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Christine Lagarde Begins to Chart a Course at the E.C.B. Christine Lagarde Begins to Chart a Course at the E.C.B.
(about 4 hours later)
FRANKFURT — Christine Lagarde is one of the most recognizable people on the world stage, but as president of the European Central Bank, a job she began six weeks ago, she is a cipher. FRANKFURT — Christine Lagarde is one of the most recognizable people on the world stage, but as president of the European Central Bank, a job she began six weeks ago, she has been a cipher.
That could begin to change Thursday as Ms. Lagarde holds her first news conference as leader of the institution that has often determined Europe’s economic fate. That began to change Thursday as Ms. Lagarde held her first news conference as leader of an institution that has often determined Europe’s economic fate. She promised to consider more opinions in making policy, and she reported signs that the eurozone’s economic slowdown was abating.
The event follows a meeting of the bank’s Governing Council, which made no changes to monetary policy. Analysts and investors were listening intently for clues about Ms. Lagarde’s opinions on questions such as whether the central bank’s fire hose of economic stimulus has begun to do more harm than good. The event followed a meeting of the bank’s Governing Council, which made no changes to monetary policy.
Ms. Lagarde urged reporters not to overthink her comments. “I will have my own style,” she said. “Don’t overinterpret. Don’t second guess. I’m going to be different.” Analysts and investors were listening intently during Ms. Lagarde’s session with reporters for clues about her opinions on questions such as whether the central bank’s fire hose of economic stimulus has begun to do more harm than good.
For all her prominence, no one knows what kind of central banker Ms. Lagarde will be. Before beginning work at the European Central Bank on Nov. 1, she spent eight years as managing director of the International Monetary Fund. In that job, she was often in the thick of the action during a financial crisis or debt meltdown. She was one of the world’s most powerful women. Ms. Lagarde urged reporters not to overthink her comments. “I will have my own style,” she said. “Don’t over-interpret. Don’t second guess. I’m going to be different.”
But until last month she had never worked as a central banker, and unlike many in the profession, she has never been an economics professor whose published research would reveal her worldview. One difference may be in the attention paid to outside views. Ms. Lagarde said elected officials, academic experts and members of public interest groups would be consulted as the bank reviews the way it conducts monetary policy.
In public appearances so far, including a question-and-answer session with members of the European Parliament, she has stuck to the course articulated by her immediate predecessor, Mario Draghi. That course commits the central bank to ample monetary stimulus for the foreseeable future. The central bank “will be reaching out to not just the usual suspects,” she said.
But Ms. Lagarde has also signaled that she will question the assumptions underlying central bank policy since the euro began to circulate two decades ago. She said the review would also examine what the bank can do to alleviate climate change and how monetary policy affects inequality.
She is overseeing a comprehensive review of central bank strategy that could redefine its role. “What the outcome will be, we do not know at this stage,” Ms. Lagarde told European Parliament members in Brussels last month, “but clearly every stone will have to be turned and every option will have to be examined.” Ms. Lagarde, the first woman to head the European Central Bank, is a familiar figure in the world of global finance. Before beginning work at the bank on Nov. 1, she spent eight years as managing director of the International Monetary Fund. In that job, she was often in the thick of the action during a financial crisis or debt meltdown.
But for all her prominence, no one knows what to expect from Ms. Lagarde in her new role. Until last month she had never worked as a central banker, and unlike many in the profession, she has never been an economics professor whose published research would reveal her worldview.
So far she has stuck to the course articulated by her immediate predecessor, Mario Draghi. That course commits the central bank to ample monetary stimulus for the foreseeable future.
It would have been a surprise if Ms. Lagarde had delivered a significantly different message Thursday. But she was slightly more optimistic about the eurozone economy than Mr. Draghi had been in October.
While the growth in the bloc’s 19 countries remains weak, she said, “there are some initial signs of stabilization in the growth slowdown.”
Ms. Lagarde also signaled that she would question the assumptions underlying central bank policy since the euro began to circulate two decades ago.
The review of central bank strategy will begin in January and be done by the end of 2020, she said. It “will turn each and every stone, and will take its time, but will not take too much time,” she added. “It will aim at not just preaching the gospel but also listening.”
There is a lot to talk about. Despite record doses of monetary stimulus under Mr. Draghi, inflation remains well below the European Central Bank’s target of 2 percent. Among economists and many central bankers, there is a growing feeling that the stimulus has become counterproductive.There is a lot to talk about. Despite record doses of monetary stimulus under Mr. Draghi, inflation remains well below the European Central Bank’s target of 2 percent. Among economists and many central bankers, there is a growing feeling that the stimulus has become counterproductive.
Extremely low interest rates have made borrowing cheap and encouraged lending, which is the point. But low rates have also cut into bank profits. Some economists argue that banks in countries like Germany have no reason to issue credit because they can no longer make money doing so.Extremely low interest rates have made borrowing cheap and encouraged lending, which is the point. But low rates have also cut into bank profits. Some economists argue that banks in countries like Germany have no reason to issue credit because they can no longer make money doing so.
“We have overstretched the use of monetary policy,” Eric Dor, the director of economic studies at IÉSEG School of Management in Lille, France, told reporters in Frankfurt on Wednesday.“We have overstretched the use of monetary policy,” Eric Dor, the director of economic studies at IÉSEG School of Management in Lille, France, told reporters in Frankfurt on Wednesday.
The low rates have been a boon for debt-burdened governments and companies, but there is growing concern that easy money is fueling real estate bubbles in places like Germany, and encouraging insurance companies and other investors to buy too many risky assets.The low rates have been a boon for debt-burdened governments and companies, but there is growing concern that easy money is fueling real estate bubbles in places like Germany, and encouraging insurance companies and other investors to buy too many risky assets.
At the same time, Mr. Dor said, the European Central Bank cannot end stimulus without damaging the economies of heavily indebted countries like Italy.At the same time, Mr. Dor said, the European Central Bank cannot end stimulus without damaging the economies of heavily indebted countries like Italy.
“It’s a problem if we don’t normalize monetary policy, and it’s a problem if we do,” Mr. Dor said. “It’s a trap.”“It’s a problem if we don’t normalize monetary policy, and it’s a problem if we do,” Mr. Dor said. “It’s a trap.”
Ms. Lagarde must try to reconcile that dilemma while also healing differences within the European Central Bank’s Governing Council, which sets policy. There is an open rift between members from northern countries who would like to see stimulus reduced and those from southern countries eager to keep it flowing. Ms. Lagarde must try to reconcile that dilemma while also healing differences within the Governing Council, which sets policy. There is an open rift between members from northern countries who would like to see stimulus reduced and those from southern countries eager to keep it flowing.
The strategy review, of uncertain duration, is likely to focus on the central bank’s approach to inflation. By law, the European Central Bank is required to guard price stability. But it has discretion to define what that means. The strategy review is likely to focus on the central bank’s approach to inflation. By law, the bank is required to guard price stability. But it has discretion to define what that means.
Since the last strategy review, in 2003, the monetary policymakers based in Frankfurt have promised to keep the annual inflation rate “below, but close to, 2 percent.” Some inflation is considered a good thing because it provides a comfortable buffer against deflation, a downward spiral of prices that can lead to economic depression.Since the last strategy review, in 2003, the monetary policymakers based in Frankfurt have promised to keep the annual inflation rate “below, but close to, 2 percent.” Some inflation is considered a good thing because it provides a comfortable buffer against deflation, a downward spiral of prices that can lead to economic depression.
Modest inflation also encourages individuals and companies to invest and spend, because otherwise their money slowly loses value.Modest inflation also encourages individuals and companies to invest and spend, because otherwise their money slowly loses value.
Some economists, such as Otmar Issing, the European Central Bank’s former chief economist, say the bank should give up trying to hit the 2 percent target, which it never succeeded in doing consistently under Mr. Draghi. Fear of deflation is overblown, Mr. Issing and others argue, and there is nothing wrong with low inflation.Some economists, such as Otmar Issing, the European Central Bank’s former chief economist, say the bank should give up trying to hit the 2 percent target, which it never succeeded in doing consistently under Mr. Draghi. Fear of deflation is overblown, Mr. Issing and others argue, and there is nothing wrong with low inflation.
Another group, whose most prominent member is Olivier Blanchard, former chief economist of the International Monetary Fund, argue for an inflation target as high as 4 percent in boom times. The theory is that a higher target would encourage companies to raise prices, while giving the central bank more space to cut interest rates in bad times.Another group, whose most prominent member is Olivier Blanchard, former chief economist of the International Monetary Fund, argue for an inflation target as high as 4 percent in boom times. The theory is that a higher target would encourage companies to raise prices, while giving the central bank more space to cut interest rates in bad times.
Carsten Brzeski, the chief economist at ING Germany, suggested that the central bank could buy itself more flexibility by simply promising to keep inflation “around 2 percent.” That may seem like an insignificant change, but it would allow the central bank to overshoot the target when necessary to compensate for a long period of meager inflation.Carsten Brzeski, the chief economist at ING Germany, suggested that the central bank could buy itself more flexibility by simply promising to keep inflation “around 2 percent.” That may seem like an insignificant change, but it would allow the central bank to overshoot the target when necessary to compensate for a long period of meager inflation.
Where Ms. Lagarde stands in this debate is not clear. But those who scrutinize central bankers’ utterances detect signs that she is concerned about pernicious consequences from measures to push up the inflation rate. Where Ms. Lagarde stands in this debate is not clear.
As evidence, analysts point out that during a speech in Frankfurt last month, Ms. Lagarde said the European Central Bank “will continuously monitor the side effects of our policies.” “I’m neither a dove nor a hawk,” she said Thursday, using terms used to denote how aggressively central bankers believe in combating inflation. “My ambition is to be this owl, which is often associated with a little bit of wisdom.”
Because Ms. Lagarde is so new to her job, the experts are not sure how much weight to give such comments. But there are some signs that she is concerned about pernicious consequences from measures to push up the inflation rate.
“Expect a lot of second-guessing of Lagarde,” economists at Deutsche Bank said in a recent note to clients, “as the market gets used to her communication nuances.” “We are very aware of the side effects,” she said. “We would not be doing our job if we were not monitoring and being extremely attentive to that balance of cost-benefit.”