Recent soft and hard data on economic activity have been somewhat weaker (EA GDP growth for the 3 rd quarter was released at 0.2% qoq, due also to exceptional factors in Germany), although less so in France (French GDP for the 3rd quarter was up 0.4% qoq). But our outlook for inflation is firmer. There are increasing signs that the labour market is tightening and nominal wage growth is picking up: the Phillips curve is back to work, albeit a bit later than expected. At the Governing Council of the ECB, we are thus confident in the sustained adjustment in inflation back to our objective. But our policy normalisation is still based on what I like to call a “quartet” of non-standard instruments: The monetary policy rhythm in recent years has been largely set by our net asset purchase instrument. But net purchases will very probably end in December. The end of our net asset purchases will not, however, mean the end of our monetary stimulus, far from it, because the three other instruments in the “quartet” will take up the beat; Our second instrument is the stock of purchased assets which we will reinvest in full for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation; Our third instrument is policy interest rates. This is a conventional instrument used in unconventional ways.
For example, putting some temporary restrictions on cross-border movement of capital could give some but not complete independence of monetary policy. But how do we reconcile independence and co-operation? In my view, we can and should act to enhance co-operation between public authorities, based on at least two elements: Ruling out any currency war, as we clearly stated at the meeting of the International Monetary and Financial Committee in Bali last month. I quote the unanimous communiqué: “[We] will not target our exchange rates for competitive purposes”. Trade multilateralism is at risk, but financial and monetary multilateralism still stands fast. Second, as the G20 Eminent Persons Group (EPG), led by Tharman Shanmugaratnam, rightly stressed in its recent report, we need to put in place a reliable Global Financial Safety Net (GFSN) before the next crisis and co-ordinate its different layers. This should include an “IMF standing liquidity facility”. The GFSN is the best insurance we can get against the risks created by economic divergence and it comes at a limited cost. I know that Governor Kuroda is very committed to this issue too. ** Let me conclude by quoting a Japanese proverb: “A frog in a well knows nothing of the great ocean” [“I no naka no kaeru taikai-o shirazu”]. In these uncertain times, the temptation is to look inwards, but that would be exactly the wrong thing to do.