Interview with Delo
Interview with Christine Lagarde, President of the ECB, conducted by Miha Jenko and published on 7 May 2022
7 May 2022
Ms Lagarde, the world has changed considerably over the past two and a half months. The war in Ukraine has demonstrated again that our world is in constant flux, as you said in one of your public appearances. As a European, how do you see the nature of the current challenges from a purely human perspective?
Russia’s unacceptable and unjustifiable invasion of Ukraine has both confirmed the importance of the peace project that is the construction of Europe and underlined the fact that it is not yet complete, including in areas such as defence and fiscal coordination. But I am proud as a European to see the surge in solidarity across our continent.
You indicated in discussions at the recent IMF meeting in Washington, D.C. that there is an increased risk of slower economic growth and higher inflation this year. To what extent is this due to the wider economic consequences of Russia’s aggression against Ukraine, and what other risks are influencing your assessment?
The war in Ukraine is first and foremost a human tragedy. And it has economic consequences beyond Ukraine. It is weighing on growth and boosting inflation. However, the coronavirus (COVID-19) pandemic also continues to weigh on growth with the recent resurgence of infections in China and the effects of new lockdowns on economic activity. At the same time, economic activity is still being supported by the reopening of the economy following the crisis phase of the pandemic, notably in the services sector.
Does your institution already have any concrete quantitative or “hard” data on the impact of this war so far on the euro area economy, GDP, inflation, exports, etc.?
We have the preliminary figures for economic growth in the first quarter of 2022, which are slightly lower than those for the fourth quarter of 2021. And the latest inflation reading showed that energy costs, which have risen following the invasion of Ukraine but also following the recovery from the pandemic, were 38% higher in April than a year ago. But it is important to take a comprehensive view of these data and to look ahead at our projection horizon.
The ECB is drawing up new macroeconomic projections for its June monetary policy meeting. With inflation on the rise, do you perhaps expect the more severe scenario that your analysts prepared back in March to materialise?
It is still too early to tell. As always, our staff projections are produced at the Eurosystem level in June and December. Our teams are working intensively on these projections. We will have this information at our Governing Council meeting on 9 June, when we take a decision on the path of monetary policy.
How realistic is stagflation in Europe currently, and what are the risks?
Stagflation is not currently our baseline. Although the unusual degree of uncertainty could mean a combined slowdown in growth amid high inflation, the current situation cannot be compared to that of the 1970s. At that time the decline in economic growth following the first oil shock was considerable – 8 percentage points – and inflation was higher than today. Moreover, back then wage increases in response to inflation fuelled the price growth. We are not seeing that today.
Would you agree that the impact of the war in Ukraine poses a particular challenge for Europe, as it is more vulnerable in terms of energy than the United States or China?
The fallout from the war between Russia and Ukraine has highlighted the deep security and trade vulnerabilities in Europe, some of which were already apparent during the pandemic. Our vulnerabilities have been most evident in the area of energy security. EU countries have a relatively high degree of dependence on Russia for their energy supplies. In 2020 the EU imported over 40% of its total gas supply from Russia. This has improved recently.
Eurostat’s latest data for April indicate growing differences in annual inflation rates across euro area countries. The euro area average is currently 7.5% – which is also roughly the rate in Slovenia – but in some member countries (for instance the Baltic nations and the Netherlands), inflation is already well above 10%. Will the ECB respond to potential asymmetric shocks, for instance through a common stabilisation function to mitigate the uneven economic impact of the war in Ukraine on individual Member States?
The task of the European Central Bank is to maintain price stability in the euro area. There are proposals at the EU level for common initiatives to prevent energy prices from increasing disproportionately. But these are initiatives that need to be considered at the level of governments: a central bank has little to say or contribute on this matter.
The ECB hasn’t raised its key interest rate for nearly 11 years. A hike is now only a matter of time, and financial observers are trying to guess whether you will raise rates in July, September or December. To be precise, I’m not asking which month, but about the circumstances that would convince you and your colleagues at the ECB that this move is necessary. What conditions would need to be met for the ECB’s Governing Council to say, well, now is really the time to raise interest rates?
We have a clearly defined sequence of events. First, we will have to end net purchases under the asset purchase programme. Judging by the incoming data, my expectation is that net asset purchases should be concluded early in the third quarter. Adjustments to the key ECB interest rates will take place some time after the end of net purchases and will be gradual. The first rate increase will be determined by the ECB Governing Council, informed by the forward guidance it has decided, and by its strategic commitment to stabilise inflation at 2% over the medium term.
What kind of interest rate policy will the ECB conduct after the first rate rise? Increasing the price of money alone probably won’t be enough to bring inflation down to the ECB’s symmetrical target of around 2%. Some previous estimates indicate this goal could be reached towards the end of next year, while others suggest not before 2024. How do you envisage the timeline for meeting this goal? Which factors and risks will be decisive in this regard?
Rather than giving you a series of dates and figures, I will focus here on three general principles that will guide us to price stability over the medium term: optionality to allow us to respond to different scenarios in an uncertain context, gradualism to allow us to act prudently, and flexibility to ensure that our monetary policy decisions are transmitted evenly to all parts of the euro area.
An interest rate rise will, combined with other factors, increase member countries’ borrowing costs, and this is already happening. Could this be a problem going forward? Is the euro area more robust now that it has more mechanisms to potentially support countries in debt distress?
The euro area is certainly more robust today than it was ten years ago. Its construction has been strengthened in many areas, such as banking supervision and the progress towards banking union. The pandemic also led to a common fiscal response by European countries, which showed solidarity during the pandemic as well as when Russia invaded Ukraine.
During the financial crisis considerable efforts and public money were required to bail out banks in both the euro area and Slovenia. How are euro area banks faring in the current situation of heightened risks?
Even though the credit risk outlook for banks is likely to deteriorate owing to the indirect effects of Russia’s war against Ukraine, and because the full financial impact of COVID-19 hasn’t yet fully materialised, the banking sector is well prepared, thanks to its strong capital and liquidity position.
Core capital ratios are at almost the highest level since the establishment of banking union, and banks also have ample liquidity buffers reaching levels far above regulatory minimums. Banks’ asset quality and profitability also improved during 2021, with return on equity reaching the highest level in five years. The non-performing loan ratio continued to decline to a level slightly above 2% at the end of 2021.
Some believe that your predecessor, Mr Draghi, with his historic statement that the ECB would do whatever it takes to preserve the euro, may have prevented the very break-up of the euro area during the financial crisis. What are you prepared to do to protect the euro?
As the guardian of the euro, there are no limits to our commitment to our mandate and to the single currency. We have proven this time and again when we have faced crises that have threatened the integrity of our monetary union and, therefore, price stability. Our unprecedented response to the pandemic is only the latest example.
Do you, as President, enjoy support in the Governing Council? Are decisions unanimous?
Consensus is formed by respecting each other, listening to everyone’s points of view and reaching compromises. I am careful to ensure that different opinions are expressed. It is by fostering the expression of different views that progress can be made to achieve the best outcome. In spring 2020 the situation was quite unprecedented, as less than six months into my presidency, pandemic-related health measures prevented Governing Council members from physically meeting in the same meeting room. But this did not prevent us from reviewing our monetary policy strategy, adopting a new strategy unanimously and taking important decisions – sometimes in rather unexpected venues, such as in March 2020, when we decided on the emergency pandemic measures around my kitchen table. I think everybody recognises that without these interventions the economic effects of the pandemic would have been much more severe.
It seems that, by force of circumstance, you are also a crisis manager. You took office a few months before the onset of the pandemic and you took immediate action with a comprehensive assistance package (the pandemic emergency purchase programme), which is now coming to an end. And just as the pandemic seemed to be losing momentum, the war in Ukraine came along, with consequences that once again mean that your work is not “business as usual”. Have you ever found it difficult in your role?
Crises have often been part of my daily life: in my role as Finance Minister in France, at the time of the financial crisis in 2007-08, and then at the International Monetary Fund, where I worked a lot with European authorities on sovereign debt issues. One of the characteristics of the European project is that Europe is very often strengthened in times of crisis, and the pandemic has again confirmed this. In response to COVID-19, fiscal solidarity on a large scale was demonstrated for the first time in the European Union. As far as the war is concerned, it basically reaffirms the validity of the European project and the relevance of the initial articles of the Treaty on European Union: “The Union is founded on the values of respect for human dignity, freedom, democracy, equality, the rule of law and respect for human rights, including the rights of persons belonging to minorities (…) The Union’s aim is to promote peace, its values and the well-being of its peoples”.
You will be visiting Slovenia in a few days. It is 15 years since Slovenia adopted the euro: how do you see our country’s economic development and its economic situation?
I am very much looking forward to visiting Slovenia next week and celebrating the 30th anniversary of Banka Slovenije. Half of these 30 years have been as a member of the Eurosystem family, given that Slovenia adopted the euro 15 years ago. Nearly nine out of ten Slovenes are in favour of “a European economic and monetary union with one single currency, the euro”. Of course, rising global uncertainties as a result of the war in Ukraine might weigh on economic activity in the future, including in Slovenia. But I know that in a few days I will encounter a dynamic country with a growth rate that has remained well above the euro area average and exceeded expectations in 2021, a much lower unemployment rate than the euro area average, and a fiscal position which improved markedly in 2021.
Like your home country, France, Slovenia also held elections on 24 April, although these were parliamentary elections. A new government is expected to be formed soon. What would you recommend it and other governments in the euro area do to address inflation and protect the people?
The parliamentary elections have just taken place and the government has not yet been formed. I will therefore refrain from giving any advice in this context. As a general principle, though, targeted fiscal measures focusing on the most vulnerable people have to be preferred at this point in time.
Lastly, Slovenians, like other Europeans and many people around the world, are concerned, on the one hand, that loans will become more expensive and, on the other hand, about what will happen to their savings and standard of living in conditions of increased inflation. What would you say to them as the guardian of the euro?
I would tell them that they can count on the European Central Bank and my very strong commitment to price stability.