com.

Thanks for listening and I hope you have a great 2022!”

Energy, inflation, and the impotence of the European Central Bank

This is the blog version of episode 12 of The Finrestra podcast: “What can the ECB do when inflation is driven by energy costs? Three proposals” (listen on Spotify, Apple Podcasts or YouTube).

Euro area inflation was estimated at 5.1% in January 2022. That’s mainly due to energy costs. Furthermore, businesses will try to pass on their higher costs (transport, heating, materials) to consumers.

Source

According to Isabel Schnabel, “Monetary policy cannot reduce the price of oil or gas.

I disagree, as I told the ECB back in 2020. If instead of government bonds, the ECB had bought a controlling stake in oil & gas majors, it could force them to lower prices.

That’s probably too radical for conservative central bankers.

But there are other, more conventional paths.

Energy makes up about 11% of Eurostat’s basket of harmonized index of consumer prices.

File:Weights of the main components of the euro area HICP (‰) - 2022 (estimated).png

What if that percentage was lower? Volatile (fossil) energy prices would have less of an effect on inflation. This would make the ECB’s job easier.

To be clear, I’m not suggesting that the ECB interferes with how Eurostat measures inflation.

Rather, the central bank could reduce our dependence on (fossil) energy.

How? Years ago, in 2017, I wrote a proposal for green investments in Europe. A European Green Infrastructure Company (EGIC) would install solar panels, build energy-efficient schools, networks of charging stations for electric vehicles… All of this infrastructure would be funded by the ECB. Why? It’s hard to imagine now, but we’ve had years were inflation was too low, i.e. below the target of the ECB. In my proposal, the EGIC would build in countries with low inflation and high unemployment. In case of the economy is overheating, new projects would be put on hold, so real resources like workers, machines and building materials can be used elsewhere in the economy.

If the EU had done this, there would be an abundance of renewable energy. This would price fossil fuels out of the market, making international energy prices almost irrelevant for European inflation.

Of course, in the real world EU politicians and central bankers have wasted the opportunity of low inflation and low interest rates.

But it’s never too late. Even without a European Green Infrastructure Company, the ECB can reduce the weight of (fossil) energy in consumers’ expenditure. High energy prices make it attractive to make buildings more energy efficient. In fact, central bankers like Isabel Schnabel have argued that the slow transition to a carbon-neutral economy is a market failure (see also this video).

The ECB could correct this market failure by making loans for energy-efficiency cheaper, for example by charging a negative rate of -5%. Banks would pass this on homeowners and landlords. At the same time, the ECB could raise rates on other loans. This would stimulate investments in building improvements, and reduce the demand for consumer loans. Companies would respond by increasing the production of building materials. It would also alleviate the labor shortage, because workers would be attracted by higher wages in the renovation business relative to other jobs.

Further reading:

The ECB can help fix the energy price crisis: Play the long game

Inflation: raising rates is not the answer

Are higher interest rates going to crash the economy? A quick calculation suggests no

Even with inflation at 5%, some people believe that higher interest rates will crash the economy. Is this 2011 all over again1?

As I explained on Twitter, increases in debt servicing costs are small compared to rises of other production costs (e.g. labor). So if the economy does crash after rate hikes, it must be because of some other/indirect cause.

Financial news January 2022

As always, I start the first Finrestra podcast episode of a month with a selection of the financial news of the previous month. Listen to the episode of 7 February 2022 on Spotify, Apple Podcasts or YouTube.

Financial news November 2021

I also covered the news in the first Finrestra episode of December:

Government debt and inflation

Do deficits automatically lead to default or high inflation? No.

Here are some good reads:

Will deficit spending lead to inflation? There is a difference between developed and developing countries.

Who pays for this? How the United States dealt with its national debt after the Second World War.

Historical lessons from large increases in government debt. The debt was set aside in a sinking fund for repayment at a later date.

Inflation is #VALUE!

What is the inflation rate during and after lockdowns?

Inflation is already hard to measure in normal times, as I discussed in Bankers are people, too (page 126-129).

But the corona crisis adds further complications. Some services are unavailable due to the corona lockdown, for example restaurant visits and air travel. To discourage hoarding, supermarkets stopped offering discounts.

The abrupt shock causes headaches for statisticians.

For more, you should read Claire Jones’ Alphaville post on the fuzzy inflation figures.