Interview with Financial Times
Video interview with Christine Lagarde, President of the ECB, conducted by Roula Khalaf on 7 July 2020 and posted on 8 July 2020
8 July 2020
President Lagarde, thank you for this opportunity to speak with the FT. It's been quite a start for you, quite a ride. You were at the helm of the ECB for about four months, when the biggest crisis in the generation struck. What has it been like for you, and how do you think you've done?
It's been a very steep learning curve, no question about that. I think that together with members of the Executive Board and members of the Governing Council, we tried to respond as fast and as efficiently as we could in a situation that was deteriorating very brutally. I've been through quite a few crises. I'm not a veteran of all crises but I've been through the great financial crisis. I was very involved in the sovereign debt crisis but this one – COVID-19 – was very, very brutal. We had to respond extremely fast because we saw a quasi-seizure of the financial markets. We saw a dash for cash on the part of many of the key players. We had to use all the tools we had and harness as much cooperation among central bankers in order to respond to the crisis. I would say that it was a combination of using all the tools, harnessing as much cooperation internationally as we could, and making sure that the Eurosystem at large, meaning of course the ECB but also all the Governing Council members, was on board and using all those tools.
We'll come back to monetary policy. When you think of the recovery – and we're starting to see now a recovery – which letter of the alphabet do you favour? You've probably heard Andy Haldane just last week talking about a V-shaped recovery and that surprised many. Certainly you have been more restrained. Are you changing your mind at all?
I don't believe in this alphabet soup that we are hearing about. I think this recovery is like no other. It's going to be constrained, it's going to be uncertain and I think it's going to be fragmented across the world because clearly, the pandemic has hit in a sequential way. It wasn't a symmetric shock and the recovery is also going to be sequential. So we are seeing countries like China, like Korea, like Japan, like Australia coming out earlier than we are seeing European countries at the moment. We are seeing the Americas at large, including the US but also Latin American countries, at a later stage of this recovery process. So fragmented, certainly, and constrained by the uncertainty that we have around in terms of which sectors will be affected most, what impact policies will have, what overall response will be produced and what kind of cooperation will we see between the countries of the world.
Europe, so far, has avoided the massive job losses that we have seen in the US. Do you think that that's sustainable?
I think that the reason many of the European countries are still showing reasonably good job numbers and unemployment numbers that have not worsened dramatically had to do with the furlough system and the unemployment benefits that were available. That actually kept employees employed and employers supported by guarantee schemes, by furlough schemes, which were not available in the same scope and broad reach in the US. What will matter is what comes next. Are we going to have coordination between the phasing out of unemployment benefits and furlough schemes and a pick-up of activity? Or are we going to face a gap in between which would then see unemployment numbers rise significantly? That's really one of the big issues.
What about in terms of inequality? We are seeing – and in fact we wrote a long piece today about essential workers and the fact that they are some of the lowest paid, have to take the most risk, and yet society and the economy have not really valued that work. Do you think that has to change?
That has to be the focus of policymakers. What you learn from history is that in all these major crises, whether they are natural disasters, whether they are pandemics, generally the most vulnerable, the poorest, the women and the young people are the ones that are most affected and that are the clear first victims of those situations. There is plenty of literature about this particular topic, and policymakers have to really focus on that category.
Let me just press you a little bit on that. What should policymakers then do?
Well, I think they have to use the tools available and that includes fiscal, of course. That includes moral suasion in the private sector. That includes reassessing the values that a society respects. I would hope that the lessons from the last three months will be remembered. I don't know if it was the case in the UK, but in many countries on the continent, at 8:00 pm everybody would go out on balconies and terraces and gardens to applaud the people from the hospitals and the clinics. Well, it's not just a question of applauding them; it's also a question of acknowledging the huge value that they deliver to society, and making sure that there is consideration for that in terms of renewed social contract, if that's what you were referring to.
Does it worry you that there has been a drift towards more protectionism and at the same time, that there are rising tensions between the US and China? That is likely to damage the global economy even more just as we're trying, just as countries are trying to recover.
Those trends that you're referring to will obviously have an impact on economic development, will have an impact on growth, will have an impact on trade between countries. What we have seen historically in the last 30 years is that what was called globalisation has had a lot of benefits for many. The reason why so many people were taken out of poverty, out of starvation, had to go with globalisation. Now, that's the rosy side of globalisation. Clearly, what we have also seen on the occasion of COVID-19 and the pandemic is that supply chains were probably stretched too much and to the point where basic supplies were just no longer available. It has also demonstrated that while mobility is of course good, proximity was seen as also very valuable and necessary for the economic development of communities. It may well be that this particular crisis will transform our perception of globalisation, proximity, short supply chain, control over one's destiny. To me, what will really matter is how we can make those concepts that are close to people's desire and hearts compatible with enough global development and multilateral relationships, so that benefits can also fall out to other countries and not just be restricted to your own shores.
So you're hoping that it won't be a permanent setback for globalisation?
I think the whole set of relationships and business models of countries will have to be revisited. Countries cannot be exclusively driven and supported by trade and trade only, for instance. Equally, you cannot just close your borders and assume that you're going to operate in your own restricted circle because problems are of a global nature, because pandemic ignores borders, because capital flies across the world.
Just one small question on Brexit: do you think that it will aggravate the impact of the pandemic on European economies because of the timing of Brexit at the end of the year, whether it's with a deal or without a deal?
If you combine two downside risks, two uncertain outcomes, you clearly have a multiplier impact so how one will reinforce the other, I don't know. They are heading in the same direction, which is not an easy one.
Let's talk about monetary policy. It's interesting that when you took over, the view amongst economists was that the ECB had breached the limits of monetary policy, and that the best you could do is to cajole, convince governments to embrace fiscal stimulus. Instead, now you say that there is no limit. This is the new motto: there is no limit to what the ECB is willing to do.
Our support for the euro is unlimited, yes. But that's because we have a mandate which is price stability, and which dictates that we pay very close attention to both monetary stance, to monetary transmission, that we are attentive that financing is not tightened to the point where economic actors cannot develop activity. I think that's exactly what we have applied at the time when the crisis started unfolding. We had to look at what was available and we had to invent new instruments in order to respond to the crisis and make sure that we could actually deliver on our mandate.
Is there a hard limit to the Pandemic Emergency Purchase Programme? If there isn't one, then what happens next?
I would observe that through the impact of the massive programmes that we put in place, the situation has calmed down enormously. The tightening that we had seen loosened. I'll give you an example. Together with a few other key central banks around the world, we had those US dollar swap lines that were in very high demand at the beginning of the crisis. Now, none of it is needed. That's an example. So I believe that the measures we have taken have actually demonstrated the efficiency, the effectiveness, and were just right in responding to the situation. We are going to be very attentive to the economic developments, to the many numbers that are popping up, whether it's PMI, whether it's services, whether it's employment, whether it's inflation and the like of it, to make sure that our tools are properly calibrated and can respond adequately to the current situation. We have a very – how would I put it? We receive myriads of numbers at the moment, but it's very uncertain. It's going to take a while before we have a solid response from the economic terrain, if you will, to really assess the effectiveness of what we do, as well as the prospects of what will happen. But we have done so much that we have quite a bit of time to assess that carefully.
Why did you say at the very beginning of the crisis that the ECB's role wasn't to manage spreads between Italian and German bonds?
Well, first of all, I think that was pre-pandemic. That was pre-major programmes that we've put in place in order to make sure that there was plenty of liquidity, that the transmission channels were not impaired, which is part of our duties – and an important one – and before we made sure that banks were in a position to lend to the economy, both at the top corporate levels as well as the entrepreneur level. I think that that is the best response that we could give at the time.
Well, Germany's Finance Ministry said last week that the ECB had fulfilled the requirements of the Constitutional Court. It does look like that particular case is on its way to being resolved. Even if it is, though, does it not set a dangerous precedent and undermine the independence of the ECB? How do you look at it?
I'm a lawyer by background so I look at the legal ground on which we stand. The first thing I see is the independence of the European Central Bank, number one – which doesn't mean to say that it's unaccountable. The ECB is accountable to the European Parliament. The European Central Bank has a court which has jurisdiction over it, which is the European Court of Justice. To me, that's critically important. The Treaty has to be respected. It was put together – and with great interest on the part of Germany, by the way – that a central bank has to be independent. I think we need to stand by those principles, which I think we have in the case of the most recent decision that was rendered in Germany. The German authorities found the right level of response. As part of the good relationship that we have with all our members, we supported the Bundesbank to make sure that the principles of proportionality were properly evidenced and demonstrated, as it has been applied ever since we went into monetary policy, for that matter.
You didn't look at it as a dangerous precedent?
Not at all, because as I said, the Treaties speak for the legal ground on which we stand: accountability to European Parliament, European law as the applicable law, and the European Court of Justice as the court which has jurisdiction over us. So that's our story.
Let's talk about negative rates: why do you think that they're beneficial, when the Fed and the Bank of England have steered clear of them?
We look at it very carefully and whenever we decide a monetary policy stance, whenever we decide to use a particular tool, we always look at how effective it is, how efficient it is and how proportional it is. Those are the three yardsticks against which we measure such or such other tool. Clearly, we look backwards to make sure that the test of time is actually demonstrating that it is, that it was, the right tool to use. Our experience with negative rates is actually positive overall. Now, it's clear that if you are granular to the point where you only look at one category of transactions or one category of citizens, you might reach a different conclusion. But we have to look at the overall euro area. We have to look at overall categories of economic players. We have to look at the overall circumstances under which we operate. We have to look at the impact that such measures will have. So at this point in time, clearly, and given the circumstances that prevailed at the time, it was the right decision to go for these negative rates.
The main criticism is that it's corrosive, especially on banks and insurance, and that it fuels bubbles in property, for example. What do you say to the critics?
I say exactly what I say to you very openly; it's that we have to look at all aspects, all consequences and all effects of a particular monetary policy. You cannot only look at the category of the savers; you also have to look at the borrowers. You have to look at the level of desired investment. You have to look at the volume of savings. You have to take all these factors into account to determine whether, on balance, the tool that has been selected as a policy going forward is actually delivering effective, efficient and proportional outcome. This certainly has been the case.
There's another concern that I hear often, and that is that the ECB's financing of governments by buying so much sovereign debt, to the point where it may have to just perpetuate because governments won't be able to stand on their own feet. Is that a valid concern?
It's clear that there are many, many other investors and purchasers out there to buy sovereign debts at the moment. We are seeing it on a regular basis; whether it's issuance of green bonds by some member states or whether it's issuance of very, very long-term maturity bonds by others or whether it's large issuance, there is a serious appetite on the part of investors. I think that the European Central Bank is not the only game in town when it comes to buying those bonds. There is a market out there. It's a vibrant one and the policies that we have in place are showing the efficiency.
Some economists are asking whether the ECB will ever hit its inflation targets.
Well, clearly the price stability that is inscribed in the Treaty is dictating and driving our action because it is our single mandate. It was defined back in 2003 as close to but below 2%. If you look at a longer period of time than the last few years, clearly that goal was reached. It's only recently that it has been lower than what the average was over the last 20 years or so. Clearly, we have the aim of targeting the price stability which is our mandate. We will continue to deploy the tools that we have in order to do so. One caveat, though, is the fact that we will be resuming finally our strategy review. Clearly, inflation, inflation components, measurements, price stability definition will be under review. But I have no doubt that we will be driven by our price stability mandate on a going-forward basis.
I want to ask you about the review in a minute, but just to stay on inflation: there is a debate right now about whether we're going into an inflationary environment or towards deflation. What do you think?
That's a really difficult question because we are seeing disinflationary forces at the moment. I think there are many economists who argue that there is more of that and potential deflationary risk. But I'd rather talk about disinflationary forces in the short term, and then total uncertainty as to the medium-to-longer term. When we look at our medium-term projection, we are pretty close to numbers that we had pre-COVID, to give you an example. Now, how these economic forces, how this economic transition, how the digitisation of the economy, how the greening of our economies will impact prices and the measurement of inflation is going to be a major determinant of what inflation will look like going forward. But it may well be inflationary in the longer term. It's part of the uncertainty that abounds at the moment.
As you say, a very difficult question. Turning to fiscal policy, how important is it for the ECB that EU governments agree on the €750 billion recovery fund?
I think it's important for all Europeans, and it's important because it will demonstrate clearly a sense of common destiny, a sense of solidarity that needs to be demonstrated in times of crisis. The fact that a recovery plan is large, fast, and focused on those areas that need improvement and those countries that suffered the most, will demonstrate that there is a European Union, and that there is unity of purpose in order to continue to build and develop this market.
I think a lot of Europeans in the first days of the crisis started to doubt that, because there was no solidarity, so I see your point. Do you think it can enforce solid recovery?
It will. I think it's a game-changer, let's face it. Because what we have seen during the crisis is a strong fiscal response at the national level, a very rapid and strong and convincing monetary response, a little bit of European response thanks to the ESM new programme, thanks to the SURE unemployment support, thanks to the EIB additional guarantees for companies. That was good, but the real game-changer element is the recovery fund; in particular if a good chunk of it is in the form of grants rather than loans, because it will, in that case, establish a degree of unity and solidarity to benefit those that have suffered most.
We should know possibly in a week or almost two weeks…
I know that there is a lot of hype and everybody would like to see, on July 17th at 6:30 and three minutes, the outcome of conclusive discussions. For those of us who've been around Brussels a bit, it takes a few days, it takes a few nights. I wouldn't be surprised that it comes later in July, so I wouldn't put all my bets on July the 18th.
But are you concerned about the divergence?
It's always a risk that going into the crisis, there was a degree of divergence, and that coming out of the crisis, that divergence persists and is possibly worsened. I think the whole purpose of the recovery plan is to try to re-establish a level playing field and to compensate those that have been worst hit by the pandemic.
An uneven recovery would presumably put more pressure on the ECB because some would want you to be tapering, others will not.
We will deal with that in due course. There's the Governing Council, there is an Executive Board and we try to work as cooperatively as we can, in good intelligence.
Let's turn to the strategic review because one of your objectives then –it was put on hold but has just been restarted – was to include combatting climate change. How do you see the role of a central bank when it comes to climate change?
I think when it comes to climate change, it's everybody's responsibility. Where I stand, where I sit here as head of the European Central Bank, I want to explore every avenue available in order to combat climate change. This is something that I hold very strongly and I believe that, as we have this price stability mandate that I described for you early on, climate change actually has an impact on price stability. If we fail to measure externalities, if we fail to anticipate drought, if we fail to anticipate variations of prices of food, of energy, of services, then we are not doing our job. So I think that even without changing our mandate, climate change has an impact. I'll tell you, it has an impact on how we model the economy going forward, how we forecast, how we measure risk, how we stress test institutions, how we value the collaterals that we receive, how we link and join forces with other national central banks to explore together what policies can actually have a decisive impact on fighting climate change. This clearly will be part of our strategy but I wouldn't want you to think that we're suddenly discovering it.
The ECB has addressed the issues of climate change. I think the impetus and the momentum is just stronger now and has to be multifaceted and has to look at all the business lines and the operations in which we are engaged in order to tackle climate change, because at the end of the day, money talks.
There have been some signs that the fight against climate change may be sacrificed as a goal as companies and governments deal with the impact of the pandemic. Do you worry about that at all?
I think those who would be tempted by that option would live to regret it. I have children, I have grandchildren. I just don't want to face those beautiful eyes, asking me and others, “What have you done? Why didn't you fight for my future? Have you protected biodiversity?” and so on and so forth. I think it's an imperative that generations will impose on us if we tend to forget it. It's a concept that markets will also force on us if we tend to forget.
Let me ask you about diversity. The Fed has spoken out again on racial diversity and how the pandemic has disproportionately impacted black and ethnic minorities. Has the ECB made any statements, and is that something that you're concerned about? The issue is that in Europe, in a lot of countries, we don't even have data so it's quite impossible to know. But in the UK, there is no doubt that we've seen a similar impact on black and ethnic minorities.
As you just said, we do not have much by way of data simply because data are not accepted. It's illegal to actually trace by way of colour, religion and so on and so forth in many countries in the euro area. So we don't have much by way of data, but suffice to look at the diversity that we have, clearly there is progress to be made. We have to continue delivering on the targets that are set for gender purposes. But we have to look beyond gender diversity; we have to look at all diversities.
You're one of three women who are defining the future of Europe at this time. With all due respect for the very powerful men, but you, the Commission President, the German Chancellor, how closely do you coordinate? I know that you know Angela Merkel very well, but how well do you know Ursula von der Leyen?
We know each other quite well and as you said, I've known the Chancellor for quite a few years. We are both veterans of Europe in some way and have attended many meetings together. We're often the only two women in big rooms full of men, and that certainly from my perspective – I don't want to speak for her – but from my perspective it does produce this complicity and friendship that is often generated by minority members. I go back with Ursula for quite a few years as well because we were sitting on the same groups or board meetings in various institutions. So we know each other well and we do communicate with each other on a regular basis.
Well, thank you very much for taking the time for this discussion.