Interview with CNBC
Interview with Christine Lagarde, President of the ECB, conducted by Sara Eisen on 9 April 2021 and broadcast on the same day
12 April 2021
Europe is at an interesting point, because there’s a lot of optimism about a recovery, and yet Europe is still in the throes of the coronavirus (COVID-19) crisis – high cases, lockdowns. What is your level of concern at this point about the system and the economy as the President of the ECB?
Well, I think there is recovery – it is delayed, certainly, but it’s not derailed. It is delayed because Europe has been hit by the third wave of the virus. Not exactly the same one – the one that we call the English variant, which has hit most European countries hard. So we are still going through some lockdown measures. Not as severe as a year ago, but it is still slowing down the economy, which is back in many ways, because there has been a lot of ingenuity on the part of the private sector, in particular, to resist the slowing down of the measures. So a lot of invention, a lot of innovation, a lot of ways to deal with a situation that is still a preoccupation and that still inflicts a lot of uncertainty. I think – as everybody else has said – light is at the end of the tunnel. We can see it. It’s not yet within touching distance. We still have a few innings to go. But certainly in 2021, in the second half of the year there will be recovery that will be moving fast, actually.
That’s good to hear. In your latest action, you announced that you’re going to ramp up bond purchases to counter the rise that we’ve seen in yields, which we’ve seen here in the United States as well. My question is why, if rising yields are a sign of the optimism about the economy and higher inflation, do you need to fight that?
When the Governing Council met earlier in March, we had observed for a few weeks a rapid increase in the risk-free interest rates of the sovereign bond yields. And we thought that this was undesirable and unwarranted, and that it would lead to some tightening that was, as I said, not warranted by the economic situation that we saw in Europe. And we didn’t want those risks of tightening to jump ahead of an economic recovery that could occur in Europe probably during the second half of 2022. So a lot of it was actually imported from the United States, and we thought it was perfectly appropriate to resist this risk of tightening and to make sure that we could continue to preserve the favourable financing conditions that we pledged back in December.
So are you satisfied to see yields back lower today?
I think that our action has been efficient. I think it’s been efficient ever since we started back in March 2020. I think that markets have understood what we want to do, how we want to preserve favourable financing conditions, and apply that joint assessment based on what we see on the financing conditions that are out there and our inflation aim. And particularly our determination to return to a pre-COVID-19 state, and then move on to our actual inflation aim.
You are expecting a rebound this year, as you mentioned, but do you think there is a possibility that you’ll have to extend the pandemic emergency bond-buying programme beyond March 2022 when it’s set to end? Is there a chance of that?
This pandemic emergency programme is characterised by complete flexibility – flexibility across time, across asset classes, across countries – and we decided when it was needed to extend it and to expand it. We did it twice. If it is necessary to do it again, we will do it again. If it is necessary to spend more than what has been identified, we will do so. If we can spend less because the situation improves fast, we will do so as well. So we will use the flexibility in all respects. And the commitment that we have under the pandemic emergency programme is to make sure that it supports the economy and helps us reach our goal of price stability, up until such time when the Governing Council decides that the pandemic crisis is over. We’ve assumed that it would be March – up until now. If it needs to be extended because the Governing Council determines that the crisis is likely to last longer, we will extend it.
What about tapering? How big of a challenge is that going to be, in this environment, and is it too optimistic to expect that you might start tapering before the end of the year, given the forecast?
I think you’re thinking of tapering in US-like terms. We are in a completely different situation. The United States is probably going to hit its inflation targets rather soon. We are very far away from that. In 2021 we will probably see inflation at 1.5%, and that is largely temporary and technical. It will go down again, we think. And our goal is close to, but below, 2%. So we’re very far away from that. And what we tried to do with our forward guidance is indicate that we will continue net asset purchases until very close to the time when we will actually look at raising policy rates, which will have an impact on interest rates.
So tapering should not be discussed in the same terms as in the United States. We may well reduce the pandemic emergency programme when the time comes, when we see the crisis coming to an end. Yes, but that’s the emergency programme. We also have another programme of asset purchases. And as I said, net asset purchases will continue until we start looking at raising policy rates.
When do you expect Europe to reach herd immunity? I know you’re not a virologist, but it’s obviously a critical economic question.
I would not make any pronouncements on herd immunity, because doctors and scientists are arguing about that. What I can tell you is that there is a very strong determination to reach 70% of vaccinations before the end of the summer. And for some countries, it will move faster. I know that there is a commitment to have a very sizeable part of the population in France vaccinated before Bastille Day, which is 14 July. We’ll see about that. But certainly before the end of the summer, 70% of the population vaccinated is something that seems to be very much within reach. Because now vaccination rollout is picking up, it is getting speedier and more efficient than it was in the last few weeks, which I think the Europeans are now really dealing with and addressing with determination. I think we have to keep up and press on to make sure that injections are taking place fast.
What about stimulus injections? Obviously, the United States has just had a USD 2 trillion bazooka, and there’s another USD 2 trillion package potentially on the table. The European recovery fund hasn’t been signed off on and is about half as big, is that frustrating for you?
Well, if you put together the whole package that was agreed by the Europeans, which is this special fund, plus the multi-annual budget, you get to about USD 2.2 trillion. That is roughly the ballpark figure that we have. When I say the Europeans, we, have to keep up and press on, that’s what I mean. It has been agreed, it has been voted by the European Parliament, all 27 Member States have to ratify. I know that 16 of them have done so. They still have a few weeks to make sure that funds are actually disbursed in the second half of 2021. That’s what we’re counting on in terms of our projections. So pressing on is in order now.
But is it adequate enough, the size, and the scope, given the trillions of dollars we’ve seen from the United States, and given some of the economic hurdles that you have in front of you? It would certainly make your life easier, wouldn’t it, if they could go bigger on fiscal actions?
Well, it was great that during this crisis fiscal and monetary acted hand-in-hand, and this has to continue. It’s difficult to compare, because we’re comparing oranges and apples here. Europe has much higher automatic stabilisers than the United States. The recovery plan and the resilience plan here is really targeted at quality measures and making sure that there is transition towards digital, green, productivity-enhancing measures, whereas the US plan is demand-driven, at least the first big chunk of it. The second one will be of a different nature, I’m sure, when it is voted.
But it’s difficult to actually compare, because you also have national measures that are taken and that provide fiscal stimulus as well. So you need to package everything at the European level and possibly compare it. But I’m not even sure that this is actually appropriate, because they are clearly tailored in a different way. Europe wants to really beef up its game. Be more digital, more green, more effective. And for the moment, as I understand the United States voted part of the plan, it’s demand-driven, it’s improving the vaccination process with great efficiency. And this is very good news for the world as well.
The European stocks have been on a tear lately, they’ve just regained their pre-pandemic highs, record levels. European bonds have rallied, even ones with weak balance sheets. The euro has been strong over the past year against the dollar. Do you see the markets, or any part of the markets, as being detached a little from the reality on the ground?
We monitor that very carefully. As you know, we don’t target any particular exchange rate, for instance. We are very attentive to the impact that it has on inflation, obviously. But we need to make sure that from a macroprudential and a microprudential point of view, the banks are properly equipped and the regulatory authorities are properly equipped to deal with what would be unwarranted movements. But we don’t see that at the moment.
And finally, one question I’ve been asking all of the world leaders, that I would love to hear your thoughts on, is what keeps you up at night? What is the central risk that would worry you about this more optimistic forecast, coming out of the pandemic?
I’ll tell you what worries me, and this is not necessarily a central bank governor’s main preoccupation traditionally. But what preoccupies me a lot is that those who are going to be crushed most out of this current pandemic and economic crisis are women, particularly young women. And I’m very concerned that the ground that we had gained over the last few years not be lost and that they eventually lose out most as a result of this situation. So you know, I think of my little girls.
Well, luckily, we have many strong women leading us in this economic recovery. Thank you so much, President Lagarde. I appreciate it.
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