FRANKFURT – Christine Lagarde is working on a version of the European Central Bank that looks more like her – not bound by traditional central bank views.
In an interview at his office on the 40th floor of the ECB’s South Tower, the bank president said his institution was “riveted” to its primary mission of keeping prices stable, but also had to reflect a changing world.
Speaking as the bank puts the finishing touches on its first strategy review in nearly 20 years, Lagarde made a passionate appeal to the ECB to adapt to new challenges, such as tackling change climate change and the rise of digital currencies. She also said the bank needed to listen better to – and communicate with – European citizens.
“There had been no strategy review since 2003 and I thought it was late,” said the 65-year-old Frenchwoman, who took over as head of the ECB in November 2019. “When we started. this strategy review I said we would leave no stone unturned.
Lagarde’s appointment as head of the ECB ruffled the feathers as she had never been a central banker before, although she had gained a formidable reputation as a lawyer, French cabinet minister and head of the Monetary Fund. international.
But Lagarde has made it clear that she sees her track record as an asset, not a disadvantage. When asked if she thinks that not spending her career in the central bank allows her to see the bigger picture, Lagarde said: “I like to think so, but maybe others do not think so. If I didn’t think so, I would be very miserable every morning when I wake up and come here.
Despite being a newcomer to the ECB, Lagarde quickly absorbed his mantra. But, she said, that shouldn’t mean being closed off to how the world is moving.
“Price stability, price stability, price stability… I must have heard it 1,000 times in my first few months. So you are glued to that. But at the same time, the world is changing around you, ”she said. “And you have to be constantly attentive to the interactions and changes that occur. “
Lagarde hopes the new strategy will address new dimensions such as climate change and the possibility of a digital euro and serve as proof that the ECB is capable of reinventing itself.
“It will be an indication that the ECB is attentive and able to adjust and adapt. Climate change is one example, the digital euro is another. We are glued to our objective of price stability and we are the guardian of the euro, but we must also be attentive to the major developments around us. ”
Lagarde has been accused of focusing too much on issues such as gender equality and climate change rather than the core business of monetary policy. She faced particularly strong headwinds after a communications blunder at a press conference in March 2020, just as the coronavirus crisis peaked. Her remark on the ECB’s stance on government bond spreads raised doubts that it was ready to do “whatever it takes” as her predecessor Mario Draghi had promised and plunged the markets into crisis. tormented.
The new president quickly reconsidered her remarks and now has her own way of expressing her unwavering support for the single currency.
“Our commitment to the euro has no limits,” she said.
” That’s what I said. And that’s what I tweeted on the night of March 18, 2020, when the Board of Governors decided on the Pandemic Emergency Purchase Program (PEPP), ”Lagarde said, referring to the the bank’s flagship measure to support the euro zone economy during the pandemic.
“I think it was very explicit and the connoisseurs got the message very well… And I think we stuck it out. I don’t want to brag about it, but we definitely delivered.
Draghi was undoubtedly a magician of the markets. “Whatever It Takes” will go down in history as one of the greatest verbal interventions in the market. But its direct line to the financial markets never extended to the general public.
Unlike Draghi and the deeply technocratic traditions of the ECB, Lagarde sought public input for the central bank’s strategy review.
The last Eurobarometer survey showed for the first time that more people trust the ECB than not. However, support for the common currency remains significantly higher than for its guardian. Lagarde attributes the shift to the role played by the ECB at the time of the eurozone crisis, within the framework of the Troika of European institutions.
“There was this feeling of abandoned sovereignty – people felt that they were no longer masters of their own destiny, that the ‘men in gray suits’ were coming to dictate the rules, which is a caricature of what was hoped for and expected. . ” she said. “This may have caused part of this gap between confidence in the euro and confidence in the ECB.”
Lagarde said listening to people’s ideas about strategy is helpful. “We had some really good questions, such as ‘Why do you want to pursue that 2% inflation target – I’m happy with zero price increase?’ So it certainly told us that we need to communicate better why we need some inflation and that we need to be more explicit and use less jargon than we have – and still do in fact – in our different communication channels, ”she said.
“As the guardian of the euro, we fight for the citizens but to explain that price stability is a fight for them, it is sometimes difficult”, she declared.
The central bank’s current inflation index does not take house prices into account, Lagarde said at the top of the list of concerns voiced by Europeans in the review. She recalled some “vivid examples” of people expressing their displeasure at the massive rise in house prices pushing up the cost of living, even as official data indicated moderate price increases. Lagarde signaled that there has been progress towards including owner-occupied housing prices in the overall index, which should push headline inflation numbers up, bringing the ECB closer to its target.
Lagarde did not provide more information on the possibility of the central bank following the lead of the US Federal Reserve and moving to average inflation targeting where policymakers take into account periods of underestimation. or exceeding the price target when setting interest rates. Some ECB policymakers, including Finland’s Olli Rehn, have publicly argued in favor of such a move.
“We either learn from the past or from neighbors. So of course we looked at what the Federal Reserve had come out, ”Lagarde said, citing both the inflation targeting and the focus on jobs. “This is what they do, this is what worked for their strategy review. This does not prejudge what will work for us, and our work is not yet finalized.
Lagarde worked hard to get the ECB’s policymakers to work together and present a more unified face to the outside world. This is in stark contrast to Draghi’s reign, when policymakers often disagreed and many, including Draghi himself, lashed out personally at those who disagreed with him.
Lagarde said she supports more regular strategy reviews going forward, but argued that a five-year cycle that has been launched might not be ideal. Instead, each president could have one at the start of their term to further shape the institution to their liking. “It could be aligned with the presidency. In this way, in the first year, each Presidency will continue the implementation of the previous strategy while launching a new review, ”she said.
“It’s a bit of a constitutional moment, when you think of the course, the anchoring, the instruments, the relationship between monetary policy and taxation, with financial stability, for example. It’s really fundamental in a way. Therefore, you shouldn’t have to do this too frequently.
However, the ambition to change things has limits. In reviewing the strategy, “we are working within the parameters and limits of the Treaty. It’s very clear, ”said Lagarde, referring to the legal treaty that underpins the EU. “The commitment I made was not to neglect anything, but also to get something that works. What would have been unreasonable would have been to go through this process and say that we needed a treaty change. “