08 July 2020

ECB's Lagarde interview with Financial Times

I think that together with members of the Executive Board and members of the Governing Council, we tried to respond as fast and as efficiently as we could in a situation that was deteriorating very brutally. I've been through quite a few crises. I'm not a veteran of all crises but I've been through the great financial crisis. I was very involved in the sovereign debt crisis but this one – COVID-19 – was very, very brutal. We had to respond extremely fast because we saw a quasi-seizure of the financial markets. We saw a dash for cash on the part of many of the key players. We had to use all the tools we had and harness as much cooperation among central bankers in order to respond to the crisis. I would say that it was a combination of using all the tools, harnessing as much cooperation internationally as we could, and making sure that the Eurosystem at large, meaning of course the ECB but also all the Governing Council members, was on board and using all those tools.

We'll come back to monetary policy. When you think of the recovery – and we're starting to see now a recovery – which letter of the alphabet do you favour? You've probably heard Andy Haldane just last week talking about a V-shaped recovery and that surprised many. Certainly you have been more restrained. Are you changing your mind at all?

I don't believe in this alphabet soup that we are hearing about. I think this recovery is like no other. It's going to be constrained, it's going to be uncertain and I think it's going to be fragmented across the world because clearly, the pandemic has hit in a sequential way. It wasn't a symmetric shock and the recovery is also going to be sequential. So we are seeing countries like China, like Korea, like Japan, like Australia coming out earlier than we are seeing European countries at the moment. We are seeing the Americas at large, including the US but also Latin American countries, at a later stage of this recovery process. So fragmented, certainly, and constrained by the uncertainty that we have around in terms of which sectors will be affected most, what impact policies will have, what overall response will be produced and what kind of cooperation will we see between the countries of the world.

Europe, so far, has avoided the massive job losses that we have seen in the US. Do you think that that's sustainable?

I think that the reason many of the European countries are still showing reasonably good job numbers and unemployment numbers that have not worsened dramatically had to do with the furlough system and the unemployment benefits that were available. That actually kept employees employed and employers supported by guarantee schemes, by furlough schemes, which were not available in the same scope and broad reach in the US. What will matter is what comes next. Are we going to have coordination between the phasing out of unemployment benefits and furlough schemes and a pick-up of activity? Or are we going to face a gap in between which would then see unemployment numbers rise significantly? That's really one of the big issues.

What about in terms of inequality? We are seeing – and in fact we wrote a long piece today about essential workers and the fact that they are some of the lowest paid, have to take the most risk, and yet society and the economy have not really valued that work. Do you think that has to change?

That has to be the focus of policymakers. What you learn from history is that in all these major crises, whether they are natural disasters, whether they are pandemics, generally the most vulnerable, the poorest, the women and the young people are the ones that are most affected and that are the clear first victims of those situations. There is plenty of literature about this particular topic, and policymakers have to really focus on that category.

Let me just press you a little bit on that. What should policymakers then do?

Well, I think they have to use the tools available and that includes fiscal, of course. That includes moral suasion in the private sector. That includes reassessing the values that a society respects. I would hope that the lessons from the last three months will be remembered. I don't know if it was the case in the UK, but in many countries on the continent, at 8:00 pm everybody would go out on balconies and terraces and gardens to applaud the people from the hospitals and the clinics. Well, it's not just a question of applauding them; it's also a question of acknowledging the huge value that they deliver to society, and making sure that there is consideration for that in terms of renewed social contract, if that's what you were referring to.

Does it worry you that there has been a drift towards more protectionism and at the same time, that there are rising tensions between the US and China? That is likely to damage the global economy even more just as we're trying, just as countries are trying to recover.

Those trends that you're referring to will obviously have an impact on economic development, will have an impact on growth, will have an impact on trade between countries. What we have seen historically in the last 30 years is that what was called globalisation has had a lot of benefits for many. The reason why so many people were taken out of poverty, out of starvation, had to go with globalisation. Now, that's the rosy side of globalisation. Clearly, what we have also seen on the occasion of COVID-19 and the pandemic is that supply chains were probably stretched too much and to the point where basic supplies were just no longer available. It has also demonstrated that while mobility is of course good, proximity was seen as also very valuable and necessary for the economic development of communities. It may well be that this particular crisis will transform our perception of globalisation, proximity, short supply chain, control over one's destiny. To me, what will really matter is how we can make those concepts that are close to people's desire and hearts compatible with enough global development and multilateral relationships, so that benefits can also fall out to other countries and not just be restricted to your own shores.

So you're hoping that it won't be a permanent setback for globalisation?

I think the whole set of relationships and business models of countries will have to be revisited. Countries cannot be exclusively driven and supported by trade and trade only, for instance. Equally, you cannot just close your borders and assume that you're going to operate in your own restricted circle because problems are of a global nature, because pandemic ignores borders, because capital flies across the world.

Just one small question on Brexit: do you think that it will aggravate the impact of the pandemic on European economies because of the timing of Brexit at the end of the year, whether it's with a deal or without a deal?

If you combine two downside risks, two uncertain outcomes, you clearly have a multiplier impact so how one will reinforce the other, I don't know. They are heading in the same direction, which is not an easy one.

Let's talk about monetary policy. It's interesting that when you took over, the view amongst economists was that the ECB had breached the limits of monetary policy, and that the best you could do is to cajole, convince governments to embrace fiscal stimulus. Instead, now you say that there is no limit. This is the new motto: there is no limit to what the ECB is willing to do.

Our support for the euro is unlimited, yes. But that's because we have a mandate which is price stability, and which dictates that we pay very close attention to both monetary stance, to monetary transmission, that we are attentive that financing is not tightened to the point where economic actors cannot develop activity. I think that's exactly what we have applied at the time when the crisis started unfolding. We had to look at what was available and we had to invent new instruments in order to respond to the crisis and make sure that we could actually deliver on our mandate.

Is there a hard limit to the Pandemic Emergency Purchase Programme? If there isn't one, then what happens next?

I would observe that through the impact of the massive programmes that we put in place, the situation has calmed down enormously. The tightening that we had seen loosened. I'll give you an example. Together with a few other key central banks around the world, we had those US dollar swap lines that were in very high demand at the beginning of the crisis. Now, none of it is needed. That's an example. So I believe that the measures we have taken have actually demonstrated the efficiency, the effectiveness, and were just right in responding to the situation. We are going to be very attentive to the economic developments, to the many numbers that are popping up, whether it's PMI, whether it's services, whether it's employment, whether it's inflation and the like of it, to make sure that our tools are properly calibrated and can respond adequately to the current situation. We have a very – how would I put it? We receive myriads of numbers at the moment, but it's very uncertain. It's going to take a while before we have a solid response from the economic terrain, if you will, to really assess the effectiveness of what we do, as well as the prospects of what will happen. But we have done so much that we have quite a bit of time to assess that carefully....

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