 Welcome to the European Central Bank podcast bringing you insights into the world of economics and central banking. My name is Michael Steen and in this episode we are marking the first two decades of Europe's single currency, the Euro. It's been two decades with two very different stories. The first saw the peak of a nearly 30 year upswing in the global financial cycle and the second 10 years saw the worst economic and financial crisis since the Great Depression in the 1930s. Let's first go back to the very early days of the Euro with this audio clip. On the first of January at zero hour the introduction of Eurobank notes and coin mark not only the completion of Economic and Monetary Union, which is a crucial achievement in itself, but one of the major, if not the, major step forward in the history of European integration. I am convinced that the first of January 2002 will appear in the history books in all our countries and beyond as the start of a new era in Europe. That was Wynn Dersenberg, the first ECB president speaking in 2002. The Euro was launched as a currency on the first of January 1999, but initially it existed on bank statements and electronically. In 2002 when Mr. Dersenberg was speaking in our clip was the year that the Euro banknotes and coins actually entered into circulation. So what was it like back then? My first guest today is Erke Leikenden. When he joined the Finnish Parliament he was the youngest MP at the time. Subsequently he served as Finnish Finance Minister. He was also European Commissioner and he served as ECB governing council member as the governor of the Bank of Finland. So with all of that experience he has an insider's perspective on the development of the single currency, the relative calm that we spoke of in the first decade and then the turbulence of the second. Erke, welcome and thanks for joining us on the podcast. Thank you. Now Finland was one of the group of the first countries that adopted the Euro as their currency in 1999. At the time you were European Commissioner for Budget. What was the atmosphere like back then and what did this moment mean for Europe and what did it mean for Finland? For Finland they joined the EU meant that Finland gets a seat around the table where the decisions are taken. Normally the history of Finland had been decided above the heads of the Finnish people. Now we became part of the European institutions. Finland wanted to be at the core everywhere including economic and monetary union. So the decision was taken to be able to guarantee that we have had influence everywhere. At the time the debate in Finland about joining was it was it a difficult one or an easy one? We were able to discuss and there was also paper done by the academics which said of course that we can join but we must have flexibility in the economy. We must have a buffer so we can adjust ourselves because you can't use exchange rates. But it was not very difficult. Of course later when the crisis came discussed and remerged but now again it's pretty stable. So support for Europe is very high in Finland. Now as we discussed or mentioned just now the first ten years of the Euro were fairly calm and periods of low inflation. Then in 2007-2008 we had what we call the great financial crisis hitting. It started as a financial crisis affecting banks and later developed into a full-blown sovereign debt crisis which markets even began to speculate about the breakup of the Euro. Talk us through that. What were the key moments for you? 2007 summer was of course the first important moment because then the turbulence in the market started, the liquidity evaporated. Some banks were closing their investment funds and I must say that then Zaku Tussier who was then the vice-president had the instincts right. He felt it can be big, important. A little later they also followed. They gave liquidity to the banks because they saw the difficulty. England didn't consider the situation so serious. That was like the first La Première. Then second big phase was of course then in 2007-2008. We had the informal ecofin where the ministers of finance and governors took part in Nice, France. It was by the way chaired by French finance minister, Christen Lagarde. We had a great dinner on Friday evening when May came back at night. Zaku Tussier then president of ECB said we need a meeting. It was over the midnight and that what is the reason there's problem in the United States with the Lehman brothers. We asked is it serious and he gave a verse which showed that it's very serious. That was last let's say that the weekend when it all started Monday Lehman brothers went under. The markets reacted very strongly and we didn't know when we get it back, come again. For that weekend it's something we never forget. I can imagine. At the time there was a problem with a very significant bank in the United States. What were your fears about how it would affect the Euro area? We didn't know then because even in America people thought that it's only one bank and Lehman brothers was not a huge bank. They thought that it's contained risk crowd welcome under control but when the confidence disappears the change can be very fast and it's a price all. At the time also it was not European bank. Perhaps people thought that it doesn't hit us so early. Of course history tells another story. There's the quote by Mario Draghi speaking London in 2012 and as you already said that that was a key moment in the crisis and you have these three words whatever it takes but can you explain a bit why why that helped turn the turn around the situation that there was this moment where people were openly speculating about some countries possibly leaving the Eurozone. How did that phrase help? The phrase helped but also actions taken. Of course it was Mario Draghi's communication was remarkably clear but equally important was during the following government council meetings decisions were taken what it means. What kind of actions ECB is ready to take so you need those two together. We now fast forward to today and banks are now supervised by the ECB as part of the single supervisory mechanism as part of this banking union which isn't quite complete yet but is still being built. That said it doesn't feel like the world is that certain. I mean we have trade wars, tariffs, Brexit. How do you see it today and how strong do you think your areas today to withstand shocks? Of course these trade wars have a very negative impact on the world growth. If there's something where economists agree it is that trade trade is critical for growth in the long term. We know now that they also downsized that not all have been have been winning with those. We haven't perhaps paid enough attention to these areas where just have been lost but anyhow all in all trade trade is critical so that's one issue. What about your area? Yes, the central bank is stronger. We have been able to create monetary policy and monetary policy tools to be acting but of course when rates are very low the capacity to move below early ones is more limited. What we need to do now are two things. One is that we need to create a complete banking union and make capital market union which means that the risks in your area would be shared by private investors. If capital markets are free they function cross border and risk are shared also by investors. You don't need taxpayers there and there we must go deep and be very firm there. Second issue of course is that we need also more input from the fiscal policies. In those countries where there's margin where there are possibilities of course fiscal policies should also be used. So all these three elements monetary policy, deep financial market union and active role for fiscal policy are needed in the future. Now can I ask you also to benefit from your long experience European affairs if you take your crystal ball and you say well we've had 20 years of the euro now and you try and look ahead to the next 20 years. What's your sense where will the euro be in another 20 years? If you asked me 20 years ago what will happen during the next 20 years I would not have been able to guess and I don't know what word will take us but I have I have a lot of confidence on the decisions making us in the future. They will analyze the incoming information take the decisions which are necessary within the mandate of the ECP but we can't possibly see where next crisis come. Normally it doesn't come from the direction you expect so just be ready ready for anything and be prepared. Erki thank you very much for sharing your insights with us. Thank you. In contrast to Erki's first-hand account our next guest can offer a slightly different perspective on the euro's development over the last 20 years that of an observer from the outside looking in. Martin Wolf is chief economics commentator at the Financial Times a position he has held since 1996 though he's been looking at economics issues for considerably longer than that. I had a chat with him recently during our annual research conference where he was chairing a panel on 20 years of the euro. Here's how the conversation went. Martin you wrote earlier this year a column about the anniversary and you said that it had been the currency had been through a traumatic adolescence but in the end you concluded it's doomed to succeed can you just recap a little bit your thoughts? Very briefly I regarded this as a very risky project from the beginning producing a single currency among what are in other respects above all fiscally still sovereign states very different economies was a gamble it's obvious in the first decade from 1999 to 2009 it looked as though it was going very well risked breads on debt reduced inflation converged growth was very strong in the periphery basically fine but then in the following 10 years after the global financial crisis then morphed into a eurozone crisis turned out that a lot of that was sort of built on sand there have been huge mistakes made in important countries with private sector lending it wasn't fiscally driven there were severe competitiveness problems that had emerged and this morphed into a sovereign debt crisis from the financial crisis a banking crisis as well and that of course inevitably became a political crisis nonetheless the immense effort and difficulty important reforms were made the creation of the european stability mechanism the whatever it takes position of the ECB quantitative easing and of course an integrated supervision mechanism a way of dealing with banks further ideas of reform so it did get through it but which is the last point it's not going to be easy there's still lots of problems and of course it is doomed to succeed because if it fails i think the whole european project is in question although one of the strengths of the crisis that you've talked about of course is that the political will that exists and you told a nice story about being in the states in 2012 talking to hedge fund managers who are betting that the whole thing's going to go fall apart yes a number of my columns in which i wrote i think of one in particular which i wrote that people underestimated the commitment to this was a response to exactly that a dinner i have had some very very senior wall street people in which basically the consensus was this couldn't possibly survive it was just this was never a very good idea and the politics would tear it apart and i argued on the contrary that first of all it's very costly to leave that's absolutely clear and secondly that you should never underestimate the commitments of the really powerful nations above all germany to keep this going so they would do enough always to ensure that it was kept going that's what i argued then i think i will be inclined to think that's still true therefore i do believe it's likely to survive but it won't be optimal or close to it the problem is yes it might survive but at the same time corroding progressively the commitment of the peoples of europe to this and then at some point you never know when it might actually fall to pieces and unless the unless there now this is this is very very difficult they're essentially too linked problems they have to fix either fix the aggregate demand problem in a big way which means i think giving themselves real capacity to use fiscal policy and adjustment mechanisms that really work which means actually let's be quite clear if you're going to have two percent inflation in the euro zone that means some countries should have three or four which countries should have three or four well obviously the countries where domestic demand is deficient whereas domestic demand most deficient germany in the netherlands is massively below potential output and this is no longer easily supportable in the world so their demand has to grow this is sort of self-evident this is part of the adjustment mechanism and the aggregate demand problem and then the other thing you have to do i think there's no doubt if you don't do that to the extent you don't do that there will have to be some form of fiscal transfer and mutual insurance countries cannot be left quite as much on their own as they have been that will of course require probably some mechanism for debt restructuring which don't yet fully exist there has to be a deal on this risk-sharing aspect of the system in other words that there's a macro demand problem a competitiveness problem and a risk sharing problem and they have to be solved together if they can be solved and there's obviously lots of technical detail here i think it will survive pretty well if they aren't resolved it might survive perfectly well but i think future very severe crises are certain that's rather glumy prognosis i emphasize that i think it will survive but you but the question is will it survive happily and successfully or will it survive rather miserably and grumpily because people feel they just can't get out of it i feel we are a bit closer to the latter than is safe i mean of course it's not true everywhere but there's a lot of unhappiness it's obvious and that has to be dealt with you can't survive indefinitely if you don't make peoples of europe believe in this is good for them christine legard just said this i think and she's absolutely right and in that show then what what is your what is your answer then in that what is the big political bargain that you think needs to be struck here i view the logic of the euro system in the end is towards a greater degree of political union it's part of it i'm not talking about tomorrow but if i were asked in 2050 if it still exists what would i expect it to look like well i would expect it to look more like a federation and that i think is where it will have to end up how it will get there i don't know will it get there i don't know but i think if it doesn't further really very very difficult crises are inescapable thank you very much martin my next guest is syria and gino she works here at the ecbs communications department and is a behavioral economist as part of her tasks she studies institutional trust and specifically trust in the ecb syria thanks a lot for joining us on the podcast thank you for having me now we're here celebrating 20 years of the euro but you're also actually the youngest guest we have on today's podcast so i i want to ask you a bit about your personal experience of the launch of the euro probably when the bank notes entered circulation can you remember where you were and what happened sure sure it was during my christmas holidays so i was 11 i was spending christmas holidays with my family in the south of italy in this small town where my grandparents used to live and i remember vividly that on the first january everyone was rushing to the atms to actually the only atm in town to withdraw these banknotes this christ banknote and they were showing to us to the kids and we were so happy everyone was so enthusiastic it was like being in a big party were you old enough to get pocket money at the time i suppose if you're going from lyra there was a into nominal terms it did you think i'm getting less and do you have plans for how to spend the new euros well i i received 10 000 lira so five euro more or less and i planned my first purchase in euro very carefully of course go and tell us what it was yes so i wanted it to be very special so i bought what was more special for me at that time so i bought harry potter stickers that's the first thing wow very good now let's turn a bit to your research i mentioned that you research trust and can you tell us first of all what we actually mean when we talk about trust in institutions and why should a central bank care about public trust as you can imagine since you were dealing with an absurd concept trust in institution has been defined in many different ways now the definition that i will propose today is trust in an institution is the belief that in our case a central bank will deliver on its mandate but also by doing so it will take into account ethical considerations so there are two aspects here to be considered the first one is the central bank must be competent must be must have the expertise in house to deliver on the mandate and this is actually what financial markets think as of as trust so they equate in a sense trust and credibility but in our research we have seen that the public needs more to trust an institution such as a central bank they also need to know that the central bank is acting in a fair manner in a nautical way so there's also a component of values that they take into account when deciding whether to trust or not the central bank this general public measure of trust is very interesting and brings us on to what actually happened in the crisis and when we talked a bit about the crisis years with airki and martin what has it done to the ECB in terms of levels of trust and where are we now when we look at institutional trust we use data from the euro barometer survey which is run by the commission it's been run for the last 20 years so we have a perfect time window to consider now the ECB started with very high levels of trust but of course the financial crisis disrupted that now it must be noted that trust in ECB was not the only one that plummeted trust in the european commission in the european parliament followed the same pattern this pattern also extended to national institutions to private and public institutions in the us and also in europe and around the world so it was really a systemic crisis going on so and so there's been a general trend downwards is there any sign of this picking up yes actually in the last three years we see that the recovery is starting so today actually according to the last data from the euro barometer trust in ECB is at 43 percent now you mentioned euro barometer data which as you said is a nice long time series available they've also been measuring all along where how europeans feel about the euro and the support for the euro tell us a little bit about where that is and what the trend has been there well support for the euro actually hit record with the last survey so 76 percent of people support the euro so more than three out of four people it's interesting to see how the crisis could not dent support for the euro so while trust in all institutions went down support for the euro slightly of course decline but not that much this is really interesting because i mean the 76 percent is of course across the whole euro area so that's an aggregate number if you start looking at individual countries i hear cited very often is Greece and we hear about i mean obviously Greece went through a very difficult adjustment what actually happened to levels of support for the euro there and where is it now for Greece so Greece today has a level of support for euro which is 70 percent so it's pretty high and even if we look at the lowest support which is recorded unfortunately in my country Italy we're still talking about 65 percent of support the countries are converging and instead if you look at the top three or top four even better you find very diverse countries you have Slovenia and Estonia which are recent euro adopters and then you have Portugal which was hit by the financial crisis hard they're all at the top yeah all at the top and the fourth one is Finland which is a country with a different story in a sense and different culture so you really see diversity there and the countries are converging in this support for the euro well that's that's good news think one thing you also looking at then we talked a bit about how trust in institutions fell including the ECB so if you were to plot and i know you've done this a chart of trust in the ECB versus support for the euro you see it tell me what that looks like there's a sort of divergence isn't there's a big discrepancy starting with the financial crisis so before that moment support for the euro and trust in the ECB were very close but then this gap widened now it's closing a little bit but still we are like 30 percent there is a 30 percent gap between trust in the ECB and support for the euro and that's something that literature might suggest we should worry about well i mean the determinants of support for the euro and trust in ECB are very different the euro is not just a currency the euro is a symbol is an ideal trust in the ECB instead depends much more on economic factor on something that is variable so of course humans are fallible institutions are fallible but the euro represents an idea it taps into the european identity of people so it's really something else why should the central bank worry about trust as something that it measures there are three main reasons the first one is linked to the transmission mechanism of monetary policy so how the actions or the decisions taken by the ECB then translate into the real economy we have evidence that higher trust in the ECB better anchors the inflation expectations of normal people like consumers small medium enterprise owners to the target of the ECB so inflation close but below two percent over the medium term in the euro area trust in ECB better allows institution to deliver on its mandate just to clarify that you're saying that if the trust is higher tends to be higher then it's easier for the central bank to reach its inflation target absolutely because it's a self-fulfilling prophecy if people think and trust ECB that it will reach its target then they will start acting like this is the truth this will actually change how the economy is working so inflation will align to the target more easily fascinating the second reason has to do with the fact that the central bank is a supranational institution and an independent central bank now we know that an independent central bank met a deliver on the mandate and this independence is balanced by an accountability framework that we have with the european parliament but at the same time this is not sufficient we also need the trust of the public because otherwise if trust plummets what happens is that people might pressure their politicians to restrict the space of maneuvering of the ECB so maybe changing the mandate eliminating some instruments so public trust shields the ECB from these political attacks or an essential bank central bank of course and the third reason instead this time it's really connected to the status of the ECB as a european institution of course trust in the ECB is gonna feed into trust for the european project as a whole so this is another reason why we should really care about trust in ECB thank you very much siria thanks well that brings us to the end of this episode i want to thank airki lickenen martin wolf and siria angino for joining the conversation and giving us their insights do also look in the show notes for links to related papers and publications from the ECB and we'd love to hear your feedback and thoughts for future episodes via social media you can use direct messages and comments you've been listening to the european central bank podcast with michael steen if you like what you've heard please subscribe and leave us a review until next time thanks for listening