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FRANKFURT — Christine Lagarde is working on a version of the European Central Bank that’s more like herself — not bound by traditional views of central banking.
In an interview at her office on the 40th floor of the ECB’s south tower, the bank’s president said her institution was “riveted” to its core mission of keeping prices stable but must also reflect a changing world.
Speaking as the bank puts the finishing touches to its first strategy review in nearly 20 years, Lagarde made a passionate plea for the ECB to adapt to new challenges, such as the fight against climate change and the rise of digital currencies. She also said the bank had to get better at listening to — and communicating with — European citizens.
“There had been no strategy review since 2003 and I thought it was overdue,” said the 65-year-old Frenchwoman, who took the helm of the ECB in November 2019. “When we started this strategy review, I said we would leave no stone unturned.”
Lagarde’s appointment as ECB chief ruffled feathers as she had never previously been a central banker, although she had earned a formidable reputation as a lawyer, French Cabinet minister and head of the International Monetary Fund.
But Lagarde made clear she sees her background as an asset, not a disadvantage. Asked whether she thought not spending her career in central banking made it easier for her to take a broader view, Lagarde said: “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.”
Despite being a newcomer to the ECB, Lagarde quickly absorbed its mantra. But, she said, that should not mean being closed to the way the world is evolving.
“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,” she said. “And you have to constantly be attentive to the interactions and the changes that are occurring.”
Lagarde hopes that the new strategy will address new dimensions such as climate change and the possibility of a digital euro and serve as proof that that the ECB is able to reinvent itself.
“It will be an indication of the fact that the ECB is attentive and capable of adjusting and adapting. Climate change is an example, 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.”
Lagarde has been accused of focusing too much on issues such as gender equality and climate change rather than the core business of monetary policy. She faced particularly harsh headwinds after a communication gaffe in a March 2020 press conference, right when the coronavirus crisis came to a head. Her remark on the ECB’s position on government bond spreads raised doubts that she was willing to do “whatever it takes” as her predecessor Mario Draghi had pledged and sent markets into turmoil.
The new president quickly walked back her remarks and now has her own way of expressing unwavering support for the single currency.
“Our commitment to the euro has no limit,” she said.
“That’s what I said. And that’s what I tweeted on the night of 18 March 2020, when the Governing Council decided the pandemic emergency purchase program (PEPP),” Lagarde said, referring to the bank’s flagship measure to support the eurozone economy through the pandemic.
“I think it was very explicit and those in the know understood the message very well … And I think we delivered. Not to brag about it but we sure delivered.”
Draghi was no doubt a magician with markets. “Whatever it takes” will go down in history as one of the greatest verbal market interventions. But his direct line to financial markets never extended to the broader public.
In a sharp contrast to Draghi and the deeply technocratic traditions of the ECB, Lagarde sought the input of the public for the central bank’s strategy review.
The latest Eurobarometer survey showed for the first time that more people trust the ECB than do not. Still, support for the common currency remains significantly higher than for its guardian. Lagarde ascribes the discrepancy to the role the ECB played at the time of the eurozone crisis, as part of the Troika of EU institutions.
“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,” she said. “That may have caused some of this discrepancy between the trust in the euro and trust in the ECB.”
Lagarde said listening to people’s ideas regarding the strategy was helpful. “We had very good questions, such as ‘Why do you want to pursue this 2 percent 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,” she said.
“As custodian of the euro, we fight for the citizens but explaining that price stability is a fight for them, that’s sometimes difficult,” she said.
High on the list of concerns Europeans expressed in the review was the central bank’s current inflation index failing to take housing prices into account, Lagarde said. She recalled some “vivid examples” of people expressing discontent over the massive rise in housing prices pushing up people’s cost of living even as official data pointed to subdued price increases. Lagarde signaled that there had been progress toward including owner-occupied housing prices in the overall index, which is set to push up headline inflation figures, bringing the ECB closer to reaching its target.
Lagarde stopped short of offering more insights into whether the central bank may follow the lead of the U.S. Federal Reserve and switch to average inflation targeting under which policymakers take periods of inflation undershooting or overshooting the price target into consideration when setting interest rates. Some ECB policymakers, including Finland’s Olli Rehn have publicly argued for such a move.
“We learn from either the past or from the neighbors. So of course we looked at what the Federal Reserve had come out with,” said Lagarde, citing both inflation targeting and a 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 finalized.”
Lagarde has worked hard to get ECB policymakers to work together and portray a more unified face to the outside world. This is a stark contrast to Draghi’s reign, when policymakers disagreed often and many, including Draghi himself, took personal swipes at those disagreeing with him.
Lagarde said she supports more regular strategy reviews in future but argued that a five-year cycle that has been floated might not be ideal. Instead, each president could have one at the beginning of their term to mold the institution more to their liking. “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 underway,” she said.
“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.”
Still, the ambition to change things has limits. In reviewing the strategy, “we are working within the parameters and the boundaries of the Treaty. That’s very clear,” said Lagarde, in reference to the legal treaty underpinning the EU. “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.”
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