Transcription
Mr. Mario Draghi, from the economy to markets to geopolitics. So thank you so much for being here this morning.
When you look at the new world order that everyone's talking about, what does it mean to you?
Well, first of all, let me thank Citadel for this invitation. I'm honored and thankful. You start with an easy question. Clearly, what is going to be the world in ten years' time? But certainly, the amount, the breadth of change in such a short period of time is, for someone like me, at least, it's been staggering.
We moved from a world which was basically, you know, US-led for more than 20 years, almost 30 years, and based on US soft touch in international relations and a set of rules which were widely shared and respected and based on free trade. Now, much of this is gone, and I think it won't come back. For example, of things that will be very difficult to have back is the fact that when you start acting unilaterally in trade relations with tariffs and subsidies, it's very difficult to hamper someone that wants to do the same in two years' time, three years' time. Everything becomes much more sort of arbitrary.
And the new world now is a world of blocks. We don't know yet which blocks exactly. It's very fluid. That's why it's so difficult to sort of craft international relations in a way that could have some, could give some guidance for the future. It's based that basically we've seen one thing is clear: the ascent of China. Now, China is going to be the other big world power. And the United States and China will have to go along. And there was a, there was a quite prophetic piece by Henry Kissinger, two or three years before he died, where he was worried about the fact that neither the United States nor China are countries that are used to go along with someone else. They have no history of having that so-called equilibrium consent. It was characteristic of the big powers before the First World War. In other words, you have a situation where you think that you cannot win a war. You can defend, but not win any war with the other party. So you have to learn to live together. And while the countries before the First World War had it and made a mess in spite of everything, neither the US nor China do have this sort of experience of living together, which means we're going to live in a riskier world than we were five years ago.
But it's also a special time when we see the rise of many new things. AI, which is transformational. I mean, I think the parallel with electricity when it came out is quite, quite right. It's going to change all aspects of our society, and it's going to be a world where there will be new winners and losers. And the winners are clearly the countries that already host high tech digital, like the United States, and, in part, lesser part, Europe. But also, the winners are going to be the countries that have natural resources, the rare earths. And the losers? Well, the losers are going to be the isolated countries, the lost countries, probably Africa, most of the developing world. So that's, that's another, another feature of this, of this world.
What macro risks do you see because of this changing world where you were? You also say that actually, we don't know the blocks that will emerge in five, ten years.
Well, it's a lot of macro risk because you have political risks and you have economic risk derived from the policies that have been put in place. The political risks obviously come from what I just said. I mean, the potential instability of this situation. So any, any, any change for the worse. Markets typically don't price this sort of risk. Markets price the risk that they can actually assess. They don't price, they don't price structural shifts. Usually, if you have a war, they price containment of the war. They don't price victory or defeat or big invasion and so on. So we see today, I think we see only a small part of what's happening in market prices. And so that is one reason.
But then we have risks, typically more traditional risks like inflation. We have liquidity risks again. This generation, I think all of you live in a situation where liquidity was exceedingly abundant and it could. I mean, we learned, everybody who's lived through the great financial crisis knows that it's abundant until it's not, and it dries up. It dries up quite quickly. And then you have risks connected to fiscal sustainability. And then you have risks connected to the downturn of China. Do we know whether this is going to be structural? How big is this going to be? So plenty of stuff doing.
Do you worry more about liquidity or inflation? Is there going to be inflation structurally higher because of the tariffs, where the markets seem to have largely looked through it now?
I think, I mean, if we're talking about inflation, I think we should probably make a difference, a difference between the United States and Europe. In the United States, you have, I mean, many of the policies that have been undertaken are potentially inflationary: the curb on immigration, tariffs, the, I mean, the stance towards the Federal Reserve, all this is potentially inflationary. The budget deficit is also such, I mean, just the high level of deficit is potentially inflationary. However, what can gain fiscal space and contain inflation at the same time in the United States is an increase in productivity. Actually, better said, it's how the increase in productivity there. We are witnessing in the high-tech sector, how that is going to be diffused, spread across the rest of the US economy.
In Europe, the situation is different because we have, first of all, we have fiscal rules. We have high deficits too, and high debt. But we have rules that basically contain any big further fiscal expansion, which is good and bad. That means good because it's very difficult to run out of control. But it's bad because if the business cycle needs fiscal support, we've been traditionally incapable of supplying it. On the inflation side, we have the ECB, which is, I can testify, completely independent. So it's, it's just, it's sort of different in Europe. If anything, we have, we have risks on the downside. Medium, long term, the risks on the downside for growth, for inflation. Right now, we are hovering around 2%. So it seems that things are okay. But in Europe, we have just the other side of productivity. If productivity doesn't grow and continues to go down, both fiscal space is reduced, is going to be reduced, and potential inflation could have stronger pressure to rise. So, but, but the future, I mean, the new, the new normal is a normal where both in the US and in Italy, we will have higher deficits, higher rates of inflation, and a tension with monetary authorities about that.
So a year ago, you put out the Draghi report, right? So you were prime minister, you were ECB president, but now everyone's talking about the Draghi report. Not much has been done since. Is it because it was too ambitious or because Europe is just slow?
No, no, it was not too ambitious. It was just an eye-opener for Europe. And but let me say, yeah, I mean, the usual thing now is bashing Europe. And if I can start answering your question in a different way, let me tell you what actually has been done since the report had come out. And what you see is a good deal of action, but in the private sector. There are now plans for five gigafactories, four with more than 100,000 CPUs, advanced CPUs. You have, I mean, Europe accounts for 50% of the global market for industrial automation solutions. So Asia is perfect for that, and you can see vertical integration of AI into these processes proceeding at the present factory rhythm. So you have, you see these things.
Also, you've seen a lot of action in the defense space. I, I never stop stressing one thing that's happened this year. Way back in March or February in Germany. I mean, Germany was a country where if you were a politician and happened to be photographed near a tank or anything, you would lose votes. You would lose many votes. It was a country where when Ukraine won, the Russian invasion in Ukraine started, there was a poll asking the German citizens, would you, if your country were to be attacked, would you go in the streets? Would you defend your country? 70% of the answers were no. Now, in this country, Chancellor Merkel had done the unthinkable. Yeah, actually, first of all, she decided that there should be a big increase in spending, about a trillion over ten years in defense. But second, she changed the constitution, the German constitution, to allow for that, which was the pillar of their fiscal policy, that so-called debt break rule. And now that could be increased, just to find something that was unthinkable three, four, five, six months before.
But then you also said, you also said something that went unnoticed. He said, "Now it's time for Germany to become the leader of Europe. And it is now time for Germany to live up to its responsibilities." So you see, this is. And then other countries followed. So then now what you are witnessing is a huge increase in defense expenditure based in Germany, but also in Italy, in the UK, and in France. Which, which is again, action since the report has been published.
And then you come to other things. By year-end, by the way, the European Commission will come out with the so-called Green Plan. One of the points of the report was that we've invested an enormous amount of money into renewables. But if you don't have grids at all, all this more energy gets wasted. Right now, we think there are, well, we think we know that about 10% of the renewable energy is wasted. In other words, cannot be transported. And there are 25,000 kilometers of grids that are waiting for permits. So to have a plan, to have a plan where there's investment in grids will start is very important. Let's see what this, what this plan is. It will come out by year-end.
Another thing that will come out is, is a regime, a legal regime for companies whereby if they are part of this new construct, they can establish themselves and trade and employ and hire according to only one system of laws and not 27 different systems, which is our big hurdle. The biggest obstacle to scaling up in Europe is our fragmentation, both legal but also financial. But at least these are two things that are quite important, and I expect this by year-end. Let's see what's going to happen.
In other words, Europe was a train that was unable to leave the station. When the report came out, people were in absolute denial. They wouldn't believe that things were bad. Now that stage is overcome. That phase is overcome. The train left the station and is slowly moving outward. It will gain speed as soon as all of this money that's been budgeted for defense, but also for high tech, is going to be, is going to be actually spent. But it will only gain speed seriously and go to full speed when you have deregulation in Europe, when you change the competition rules in Europe, then is the only time then we'll see the train gaining speed.
How quickly could we see that?
Well, the chances of joint issuance, for example. I wish I knew. But I mean, it's the joint, for example, the joint issuance. The joint issuance is fundamental because there is a mushrooming of national budgets to spend so much money for so many, so many investments. So one way of doing it is to issue debt at European level jointly for what? Well, in the past, we used to say we need common debt for having a common budget. Now, there is no chance this is going to happen any time soon. But there is a much bigger chance now that we should common debt for common European projects, for example. To have a European grid system will definitely require common issuance of debt.
How should Europe actually position itself on the geopolitical stage? So they need the US for Ukraine, but you also need some kind of proximity to China. Does Europe need to choose?
Well, first, as far as Ukraine is concerned, it's quite clear that, and really also, the joint issuance of the bond you attach to the previous question you asked me. It's clear that to go ahead in that, in a group of 27 member countries, this is not going to work. Because we have in some countries in Central and Eastern Europe that are really siding with Putin, they are siding with Russia. And we can see, especially in the defense and security and intelligence areas, but also in some high-tech spheres, in cybersecurity, in communication, in space satellites, we see that it's more and more a coalition of the willing. So it's France, Italy, Germany, UK. And and so that's moving. And my sense is that these countries in Central Eastern Europe have been receiving since they joined, so more than 20 years ago, about 4 or 5% of GDP subsidies from the rest of Europe. And they are not showing any solidarity right now. So it's natural for others to move ahead on their own.
How they will put themselves, place themselves with respect to China. I think that was your question. It's a, my sense is that any pretense of decoupling completely from China is gone, not only in Europe but also in the United States. And it's just the discovery of how interdependent we are has basically freed, at least for the time being, at the end, freed the landscape from any serious objective of decoupling. So what's going to happen is de-risking. This will continue and will continue at different intensities depending on the technologies, on the sectors and so on. So I think Europeans will try to navigate here. There are more reasons of tensions with China now from the European side, because as soon as the, I mean, because one of the effects of the US tariffs on China was that China now is pouring all the sort of excess capacity they've piled up in years of industrial policy, is pouring all this excess capacity into Europe. So it's into Europe and the rest of the world. So that, for example, car producers in Europe feel the Chinese competition very, very much nowadays. And so the response of Europe will have to be containment, probably response to some sort of retaliation. But the retaliation can't go, can't be too much. Because, you see, the problem of Europe is that it depends on trade much more than the US or China. 50%, around 50% of European GDP depends on trade, and it's only 31, 32 for China and 26 for the United States. So we are much more open than anybody else. And so we can't retaliate too much because the others can do us more harm than we could do to them. And so it's a matter of being. And that's, in a sense, the report proposes this line of thinking: go step by step, be gradual, be sector by sector, protect, contain protection. And we don't need to have one wall. We can't afford one to have one wall. We've got to protect some frontier industries, small things in high tech, in green tech. That's what, that's what we do.
I know you've also said you want a new approach to coordinate state aid in the EU. What would that look like?
Yeah, there is one, one thing that I think is feasible and could be done in a reasonably short time. What happens today is, let me step back. We moved. I was saying at the beginning, we moved from free trade to industrial policy made by subsidies. Countries like for, and we have two models for industrial policy. One is China, where the center decides, the government decides the priorities, and then the various regions fiercely compete to deliver on these priorities. And then we have the US model, which is a top-down model. In other words, the federal government decides certain sectors, certain lines of actions, tenders, the money companies got around that and go ahead. Europe doesn't have either model. We have, we have state aid, which is intrinsically national. So we basically, the European Commission now authorizes, for example, European countries to give state aid for energy. Now, how do you think this money was used? To pay subsidies for energy that may, that may make energy cheaper in the short term, but doesn't address the structural problems that you can address only with a European use of that money. So the view I have about state aid in Europe is that we should pool all this money, which is a lot of money, because there's one thing that Europe doesn't lack and that's money. It's just the other way around. People think, oh, we can't finance this and that. No, no, no. Money always flows to good ideas. It's just that you don't have, you can't scale up your projects. They have to become attractive, and that's where we have to take action. So we have plenty of money, pooling together to deliver on the scale you need to achieve for these investments to be really profitable.
I love that, "money always flows to good ideas." Something to live by. Everyone will have seen, of course, the news of the Prime Minister of France resigned today. Does it bring back memories? Mario Draghi was, of course, the technocratic prime minister in Italy after something that could actually mirror what we're seeing in France right now. What kind of a... I don't know whether you have advice for France right now.
No, no, no. It's, it's really a very difficult situation to read and act upon. I think what's going to happen here is that probably there will be another government, probably a little more center-left. They, they won't have a majority in Parliament. There will be, however, there will be a budget, but the only budget that could possibly pass through Parliament is a budget that's exactly the same as things are today. So no change. And, and so the country will navigate towards the next presidential elections. We are in 27, in 2027. In the meantime, something must be done because markets are rattled, people are anxious. And, and so something else ought to be done. Some, some sort of reassuring action on the economic and financial front must be undertaken. But I am, in all, by the way, this is not unprecedented in France. It's already happened. It happened a long time ago in the fifties. And it led to Charles de Gaulle becoming president of the republic and changing the constitution. So I think, in the end, I'm less worried than most people are about that. I'm kind of, I think something has to be done on the economic and financial, as I said, on the financial front to reassure markets. But I don't think the catastrophe is looming or anything terrible is about to happen.
So a message to markets. Markets are a little bit nervous right now.
Yeah, they should cool off. Well, for one thing, markets can be nervous only up to a point because it's quite clear that someone will buy these bonds if needed. And let me now, please, let me expand on that. But, but clearly, it's clear that fortunately, in a sense, we could not afford having a debt crisis in Europe and a contagion which would go all around and certainly would not be limited to France. So there will be some sort of containment action on that side. So there is, I mean, here you call it a put option. Yeah, there is a yes.
I wanted to talk to about monetary policy as well. I know we have a lot of, probably right strategists. I mean, what would you know, how should the ECB be thinking about the current situation? Overall, do you think there's there's room for another cut or anything of the like?
Well, it's a tough time for central banks. I mean, I, I'm happy, you know, they're the them. It's a tough time because with, with high deficits and high inflation, central banks have had all the tools, by the way. They have policy rates, they have liquidity facilities, and they have the balance sheet. So these three categories of tools can be used, but can be used only at this point in time in one direction, namely to fight inflation. They will not be able to support the business cycle if things were to go wrong on the growth side. So that's why, that's why it's now again, the situation is different between, between the US and Europe. In the US, I think the risks on the downside for growth are less. And in Europe, they are sort of probably more so. But, but basically, the everything will hinge on upon the fiscal side, on fiscal policy. And that's why it's absolutely crucial that all these countries have a medium-term stabilization plan for fiscal policy, because that way means that people are reasonably reassured that after a certain number of years, five, six, seven, the budgets are going to be stabilized. So if you have a, if you have a fall in GDP or a slowdown in the economy, you can actually use fiscal policy to support the economy. Letting people know, let the markets know that's going to be a temporary thing that you're going to fix it the year after. But monetary policy cannot do much because inflation is high. No, we are, we are thinking about 2%. But the point I was saying before about the new normal, maybe the new normal is higher than 2%. So central banks aren't really good at doing that. Still, still some instruments, especially for Europeans, actually are actually pretty, pretty useful. I'll tell you something, the, the correlation between European long-term rates and US long-term rates is three times the correlation between European long-term rates and policy rates of the ECB. So in fact, if some spillover from the US goes into Europe, policy rates are not a good tool for the ECB to use to fight against or offset these, these higher rates. And that's where, that's where the balance sheet helps. That's where the balance sheet is useful to do that.
How should we be thinking about debt in general and even US debt? Because that has huge consequences for money markets across the world. How should we think about US debt?
Well, I think, again, this question brings me back to productivity. The productivity growth, both in the US and in Europe, will define the fiscal space in both continents. And if we manage to increase productivity, and we don't need huge increases, by the way. You, you probably are aware of these computations that have been made showing that in the US, debt to GDP would go down 200% in ten years' time if productivity were to rise by not much, by something like 1.7% over ten years. So this is for a 2D growth. Similar calculations have been done in, in Europe. So that then, if anything, if I have to find out what would be the most interesting piece of data today is a data which doesn't exist, but it's a piece of data that shows how fast the productivity increase that we see in high-tech sectors spreads to the rest of the economy. The diffusion, let's call it diffusion rate. That to me is the most interesting piece of data because it defines everything else, defines inflation, it defines fiscal space, it defines policies.
It's impossible to know where the next financial crisis comes from or when it happens. So I'm not going to ask you about that. But do you have any doubt that if we did have something as big as 2008, central banks would work together?
Yeah, I don't have any doubt about that. I think, any spite, in spite of, I would say, the fragmentation that we are having and will be having in the coming years, the potentials for contagion worldwide are so big that I think central banks will not hesitate to join forces and provide liquidity where it's needed and how it's needed. So, no, that is. And you know, differently from politicians, central bankers continue to gather almost on a monthly basis worldwide. So they have to have a place in Basel, in Switzerland. It's called the Bank for International Settlements. And they gather there once a quarter for two days, three days, and more often than that when it's needed. So there is a constant habit of discussing, which makes them less hostile to each other than their politicians.
I want to talk about China, but first, maybe something a bit more personal, because you were in banking for a long time, then you were president of the ECB for monetary policy, then you became prime minister of a G7 country. What was the most fun?
Yeah, the most fun, I think, was my last job as prime minister, definitely. It's the way it's a job where you actually, first of all, you see the outcome of your actions, which is a great satisfaction. As a central banker, you rarely see it. But I was lucky. There was one instance when I actually saw the outcome of my speech because markets reacted. Everybody here saw too. But that's unusual. But that's that's unusual. Usually, I mean, you spend a lot of time thinking and discussing about what component inflation is going up or down, what sort of goods and commodities are, what markets are expecting from one word or one comma of your next speech, things like that. For many years. In the case, I mean, the case of a prime minister, the number of things, the, the breadth of the job is infinitely bigger, and the sense of being useful to your country, to your people, is an extraordinary thing that I think people have only if they have that job.
Is it difficult? I mean, are personal relationships important, actually, also at a country level?
Yeah, it's, it's much more, in a sense, it's much more challenging. If you are a central banker, you deal with central bankers and with markets. If you are at the head of a country, you deal with all sorts of people. I mean, and I happen to be, to be sort of, I would say, drafted into this job at the summit of the COVID crisis. Our vaccination campaign was going nowhere. And so that was the first thing that I had to do and I had to deal with. No, that's for one thing, the vaccination campaign was, according to all people, but the Novavax, of course, is an extraordinary success. And that went through. And then, and then I had the recovery of the country. The country had, I mean, GDP had dropped by 9% the year before, and it grew by more than 11% the year after. Part of that was bouncing back, part of that was simply to have an economic policy which would sort of create the conditions for the private sector to go and flourish again. And then, and then I found myself in the war when Russia invaded Ukraine. So that was a time when, when in a sense, the prime minister is supposed to take a stance, to decide where to place your country, and then bring your views to Parliament and obtain a positive vote from Parliament, which, by the way, voted unanimously, including the party that was the opposition. So it was a, it was a really sort of fulfilling experience, and I'm glad and grateful for that.
And on the back of that, what did you learn about China? Are we now underestimating the slowdown actually in China? Structural slowdown that we could be seeing?
Well, I don't think people now, by now, are underestimating it. I think people more or less are, by and large, very, very worried about what's happening in China. It's a country that moved from 6 to 10% growth to 3 to 5% growth. It's a country that is plagued by demography, by debt, by, well, you know, property. Real estate accounted, used to account for 30% of GDP in China. And now it's all collapsed. So, and consumption doesn't pick up. It's a country where welfare isn't developed much, so people have to save a lot. So all this is on the negative side. However, of recent, of recent, I would say, there have been some policy decisions which make somewhat hopeful: policies that are in favor of promoting consumption, policies that are on the side of encouraging profitability, policies that would help regions to deal with the property market. And also something that is quite interesting and, I mean, from certain angles, falls from certain angles, it's a positive development from others, it's worrisome. But certainly, China has now started a 100% effort on AI and high tech. And if they, again, I go back to productivity, if they can raise the productivity of their sector, that will give them, again, fiscal space to cope with a property market, with a debt market, with a debt legacy.
Should it really matter actually who gets there first? On whether the US and China.
Well, it doesn't. I don't think it's a race where you just, you at first. So it's, it's, it's a multidimensional, actually, multi-dimensional process. China is probably ahead in everything that deals with the combination of AI and automation. It's, it's not ahead in everything. And the frontier of AI, it's, it's proceeding with the integration of the AI with the, with security. So it's, I think that, but this is not based on my own expertise or my own knowledge. I do believe the United States are way ahead for everything that concerns AI, just pure progress, scientific progress. And they were, they are way ahead in everything is science and.
Yeah. Do you think it will change our economies even more than we think right now in five, ten years, in terms of productivity, in terms of just the way our economies are built?
Yeah, it will change everything. It's only a matter of how fast. And if there is a, on the how fast, it's not an irrelevant question, because if it takes too long, we, we may suddenly have episodes of, say, bubbles. There is an overselling of certain things of AI. And it's much of what we see. Normal consumers of AI is now buying our commodity. It can be done by basically lots of people. It's almost the same. So there will be a competition on prices quite soon. And then you wonder, all this huge investment that's being made, who's going to, who's going to be paying for it? Are we sure the returns are enough to pay for these big CapEx that's been had been made? But again, we've got to be, I don't know, I have to be humble about that. A lot of these investments are really about other things. So I don't know enough to answer this question.
We only have a couple of minutes left. So I want to ask you about private markets, because we'll talk a lot about private markets today. How do you think it changes the complex for just finance in general?
I am bi-positive. Private markets actually, they opened up a frontier. They increased the amount of credit to the private sector. They provided with flexible solutions. They are not regulated under Basel III like banks. And so they can actually, of course, there's going to be more leverage, but they can provide clients with a variety of different solutions that the banks are unable to do. Having said that, it's quite clear that you may have cases of fraud, as we just are experiencing now these days. And you can have many surprises. For, especially in this case in which the sort of the, the data, the one who actually is the recipient of the flows, private credit is also the same person that certifies the quality of collateral. Because that's what's happened, in fact. In that case, there's a clear conflict of interest. Now, how do you deal with that? Okay, here you have two stances. And not surprisingly, in Europe, people say, oh, we have to regulate like, we have to regulate them like banks. Now, this is a position that would kill private credit, would kill private markets, and is pushed, not surprisingly, mostly by banks, which see themselves as being displaced by the, by private credit. Another position is to say, listen, we are not going to regulate you like banks, but we want you to be transparent. So whatever pension fund is going to buy into these private credit will know exactly who is going to certify for the quality of collateral, how you price the collateral, and so on and so forth. In other words, put investors in a condition to assess exactly the kind of risk they are getting into. Because to have a say, Simon said recently, equity rates with senior debt is not going to work. You can't tell me why is that?
Should the banks be less regulated? Should what? Should the banks be less regulated?
That, I think so. In Europe, certainly. Yeah. Not nice, not profound deregulation, but certainly some, some things ought to be. Yeah. Certain capital, minimum capital requisites and other things. Yes, they can be. But it's also, I'm cautious about that for one other reason. The problem of European banks is also a problem of profitability. So I think we should assess what are the reasons why they're making less profits and probably address those reasons first. The other way around to deregulate so they become more profitable. Probably they have some reason to ask for that, but I've got to be much, much more cautious on that.
For Mr. Draghi, we talked, we're out of time, but actually we talked about geopolitics, fragmentation, banks. We've touched all of it. And many people think this is the most disrupted year or years that they've seen in their lifetime. Do you agree, or we do agree with that, that this is the most disruptive moment in our lifetime?
Well, I mean, you know, you have still ahead. Well, so, yes, we're all very young. No, I think I think it's been a big change. I frankly, I mean, even even six months ago, I would have never guessed I would see a change of this, of this size, of this magnitude. After all, I grew up in a world of free markets, commonly shared, I mean, commonly agreed rules, and America's foreign policy in international relations based on mostly on soft touch. And now you deal with something that requires a different language, requires a different, I mean, strength is the first thing you want to achieve in this world because you are respected only if you are strong. That's what we learned from Putin, and that's what we are learning today. So that's, and that changes completely in all your relationships now. What would you look for? Security, resilience, and only as a third, you look for efficiency, namely profit. In my world, it didn't matter where you would sell stuff or from whom you would buy stuff. Now it does.
Mario Draghi, thank you so much for joining us.
Thank you. Thank you. Thank you.