Source: European Central Bank
Interview with Christine Lagarde, President of the ECB, conducted by Johanna Treeck and Florian Eder on 11 June 2021 in Frankfurt
14 June 2021
The eurozone still needs fiscal and monetary support. That is why we would very much love to know for how long you expect the region to still need the proverbial crutches that you cited?
In terms of real gross domestic product (GDP) we are likely to be back to the pre-COVID-19 level that we had in December 2019 – if the Delta variant doesn’t ruin our plans – in the first quarter of 2022. That is one quarter earlier than we had expected in our projections in March.
We have to take the economy through the pandemic and into a recovery phase, which has now started. We need to really anchor the recovery. We always talk about inflation anchoring and we are not oblivious to that. But the recovery needs to be firm, solid and sustainable.
You don’t remove the crutches from a patient unless and until the muscles have started rebuilding sufficiently so that the patient can walk on his or her own two legs. The same applies to the economy. We are at a turning point where, bearing in mind alternative variants, we are on that recovery path, heading firmly towards a return to the pre-COVID-19 level.
According to our latest projections, we see the euro area economy being back to the pre-COVID-19 level during the first quarter of 2022. That said, I am not suggesting that the pandemic emergency purchase programme (PEPP) is going to stop on 31 March. We have plenty of flexibility, but in terms of economic outlook we are heading in the right direction.
So there are indications that, as originally foreseen, you should be able to end the PEPP at that time?
I wouldn’t say it that way, because the wording in the introductory statement, including yesterday’s, is very specific and says until at least March 2022 and, in any case, until the Governing Council judges that the pandemic crisis phase is over. But our projection, and the design of the PEPP as we have it, seems to be heading in the right direction. But as stated previously, it is far too early to debate these issues.
As you are assessing the outlook, do you have an eye on the developments in the United States, for example, and in other economic areas?
Yes, I think it’s very healthy to have a panoramic view and to look at the global economy because the global economy, whether it’s advanced or emerging market economies, has an impact on any domestic situation.
G7 leaders are at this very moment meeting in Cornwall. Should there be more of a coordinated response among the West?
The answer is a strong yes. You know I’ve attended G20 meetings for 15 years. It’s a relief to see this impetus, momentum, determination to go together and come together and have some steps along the way, as we have seen in the last six months, since US President Joe Biden was elected. Before there were a few years of difficult multilateralism, particularly in the last four years. In 2008, during the global financial crisis, there was also a determination to come together; Gordon Brown was UK Prime Minister and in the leadership of the G20 at the time. President Barack Obama was interested in multilateralism, but he was already not as interested in Europe as he was in Asia and his famous pivot towards Asia. Multilateralism, as we had known it before, was changing. But now it’s clearly back. And even the announcement of half a billion shots of coronavirus (COVID-19) vaccines for poorer countries that was made yesterday is quite spectacular on the part of the United States.
Can we talk about the strategy review? Some of your colleagues have suggested that you might follow the example of the Federal Reserve and move towards average inflation targeting. What do you see would be the merits of that approach?
I’ll tell you how we are conducting the strategy review because I think the process matters. There had been no strategy review since 2003 and I thought it was overdue.
When we started this strategy review I said we would leave no stone unturned. We’ve had more than a dozen seminars on each and every aspect that you can imagine. From the definition of price stability to the measurement of inflation, to the definition of medium term, to the relationship between monetary and fiscal policies, to climate change impact, to communication.
We looked at every possible issue. In so doing we also looked at what everybody else was doing because we learn from either the past or from the neighbours. So of course we looked at what the Federal Reserve had come out with – its average inflation targeting with asymmetric symmetry and focus on employment. This is what they do, this is what worked for their strategy review. It does not prejudge what will work for us, and our work has not yet been finalised.
One thing I can tell you is that we will stay within the boundaries of the EU Treaty. The commitment I had made was to leave no stone unturned, but equally to get something that is going to work. What would have been unreasonable would have been to go through that process and declare that we needed a Treaty change. So we are working within the parameters and the boundaries of the Treaty. That’s very clear.
You promised results of the strategy in the second half of the year, which starts soon. Our understanding is that you have progressed very far, so might you present results towards the end of the summer already?
I would hope so. But whether it is at the end of the summer or in autumn is less important than the quality of the review and the solid consensus.
Would you support a more regular strategy review exercise? A five-year cycle has been floated.
I’m not sure it has to be every five years, honestly, we haven’t settled on that one. My personal view is that if you do this every five years, there comes a time when a new president comes in and he or she is almost stuck for the first five years of his or her term. Instead it could be aligned with the presidency. That way, the first year every presidency will continue with the previous strategy implementation while getting a new review under way.
It’s somewhat of a constitutional moment, when you think about the route, the anchor, the instruments, the relationship of monetary policy with fiscal, with financial stability, for example. It’s really foundational in a way. Therefore, you shouldn’t have to do that on a too-frequent basis.
You say that the Treaties are the boundaries. To what extent is the German constitution or the German Constitutional Court in your mind when you think about these things. Is that much of a concern?
It’s one of the other things that I had to deal with in my first year as ECB President. It is this judgement by the Karlsruhe court and the determination of what the relationship is between the European legal order and the national legal orders. Obviously, the European Union has to pay attention not just to the German Constitutional Court, but to all the Supreme Court equivalents or highest court in the countries. But as far as we are concerned, we are governed by European law and we fall under the jurisdiction of the European Court of Justice.
What is fascinating about the ECB is that it is riveted on one objective and that is price stability, price stability, price stability. I must have heard it 1,000 times in my first couple of months. So you are riveted to that. But at the same time, the world changes around you, and not just the world in your vicinity, but in the 19 Member States that you serve. And you have to constantly be attentive to the interactions and the changes that are occurring.
I hope that when we complete the strategy review, climate change will have a space. It will be an indication of the fact that the ECB is attentive and capable of adjusting and adapting. Climate change is an example, the digital euro is another one. We are riveted to our price stability objective, and we are the custodian of the euro, but we have to be attentive to the big developments around us as well.
So would you say that, following the strategy review, the ECB is giving more room to its secondary mandates.
No, not at all. I’m telling everyone interested in those distinctions, particularly those who say the primary objective matters most: price stability is a very focused as well as a broad mandate. For instance, if you don’t pay attention to climate change, how can you assume that you have price stability, and that your new definition of inflation is correct? How can you assume to have price stability if you don’t change your models not only to take into account what happened in the last 30 years but also what’s likely to happen in the next 30 years and will affect asset values today?
Do you think it is easier for you, because you did not spend a career in central banking, to look a bit more to the left or to the right than a classic central banker would, as you just described?
I like to think so but maybe others don’t. If I didn’t think so I would be very unhappy every morning when I wake up and I come here. Diversity helps.
On the strategy review, the general expectation is that at the very least you will move towards a more symmetric target of price stability at 2%, which would imply a slight change of your goalposts. Would that then warrant a policy reaction to bring policy in line with the target?
If we were to go in that direction, that would be a clarification of the symmetry that has already been affirmed since July 2019, but which is, which probably has been, confusing for observers and for markets as well.
Is there one particular lesson that you have learned from listening to people? I was wondering what people have on their minds when they are asked about monetary policy.
The outreach exercise that I think you’re referring to was opened up to anyone and everyone who wanted to participate. I would put the respondents into categories. We had our usual interlocutors: members of NGOs, trade unions and other interest groups. And they asked the expected questions. But what I found most interesting were the people who participated and did not belong to any particular group. They raised questions like: “Why don’t you take climate change into account?” and “Why aren’t housing prices better incorporated into the measurement of the price pressure that we are under?” And we had some vivid examples of people saying “Okay, five years ago I was paying so much. There’s not been any improvements to my apartment and I’m paying so much more now. And yet you’re telling me that inflation is only that. Explain to me why that is.”
Is that a pan-European topic actually?
It is. The 19 national central banks had their own outreach events. And housing was a key point. People were also interested in what the ECB can do to help with unemployment, and what we can do with wages. So, this is not the primary objective but with the medium-term aspect, climate change, housing costs, employment and wages can be captured as well. We had very good questions, such as “Why do you want to pursue this 2% inflation goal – I’m happy with a zero increase in prices?” So, it certainly told us that we have to better communicate why we need some inflation and that we have to be more explicit and use less jargon than we did – and still do actually – in our various communication channels.
Did you make progress on figuring out how you might incorporate housing prices? It’s been an issue that’s been around much longer – I think under your predecessor Jean-Claude Trichet, even back then it was debated. So do you think that you’ve made progress?
I hope so.
Speaking of people’s opinions, the latest Eurobarometer survey showed 80% of respondents support the euro but only 46% trust the European Central Bank. What are you doing wrong?
First of all, 80% is a phenomenal number. It has improved over time and has fared well during the crisis. So, the euro, of which the ECB is the custodian, is popular. It is regarded as a link – or the cement – between the 19 euro area countries and the populations of these 19 EU Member States. That is phenomenal. I still remember the front pages of various newspapers 20 years ago, not necessarily on the Continent, predicting that the euro was doomed to fail and that it would be a disaster. So that is a superb result.
The 46% that you mentioned – that is an improvement on where we were a few years ago. Our image might have to do with the role that the ECB had to play during the euro area crisis. Because the ECB was associated with the Troika, and the Troika was itself associated with austerity, harsh measures, and decisions coming from the outside. There was this sentiment of abandoned sovereignty – people feeling that they were no longer in control of their destiny, that the “men in grey suits” were coming to dictate the rules, which is a caricature of what was hoped for and expected. That may have caused some of this discrepancy between the trust in the euro and trust in the ECB.
But for the first time since then, we have more people who trust the ECB than don’t. But we need to work on that further. We need to explain what we do and how we do it. As custodian of the euro we fight for the citizens, but explaining that price stability is a fight for them, that’s sometimes difficult.
Everybody knows that one famous sentence of your predecessor. Can you define the “whatever it takes” for your term, for the post-pandemic era?
Our commitment to the euro has no limit. That’s what I said. And that’s what I tweeted on the night of 18 March 2020, when the Governing Council decided the PEPP. I think it was explicit and those in the know understood the message very well.
Support has no limit meant exceptional circumstances require an exceptional emergency purchase programme. If you pack all that together, it’s heavy. And I think we delivered. Not to brag about it, but we sure delivered.
What’s your take on the EU recovery fund, Next Generation EU? Is it courageous enough, is it big enough, will it help?
When I look back, it’s amazing the change that occurred, first in May, then in July last year. In May, it’s an indication that when the Franco-German tandem works, it makes a huge difference. It’s not enough, but it’s a strong impetus, and messages were well understood. Then came July, again a strong signal of unity of purpose and joint action.
Now it has been ratified and the process was completed one month ahead of schedule. The Commission will be active on the markets next week, and it will be able to deliver 13% of the funds before the end of the year as advanced payment. I think that’s a very, very strong change and it’s a structural response to the very severe shock that was inflicted on all of us.
Now the next question is whether this is enough. Well, let’s first make sure that it’s issued, it’s distributed and, more importantly, it goes towards projects that enhance growth, structural reforms and towards the changes that are contemplated. If countries can demonstrate that not only do they ratify, not only do they submit the plan, not only do they collect the money but that they also actually deliver right to the last inning – meaning that, on the ground, it’s actually done – that is a very strong statement.
It’s a big challenge and one that can really transform the future of Europe. I think all governments know that. President Draghi, where he is now, recently acknowledged that challenge.
So you are very confident that this time it will work, and that reforms are going to happen. Do you think this is built into this process and into the new rules, or is it rather because people are aware of what’s at stake?
It’s both, I hope. When a country says that it’s going to restructure its justice system, which has been untouched for decades, it’s hard work. As Wolfgang Schäuble would say, it requires “implementation, implementation, implementation”, and attention to detail, because the moment you want to change, you come up against so many barriers.
How do you see Europe after Angela Merkel’s retirement?
Europe will be different because Angela Merkel has been a defining leader for a long time. I am not taking any views with regard to who will be the next chancellor. But I am confident that he or she will lead a pro-European government and that will be good for Europe.