Interview with La Provence
Interview with Christine Lagarde, President of the ECB, conducted by Marie Cécile Berenger
2 July 2021
What was the European Central Bank’s role in the health crisis?
Let’s recall the situation prevailing in early March 2020 when all the political and economic players in the public and private sectors suddenly realised that the health crisis would also have severe economic consequences. The financial markets were then gripped by major uncertainty. Like the other major central banks in the world that I was in contact with at that time, the European Central Bank (ECB) had a dual role. The first role was to stabilise the markets. We launched our pandemic emergency purchase programme, with an envelope which was increased to €1,850 billion over time, to calm the markets and help stabilise prices in line with our primary objective. The second role was to ensure that banks had sufficient funds to finance the economy. At such times there is a risk of credit tightening, of firms no longer having access to liquidity and of economic activity freezing up completely.
Did stabilisation involve purchasing corporate and sovereign debt?
Stabilisation involved purchasing different categories of assets, corporate bonds and public debt (on the secondary market in the latter case, never directly from governments) to provide reassurance and avoid the risk of market fragmentation. Monetary policy should indeed apply across the whole euro area.
Was all of that decided as a matter of urgency? Was there consensus?
No, there was no immediate consensus, but our analyses quickly converged! Given the scale of the risk, we came together in extraordinary circumstances. As it was at the start of the lockdown and the ECB premises were closed, we began to work by videoconference, albeit without the equipment that we now have at our disposal. The emergency purchase programme and the massive funding for firms were decided on during the night of 18 March by all of the governors of the 19 central banks. In my case, I was with some members of my Executive Board around my kitchen table in my apartment in Frankfurt! Our teams had worked flat out for long full days in order to put the finishing touches to these two major programmes. For when the need arises, a central bank is able to respond rapidly and overwhelmingly. Moreover, we tried hard to achieve the broadest possible consensus.
What are the limits to this support to economies by creating money, what is the risk?
The most serious risk would have been to do nothing. The ECB’s primary mandate, laid down by Europe’s founders, is to maintain price stability. For that, the economy needs to be running smoothly, there needs to be investment, growth and job creation. It’s in this context that we offered our support by using the two levers of emergency purchases and exceptional loans at extremely favourable conditions. And we agreed to maintain these measures until at least March 2022, and in any case, until we judge that the coronavirus crisis phase is over. While the recovery is now beginning to get under way, it remains fragile.
What are the limits of these measures?
The ECB’s primary mandate is to maintain price stability. How do you measure this stability? By ensuring that medium-term inflation is below, but close to, 2%. That is our objective, the point we are aiming for. Prices need to increase in a gradual, stable and sustainable manner. For that we need a sustainable economic recovery. But we are not there yet.
Was this reassessment of inflation heralded by the explosion in commodities prices? Is it good news?
The recovery in itself is good news: it started in China, is markedly stronger in the United States but Europe isn’t being outdone. The double monetary lever applied by the ECB and the fiscal policies pursued by the governments and the European Union are fuelling the recovery. We observe a price increase which is notably driven by two base effects. The first relates to petrol prices, which collapsed to less than USD 25 per barrel during the pandemic before climbing back up to around USD 75 per barrel currently. The second base effect concerns Germany, where the rate of VAT, which had been lowered last year to support the recovery, was restored on 1 January 2021. However, these base effects will not last. We will see a return to lower rates of inflation as indicated in our projections.
What are your inflation expectations?
Our inflation projections for this year are around the 2% mark – which is something we haven’t seen in more than eight years. The increase in prices should nevertheless slow to 1.5% in 2022 and 1.4% in 2023. We therefore expect inflation in the medium term to stabilise below our objective
As the ECB’s core task, how does this price monitoring occur?
We measure price increases using several instruments. We take what we refer to, for simplicity’s sake, as a “basket of goods” from which we then strip out food and energy prices. When we look at this more limited basket, we see that prices have increased slightly every quarter over the last nine months. We also closely monitor wage negotiations because a rise in prices leads to higher wage demands, which in turn has a second-round effect: an increase in wages creates additional demand, which puts pressure on prices. We keep a very close eye on all of these factors.
Do you agree with the opinion of some observers that the sovereign debt generated by governments should be cancelled?
No, I don’t. First of all, it runs counter to the legislation and would be an infringement of the treaties. Furthermore, it’s an accounting illusion. Most of the coronavirus-related debt contracted by the French Government and purchased on the secondary market as part of monetary policy is recorded on the Banque de France’s balance sheet. The debt canceled would create a gap in the balance sheet that would have to be filled, either through a contribution from the French Government to the Banque de France, or through a reduction in the revenues transferred by the Banque de France to the French Government. It’s a bit like borrowing from Peter to pay Paul. It makes no economic sense, because interest rates are extremely low at the moment and because if a country were to stop repaying its debts, lenders would be reluctant to fund it. That’s what happened to Venezuela, Argentina and Lebanon.
Should the French people be worried about this debt?
Creating this debt was crucial to avoid an economic disaster. The response of the euro area countries, including France, was necessary. It was fast and complemented by a European effort, the result of which we have just seen – France’s share of the New Generation EU plan, €39.4 billion, has just been announced, 13% of which is scheduled for disbursement in 2021. Immediate measures have been introduced at the national level, such as the partial unemployment schemes, government loan guarantee schemes, etc. At the European level, there must now be a major push to modernise economies. It’s not enough to say “let’s be green, let’s go digital”; we must implement the necessary reforms.
Is helicopter money a solution?
In its purest definition, i.e. in the form of central bank direct handouts to households and firms, it has never been used. That is a matter for the budgetary authorities, not a central bank.
You never miss a visit to the “Rencontres économiques”, do you?
That’s true, I’m more or less a veteran! Except for one time, I think, I’ve attended every year since 2004. It’s an opportunity for sharing ideas, proposals, suggestions and for bringing together the best economists and contributors from a whole range of fields. It’s like one big beautiful melting pot of ideas!
You are also fond of this part of France, aren’t you?
Yes, dating back to my childhood. I lived in Avignon for a few years, where my mother had a home. One of my grandfathers lived in Lourmarin, where he passed away, and I did part of my studies in Aix-en-Provence, so I think I have genuine ties to Provence. My strongest connection to the region is through my husband (editor’s note: Xavier Giocanti). He comes from Marseille stock, which is why I come back to Marseille whenever I can.
Can you tell us about your favourite places?
I especially like Marseille because it’s a port. I spent 17 years of my youth in Le Havre, which is also a port and was a rival to Marseille. The gateway to the sea, the wide horizons and the port activity are enchanting. I like going to the Miramar for bouillabaisse, buying a piece of tuna or anglerfish from my dear friend Christine at the Vieux Port, walking along the Prado beaches when the sea is really agitated, doing some cyclo-cross biking in the Calanques and stopping for a bite to eat in the Baie des Singes. I love Les Goudes! A long time ago, before the Calanques national park was created, I tried to persuade Xavier to buy a little cabin there, but it didn’t work! It’s too late now…
What advantages does our region offer?
There are so many. Against the background of a new Europe and a new growth which is both green and digital, I think Marseille’s positioning is strategic. Apart from being a gateway to the Mediterranean, an area of influences, Marseille is present in key sectors thanks to its university infrastructure and research centres, particularly in the area of healthcare. Marseille offers a mix of geography and climate that can help start-ups get off the ground, particularly in the biotech and digital sectors. You also have the national park, now well-established, which protects the environment, and a whole range of sea-based services for protection purposes. In tomorrow’s economy, this coastline and city boast unique advantages that must be taken advantage of.