Interview with TIME
Interview with Christine Lagarde, President of the ECB, conducted by Klaus Schwab, Founder and Executive Chairman of the World Economic Forum, on 30 August 2021
1 September 2021
I'm Klaus Schwab, Founder and Executive Chairman of the World Economic Forum. And I have the great pleasure to have a discussion today with the President of the European Central Bank, Christine Lagarde. President Lagarde, I think we met for the first time just about 20 years ago, and you were a very prominent lawyer at the time. In the meantime, you have developed also a career as a politician, as an economist, as a statesman, and as a banker.
Knowing and admiring your global perspectives and, I would say, your global responsibilities, I would like to concentrate our discussion on what I consider the four foremost challenges we are faced with at this present time: COVID-19 of course, climate change, inclusion and especially gender parity, and finally, the fourth industrial revolution — how well we can harness new technologies in order so they can serve and not harm humanity.
If I may turn to the first subject, COVID, which, of course has determined our lives, and has had tragic consequences for many people. We are now in some way, at a crossroads because while there is so much vaccination, there are still many question marks. So my question would be: how do you see the road back to normal, if any new normal exists?
And also, if I could raise one issue related to your function in the fight against COVID, what is the role of the central banks? We have heard about the IMF and the special drawing rights which may be used to mobilize $50 billion, but what is your view of the road back to normal?
Thank you so much, Klaus. Yes, it's been 20 years of happy journeys together, where we have crossed paths many times, and looked at the world as it goes, and tried to work out ways to improve it if we could. And I'd like to salute your efforts in that journey.
To turn to your question about COVID, and your use of the term “return to normal.” Let me take us back to what we have gone through in the past two years, because I think that is actually going to determine how we transition towards a new way of conducting ourselves, in all respects. We have gone through a massive shock to the global economy, that hit us in the face and actually made us realize that health mattered actually a lot more than the economy and finance, at least in the short term.
And there was clearly, as opposed to back during the great financial crisis in 2008, a determination to focus on restoring health, securing income for people whenever that was possible, and trying to cure the pandemic that had just fallen on the world.
Of course, there were a few hiccups to begin with. But overall, policymakers did a good job of addressing the issues by reacting very promptly, and very forcefully. And certainly — because you asked about the European Central Bank and what central banks can do — with a massive response in terms of liquidity, in terms of availability of currencies that were sought by all economic players, and in terms of sustainability of those plans to help with the financing of the economy.
So one thing which I take some confidence in, is that we learned from the previous crisis. We learned that we could not procrastinate, we learned that we could not go slow, we learned that we could not face inwards. We learned the hard way at the time. You know that saying in the stock market, that you either go big or you go home? Well, we certainly all went big, in order to fight what was happening. By the same token, we adopted very strange measures, you know — locking down, and shutting down our economies, these almost mediaeval ways of dealing with this pandemic.
And then, thanks in many ways to globalization — and I'll be happy to expand on that — we came up in next to no time with vaccines, which is something that was unheard of. From a pandemic that started in February, we had vaccines available in December. Typically, it takes more than five years to experiment and create a successful vaccine. This time, it was nine months, as opposed to five years. And this is largely a story of globalization.
So, number one we learned from past mistakes, and that we needed to go big and go fast. Number two, we benefited from globalization and came up with vaccines very quickly.
We are emerging from this pandemic, with economies that are stabilized, with, in a way, little sustained disruption. When you look at the unemployment levels in advanced economies, not much damage has remained from the pandemic. When you look at the level of GDP, the size of our economies, we will be back to where we were pre-pandemic at the end of the year.
So, we really fought hard and responded well, and have come out now with a situation which still needs a lot of attention. But it seems to me now that policymakers have to be almost surgical — it's no longer a question of massive support, it's going to be a question of focused, targeted support in those sectors that have been badly hurt.
In addition to supporting the recovery, we must vaccinate. If we don't vaccinate the whole world, as we should, COVID-19 will come back to haunt us, and it will come back to hurt us. To do that, the world needs to be a little bit more generous. And in being generous, it will be serving its own interest. As you know, I am baffled by the fact that the entire global community cannot put together $50 billion in order to address vaccination in those countries of the world where only 2% of the population is vaccinated - I mean the low income countries.
We have spent, in fiscal support, something like $6,000 billion — what is needed is 1% of that in order to vaccinate the world. So I think that to move to this new normal, whether one likes the word or not, we need to anticipate and vaccinate and then we need to learn the lessons of what we have just gone through.
I think the world that we will live in, will bear the stigmas of COVID. By that, I mean, we will not travel in the same way, as opportunistically and as randomly as we did. We probably will not socialize in the same way, as close to each other. And we will probably shift to better protection of biodiversity and better protection of the climate than otherwise we would have had.
So I genuinely hope and think that COVID-19, that has hurt so many of us and has made so much hardship in the world, is going to teach us a few lessons for the future, and will help us move faster on what I think are the priorities for tomorrow.
Christine, you mentioned that we have to learn from surprises like this, and we have to think big and act fast. Now, you could apply the same principle to climate change. And if we look at the latest IPCC report, we are not any more in a situation where we can fight climate change. We may have already caused irreversible damage to our planet. My question would be, what can institutions like the ECB and also central banks do to make monetary policy really contribute to a healthier life and wholesome planet?
And actually, what would be the implications of the fight against climate change and preserving nature and biodiversity for our economic model? Many people are afraid it costs us, and it comes with a reduction of our lifestyle and our quality of life. Can we combine the drive towards a green economy with economic cost?
Those are great questions. Let me address the first one. What role can central banks play in the fight against climate change? And that's a highly controversial issue. There are some traditional thinkers who believe that central banks should altogether stay out of that business and exclusively concentrate on inflation, and price stability. I strongly disagree with that myself.
At the ECB, we have now wrapped up and concluded our strategy review, which was the first one in 17 years. And I was blessed to have an entire Governing Council unanimously agree that the fight against climate change should be one of the considerations that we take when we determine monetary policy. So at least the European Central Bank is of the view that climate change is an important component in order to decide on monetary policy.
Why is that? Because obviously, climate change has an impact on price stability. I'll give you one very simple example that happens in the financial sector, actually. To guard against many of the climate change consequences that we will suffer, economic actors are going to have to take out much higher insurance coverage. Insurance premiums will rise, and so insurance companies will have to deploy their activities differently.
And that's only an example from the financial sector. If I look at droughts, if I look at farming, if I look at the rising level of seas, and so on and so forth, it will have an impact on agricultural production, it will have an impact on where people live, it will have an impact on not only the way we live, but the cost of living, and that clearly has to be embedded into the analysis that we conduct.
A second observation: Climate change does have an impact on the valuation of assets because it inflicts a risk on companies. Not just the assets that they hold, but also the products that they produce. And this is not yet very well recorded at the moment.
So one could argue that without proper disclosure and information about those risks, assets are likely to be mispriced and poorly recorded. From an accounting point of view, they should take into account future profits as well as risks that apply. Many central banks, not all of them but many of them, hold corporate bonds. Are those assets well-priced? Should they be better identified, together with the risks that they carry? That's the second reason.
Read more: IMF Chief Kristalina Georgieva Says We Have a 'Once in a Century Opportunity' to Fund a Sustainable Future
Having said that, I'm also very prepared to recognize that the key actors in the fight against climate change and the preservation of biodiversity are not central banks. There are parliaments, there are governments, there are regulators who have to decide and who have to convince the public that these matters actually impact their life, and must be taken into account.
And sometimes hard decisions have to be made, such as pricing carbon emissions, such as regulating activity, in ways that will make certain things more expensive. And that takes me to your second question. Can we arrive at that trade-off between fighting climate change, preserving biodiversity and yet securing enough growth to respond to legitimate demands of the population? And my first answer, Klaus, to be firm, is that to have a way of life, we need life. And in the medium term, we do have major threats on the horizon that could cause the death of hundreds of thousands of people.
So we have to think life, first. We have to think way of life, second. How can we come together to make sure that we secure the first priority, which is life, and also protect the way of life that people have? And make sure that the cost of it is not so high for some people, that they just cannot tolerate it. I think that the trade-off that we reach will probably require some redistribution, because it is clear that the most exposed people, the less privileged people are those that are going to need some help.
And under the Paris Agreement, back in 2015, it was decided that all nations would put together a pot of $100 billion in order to help least developed countries adapt to climate change. But that hasn't yet happened. And it was due in 2020. Now, granted, COVID-19 happened, we probably have one or two years extension. But according to U.N. calculations, we are still at $79 billion and not 100 billion that should be made available to least developed countries.
Christine, you spoke about life. I'm very often thinking that my grandchildren’s life expectancy will be such that they are around hopefully at the transition to the next century. And when I look at global warming, I become aware of what responsibility we really have. And the same goes for inequality, another global problem which needs urgent attention.
We have seen that a tendency towards inequality was already with us before COVID and has been tremendously accelerated. And some people would even say that the necessary fiscal and monetary policies of the past 18 months contributed to a certain extent to increase inequality. But on the other hand, they helped to save workplaces.
So the question is open — a number of factors are difficult, conceptually. It’s a complex issue. We have structural changes in industry with the move towards platform companies. We have economic inequality among individuals in a post pandemic economy, defined by increased digitalization and flexibility. And we also, of course, have the fact that many people dropped out of the labor force, or remain unemployed. And yet in some countries, we have as many open positions as we have unemployed people.
So it's a mismatch between skills and probably we have to do much more in order to reskill and upskill people. From your position: How would you contribute to address this issue of inequality?
I like the way you put your question Klaus, because I think that the jury's out as to whether or not the monetary and fiscal support that were provided during the COVID crisis, actually exacerbated inequalities or reduced inequalities that obviously have not arisen if they have been properly addressed. I'm talking here about the jobs lost, the closed factories, the reduced income — all of that, I think, has been well addressed by fiscal and monetary authorities around the world. So let's put that aside, I tend to believe for myself that central banks had to do what they had to do, and had they not put in place those massive plans of liquidity supply and support, we would have been in a worse-off situation, which would have hurt the less privileged more, the most exposed and the poorest people, because they would have been the first ones to lose out. I don’t say that to give us a good conscience as central bankers, but I think that we unfortunately have to deal with counterfactuals.
So how can we contribute going forward to reducing those inequalities? We will continue to support the economy, we will continue to guarantee and to procure price stability, we will continue to be focused on our mission. And that will not be enough to reduce inequalities.
You know, Klaus, I'm particularly attentive to the inequalities that are suffered by women. During the COVID crisis, those that suffered most actually were women. They were the ones most exposed to COVID because they were in the caring and the nursing and hospital sectors. They were the ones on the frontline in the lower skilled and lower paid jobs. And when the choice was between the man and the woman at home, to stay at home to look after the elderly, or the young kids, often it was the woman who stayed at home.
So my hope is that we all recognize that the upskilling and reskilling programmes are necessary going forward in order to adjust to this, these new forms of conducting business, we can actually give a special benefit to those who were most affected, including in particular women. I'm convinced that when given the opportunity to reskill and to skill up in order to readjust into the economy, women will actually thrive and they will want to do that. I have no idea from a constitutional standpoint in many countries whether that can be achieved because there's generally the principle of equal access, equal opportunities and all the rest of it. And we know that the situation is not that equal.
But how we can give women a better chance because they were worse off during the COVID crisis is an area that we should explore. It is still mindboggling that in the OECD countries, there is still a major wage gap, and the World Economic Forum index that determines how close or far we are from equality clearly indicates that we are far away from reaching this equal wage, equal opportunity, equal access to education for women around the world.
I fully agree with you that central banks and fiscal authorities had no other choice but to act. And sometimes you have to deal afterwards with the unintended or unforeseen consequences or negative outflows of such decisions.
But coming back to gender parity, I want to ask you, maybe a personal question or two personal questions. The first one is, when we look at women in leadership positions, we see relatively few in the financial sector, compared to the rest of the economy. So, what can be done in order to make sure that we have more women in the banking and financial community in leadership positions?
And the second one, which is a more personal one: What are the greatest lessons you have learned? I mean, you are a woman who made it to the top of the IMF, in the French government and the ECB. How would you tell a woman that they can make the progress they deserve, in spite of the still prevailing systemic discrimination women face?
Thank you, Klaus for that question on women in finance. Just a few numbers to begin with, because often, we just underestimate the situation. If you look around the world banking system, only 3% of CEOs of banks are women. When you look just at Europe, and take into account banks and all financial institutions, it’s still less than 9% of CEOs, or presidents who are women. That's an abysmally small number.
If you consider on the other hand, that in the household at home, those who in most instances control finances, are women. So there is an insidious chip on their shoulders that stops them from moving into finance and into banking and into the financial world in general.
When they do go into that world, they do extremely well. There have been studies to show that women are better risk assessors, and their performance is at least equal to that that of men. So what trigger would it take for them to go into finance? Honestly, I don't know. I think just like in other sectors, it's going to be a combination: of self-confidence – badly needed; role models – in very short supply at the moment; and education, and I think on that particular front there should be scholarships, there should be support, there should be special incentives put in place in order to encourage young girls to go into math, to go into sciences in general, because they are underrepresented later on in life, in finance, but also in technology, and in economics. And those are fields where sciences, maths, technology, are the grassroots of the education system. So it's really a massive effort that is needed, but incentives, scholarships, anything that works should be used.
At the European Central Bank, we have a special scholarship that we've put in place for women to take a master’s degree in economics, and it works. We are really recruiting exceptionally talented woman. So money talks, often. Scholarships, incentives, all of that must be put in place in order to bring them into the fold. Because we cannot have a world where half the population is represented by only 3%.
And to your second question, what was most helpful to me personally? I'm sorry to say, but I think it's love. That was most helpful to me. Because the love that I received from parents, family, husbands, children, has actually given me the confidence to ignore some of the noises that I heard along the way. And confidence matters enormously. When you shift from one area of work to another area of work, you think to yourself, can I actually do it? And women often ask themselves, can I do it? Men rarely do. They take the challenge. They go with it. They don't prepare as much, but they don't doubt themselves to begin with. In many instances, women doubt themselves to begin with, and I've spoken to many, many of them. So I won't say love is the way but love is one good nutrient for confidence, which itself is critical in order to take risks. And yes, I did take risk in my life, professionally.
Christine, you emphasize self-confidence. But I would also say I think we should have more trust in women. I will confess that all my financial affairs are in the hands of my wife. I haven’t made any bank transactions in the past twenty years. And I’m not doing too badly with it!
So we’ve addressed the big issues. We’ve spoken about COVID-19, we’ve spoken about the climate crisis, and about inequality. As you know, my particular concern, having coined this notion of a fourth industrial revolution, is how do we use technology to the benefit of mankind, and how do we cooperate together on a global level. And I want to focus on one aspect of this revolution which is digital currencies — or should I say, decentralized digital currencies like Bitcoin.
What is your stance on these decentralized currencies? Can they contribute to financial stability, in your opinion, or are they are a threat? And if I remember well you have suggested that the ECB might create a digital currency in the next four years — what would be the benefits of such a move, and what might the pitfalls be? Would it strengthen or weaken the position of the euro on a global level?
I wish we had another hour, Klaus, for that one! But I'll try to zoom in on a few things. Number one, I think that all cryptocurrencies alleged to be cryptocurrencies are not currencies at all. They are speculative assets, the valuation of which changes over the course of time. They present themselves as currencies, which they are not. So I think that we should all in the finance sector and at the regulatory level, call a spade a spade. An asset is an asset and has to be regulated as such, it has to be supervised by the asset regulators and supervisors, but should not claim that it is a currency; it is not.
The second category is stable coins. These are devices that have been invented by some of the big technology companies, Facebook is certainly a leading example. There are many others around as well. Stable coins are pretending to be a coin but in fact, it's completely associated with an actual currency. For instance, some of them are saying that they can be used for transactions, but the value will be exactly aligned to the dollar. Fine, but again, let's call a spade a spade. If it is, so then [the coin issuers] have to also guarantee to those holding coins that they can exchange those coins for dollars. And therefore, those coin issuers should have to back up their coins with as many dollars as they have coins. That needs to be checked, supervised, and regulated, so that consumers and users of those devices can actually be guaranteed against potential misrepresentation. I think very recent history has showed that those reserve currencies were not always available and as liquid as they were intended to be.
Third is the digital currencies that the Central Bank of China has been experimenting upon for the last seven years, and which the ECB has decided to experiment upon for the next two years before it makes final decision to go ahead with it. The Bank of England is looking at the same kind of approach, and the Fed will soon be issuing a paper to determine which way it goes.
At the European Central Bank, we believe that we should be ready and have the technology available in order to respond to customer demands. If customers prefer to use digital currency rather than have bank notes and cash available, it should be available. And we should respond to that demand. And make sure that we have a solution that is European based, that is secure, that is available under friendly terms, that can be used as a means of payment at reasonable terms as well and does not jeopardize the whole banking system, which should be part and parcel of the proposal.
So that's the reason why we've decided to go ahead with a two year experiment to ensure that we can actually respond to that demand: Availability, just as cash is available and will continue to be available, but it will be a consumer’s preference; the safety and security of the device; user friendliness; cheap cost; and ways of transacting business that will be recognized and accepted not only in the euro area, but around the world.
Thank you, Christine, for this clarification, because I think there's a lot of ignorance about these new types of coins or currencies. I think we have really explored today some of the great issues and I think you have clarified some issues also. The central banks are considered to be a very abstract institution, which affect our lives only in indirect ways, but I believe you have shown that it is very important to have leadership of central banks, which really contribute to making this world a better world. And I think you are taking the lead. Thank you very much not only for participating in this dialogue, but also for taking the lead for improving the state of the world.
Thank you so much Klaus.
[This transcript is written in American English, in line with the version published by TIME.]