After more than a decade as head of analysis for Europe at Deutsche Bank or Bank of America, Gilles Moëc (Lorient, France, 50 years old) has held the position of chief economist at the French insurance and asset management giant since last year AXA. A concern is hovering around his head these days: what the exit strategy will be like after the extremely powerful fiscal stimuli of recent months, always with the essential permission of the ECB. His forecast: the push and pull will come soon, in the second half of 2021, and it won’t be easy. “The hawks have been mostly quiet, basically because we are in the middle of an emergency. But when we return to normal health, they will be heard again ”, he predicts.
Question. The European stock markets have risen strongly in the heat of the vaccine. Is this trend sustainable in the medium and long term?
Reply. The initial reaction makes sense. We all had an expectation that, at some point, we would have a vaccine. But there was a small chance that there wasn’t and that we would get stuck in lockdown. And, furthermore, it is not just that there is only one: there are two, three, maybe more … That eliminates many tail risks. In the eighties, my generation thought that, at some point, we would see some kind of vaccine against AIDS, and it never came: from a medical point of view they are very different viruses, but the fear was there.
Q. Where does the vaccine place the market?
R. It puts them, almost automatically and despite the fact that we are still in the middle of the second wave, in mid-2021, when group immunity will foreseeably be a fact. I understand this, but I am concerned about the risk of accidents occurring between now and the second half of next year: we cannot think that the road will be a straight line. The benefits [empresariales], for example, they will continue to suffer in the beginning of 2021 and we are still going to experience episodes of volatility.
Q. Is there any irrational exuberance in this recent stock market rally? US indices have not stopped breaking all-time highs, not even in the midst of the pandemic.
R. There is exuberance in the market, but the question is whether or not it is irrational. The markets are reacting to what the central banks are telling them in unambiguous terms: that they are going to be behind them. The accidents I was talking about can come mostly from the corporate earnings side if the second wave, or a potential third wave, hits hard.
P. Until when will they have the crutch of monetary policy? It cannot be an eternal support …
R. That’s the big question: how far are they [los bancos centrales] willing to come to your support. The litmus test will come in late 2021, when a significant vaccination has already taken place. And the problem is that, when the time comes, the markets will see the economic normalization too harsh with respect to the situation in which the economy is.
P. Since the last crisis, financial markets are overflowing with liquidity. Is there a bubble risk?
R. The QE [los programas por los que los bancos centrales compran deuda a gran escala para rebajar la presión que afrontarían Estados y empresas en condiciones normales] They are a bubble making machine – this should come as no surprise. Assets, in other words, are worth more than they should be worth considering their fundamentals. By definition, the real risk is not embedded in the current price of these assets. That is why it is so important how the exit strategy will be at the end of 2021: the test is no longer dealing with the economic crisis derived from the pandemic, but rather thinking about how it will be done to withdraw all that excess liquidity when the time comes.
Q. The European recovery plan is a turning point with respect to the last crisis. How do you rate that script twist?
R. Although its implementation could be better, the signs are very positive. Send a powerful message. Now it seems natural to us that we face the crisis by mutualizing debt, but until a long time ago it was not: how much would we have saved if this approach had been applied in the sovereign debt crisis. For non-European investors, above all, it is very important: the line of mutualisation has been crossed, and that is what they see as an expression of European solidarity. The amounts are important, but the question is more in the design of the time horizon: if it is a new version of the structural funds or if it is an effective mechanism for stabilizing the economic cycle. Most of the money will arrive when the pandemic has passed, so it will help more to converge between countries than to combat the emergency.
Q. The ECB’s approach has also radically changed. Have we learned the lesson?
R. The response that Europe has given this time already involves learning from mistakes in handling the previous crisis: it took us too long to reach a level of cooperation between fiscal policy and monetary policy like the one we have now. This time, by the very nature of the shock, the frugal did not have the same arguments for discipline and fiscal rectitude as they did a decade ago. Will the way in which this crisis has been dealt with leave us a permanent profit? I think so. The suspension of the limits when things really get down and an emergency like this is upon us was a very important decision, especially in the case of the ECB. At the same time, we have to be realistic about the time horizon of this policy: the hawks have been mostly quiet, basically because we are in the middle of an emergency, but when we return to a normal health situation, perhaps in mid-2021, they will return to Make yourself heard. And what they will say is that the suspension of the limits cannot be the modus operandi permanent in the EU.
Q. How do you think that exit strategy should be?
R. I think it will require even greater cooperation between fiscal policy and monetary policy. Governments will more easily embark on the road to consolidation if they are confident that central banks are behind, protecting them from another sovereign crisis.
P. 2021 is here already, just around the corner.
R. We are still in the middle of the second wave in most European countries, and it is important that governments feel that the ECB is still there to protect them. When we get into that second half of 2021, the European Commission will have an important role to play: what really matters is creating a credible fiscal policy path. And, necessarily, that path is going to have to be more flexible and creative. But, on the other hand, governments have to be transparent with their citizens and achieve a broad consensus between the parties for consolidation. If they do their job, the ECB will be more comfortable supporting them than if they don’t. There is nothing worse than a government having to undertake adjustments dragged by the pressure of the markets.
P. There are those who believe that inflation may return in the coming years. But at the moment, there is no sign of her.
R. I am more on the side of those who see more risks of deflation than of skyrocketing inflation. Still, some elements could lead to higher inflation in the future: a certain turnaround in globalization, carbon taxes, or the temptation to return to more rigid labor markets.
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