Jean-Claude Trichet, former president of the European Central Bank (ECB), warned on Wednesday about the escalating global debt and the slowdown in globalization as significant risks to the world economy, including Korea. Speaking at a press conference held at Lotte Hotel in central Seoul, Trichet highlighted that overindebtedness could potentially trigger a new financial crisis in the most vulnerable sectors and countries.
In his remarks, Trichet noted that global debt had reached a record $307 trillion in the second quarter of 2023, pushing the global debt-to-GDP ratio to 336%. He pointed out that Korea's household debt was particularly concerning, accounting for 102.2% of the country's nominal GDP in the first quarter of 2023. This made Korea the only country in that period whose household debt exceeded its GDP.
Trichet also expressed concerns about slow globalization or deglobalization, which he said would significantly impact the Korean economy given its heavy involvement in global trade.
Addressing inflation, Trichet emphasized the need to "gain control over inflation" to avoid a situation similar to what followed the global oil crisis of the 1970s and early 80s. However, he noted that current circumstances were different due to changing attitudes of central banks towards inflation.
The former ECB president observed that central banks, including those in the United States and Europe, are "extremely keen on" combating inflation and have demonstrated their ability to "drastically change their monetary policy", unlike in past when they did not take inflation seriously.
Among strategies to combat inflation, Trichet suggested ensuring alignment between central bank policies and government fiscal policies. He advised against simultaneous augmentation of policy rate by a central bank and expansion of fiscal policy by a government.
Despite these challenges, Trichet expressed "reasonable optimism" in his keynote speech at the G20 Global Financial Stability Conference 2023 about regaining control of inflation in the medium term. He praised central banks of emerging countries for their responsibility in countering inflation and acknowledged that central banks of advanced economies, after initial hesitation, also demonstrated appropriate determination to regain control of inflation.
"Despite the inflationary surge since 2021, we have not observed a destabilization of the inflation expectations on a medium-term [three to four years] basis. This is reassuring, even if the game is not over," Trichet said.
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