Interview with France 2
Interview with Christine Lagarde, President of the ECB, conducted by Léa Salamé and Thomas Sotto on 4 June 2020
5 June 2020
Good evening Madame Lagarde. Thank you for agreeing to share some of your scarce speaking time with us. This afternoon you published terrible growth projections for the euro area: -8.7% in 2020. In France, we are looking at a recession with the economy shrinking by 11%. How can we stay optimistic when we see such catastrophic figures?
We remain optimistic because we know that we are currently going through the worst phase of the crisis. Economies have just been hit by a huge shock, the likes of which we have never seen before in peacetime; a shock from a pandemic that has hit every country in the world, one after the other, and that has slowed, even totally stalled, some economies. But for several days now – or several weeks in some countries – we have been seeing the lockdown measures steadily lifted, and activity is gradually picking up again.
We were at the lowest point of the curve and we are carefully going back up. Clearly, the extent to which the situation improves will depend on how quickly we can pick ourselves back up and on the collective efforts we are all capable of making.
A second reason to be hopeful: yes, our projections for this year are bleak, with growth of -8.7%, so negative growth for the whole of 2020. But we will return to positive growth in 2021, and it is very likely that by the end of 2022 our economies will have returned to where they were when this catastrophic crisis hit, sparked by the coronavirus (COVID-19) pandemic. So we were at our lowest point, but now we’re starting to pick ourselves back up and we will return to positive growth next year.
This is clearly a very challenging time that requires every effort to be made. We have to do everything we can to revive confidence. Here at the European Central Bank we have to ensure that credit continues to flow, that investments can be made and that consumption picks up. Every effort must be made and every institution must be mobilised, at the national level, at the regional level and, of course, at the European level.
In an attempt to resurface, the ECB has decided to inject a further €600 billion through its emergency programme to support the economy. In total, that’s €1.35 trillion. These are astronomical, dizzying figures; it’s very hard to grasp their concrete value. What effect will all this money have on our lives?
The programme you are talking about is designed to purchase private and public sector securities. Why are we doing that? We are doing that to put downward pressure on interest rates. Mechanically, our actions are transmitted along the entire chain of financial products and loans extended to businesses and households. If the ECB lowers the interest rates that countries have to pay to borrow, this has a mechanical effect that also lowers the rates offered to businesses and households.
So when you buy a car, or take out a consumer loan, or purchase real estate, the bank, the financial institution that is giving you that loan, can do so at exceptionally attractive and low interest rates. And this is because the ECB and all the national central banks of the euro area are putting downward pressure on interest rates.
The debt levels of euro area countries have exploded overnight! We’re talking about 115% of GDP in France – this is unprecedented. Will this money have to be repaid? And if so, when? In 10 years? 50? 100? Is repaying this money going to strangle the economy?
Allow me to make two extremely important points. First, borrowing was the only way to handle the budgetary expenditure. In other words, for countries to be able to protect their economies, they definitely had to inject public money. When every private actor has ceased their activities, public money has to be injected to support the economy. Everywhere in the world, and of course in the euro area as well, every country has had to borrow to finance their public spending. There were no other options.
And my second point: interest rates are especially low at the moment. Currently, when euro area governments borrow money, most of them do so at rates close to zero, and some are even borrowing at negative rates. Debt servicing – which is what is most relevant for annual budgets – is being conducted at especially low rates. The correct response was for countries to commit to supporting their economies. So what does it mean that the economy is now going to start to pick up in terms of consumption, in terms of investment? It means growth. And growth is clearly the best way to deal with these additional necessary debts because, with the relatively low costs of debt servicing at the moment, it enables them to be gradually repaid.
There was extensive criticism of Europe’s delayed response to the crisis, of national self-interest, of silence on the part of the European Commission. Even Jacques Delors himself spoke out and warned that Europe was in mortal danger. Isn’t there some truth to these criticisms? There was a delay in getting things under way, wasn’t there?
As you can imagine, I will of course defend my own shop! The ECB was ready to act at extremely short notice. As a point of comparison, during the global financial crisis we experienced in 2008, and subsequently the European sovereign debt crisis in 2011, we were on unfamiliar ground and it was our first time facing a crisis of this nature, so the European institutions took some time to launch new tools, they took some time to commit themselves.
At the ECB we were genuinely very quick off the mark. We have been taking exceptional measures since 18 March – in fact, we started taking them on 5 March.
Then, on 18 March, we stepped up our action, and were truly very decisive in the support we gave to the economy. First, by providing a significant amount of liquidity because there was a serious liquidity crisis, and second, by ensuring that lending to firms continued at favourable conditions for all parties. Third, by seeking to fulfil our mandate and preserve price stability by exerting downward pressure on interest rates to stimulate lending for investment and consumption and thereby bringing about an economic recovery.
I don’t know if you read or listen to Michel Houellebecq, but in relation to this crisis he said that the world afterwards would be a worse version of the world before. It’s similar to Greenpeace’s criticism that the ECB has allocated more than €7.5 billion to polluting fossil fuels, and not enough to non-polluting, renewable energy sources. How would you respond to that? Doesn’t it send the wrong signal?
It’s a problem that is particularly close to my heart and which – even when I am criticised for it, both during my eight years at the IMF and now at the ECB – I think is deserving of special attention and should be a priority.
We have launched a strategy review, which we are going to resume now that the coronavirus has abated a little and restrictions are being eased. We will also “ease restrictions” on our strategy review and will get back to work on it wholeheartedly.
The fight against climate change and the protection of biodiversity will be crucial elements in our various courses of action. These have multiple dimensions; they go beyond asset purchases alone. In that regard, I do not entirely agree with the figures that were mentioned, by the way, but that’s not so important. The fact is that we have to take these elements into consideration as a matter of urgency.
This will cause us to change the models used for our economic projections, to re-examine the body of what we call “collateral”, in other words the securities, the loans to firms, pledged by the banks as security for funding. We will need to ascertain whether those loans have been valued correctly, taking climate risk into account. It will also lead us to work, in our role as supervisor, on a “stress test” for banks that will incorporate the dimension of climate change. And it will very likely prompt us to use the fight against climate change as a parameter when calibrating our programmes for purchasing assets in the market – but it cannot be the sole parameter.
It should be noted that we are already large purchasers of what are known as “green bonds”: we are very active buyers in that market. We hold almost 20% of all green bonds.
In a Tweet you said that what you missed most during this period was being able to see your grandson. Looking at him today, do you have any fears for him? Could you share your thoughts?
At the moment I only see him on my smartphone and in photographs, so it’s still a little sad… I would love to see him from closer by, as I would love to see all of my family. Looking at him makes me all the more convinced of the value of our mission, which is to work to make our society a better place, so that it will take up the fight against climate change, protect biodiversity, ensure that future growth is both fairer and more efficient. So yes, it does give me an even greater sense of responsibility.