“I will have my own style” and “I am neither a dove nor a hawk” — perhaps the two most memorable phrases from Christine Lagarde’s December 12 debut press conference as President of the European Central Bank (ECB).
She chose to take her first steps slowly but surely. Slowly, because she did not follow the lead of her predecessor, Mario Draghi, who began his career at the head of the institution by asserting his authority with powerful measures. And surely, because she said that work on designing the ECB’s new strategy would begin in January, not only in terms of refining its mandate on inflation, summarized in the phrase “below but close to 2 percent,” but also incorporating key new issues: technological revolution, climate change and inequality.
A chance for Lagarde to give new clues
Lagarde will have the chance to give further hints about this strategy at this Thursday’s meeting, in a macroeconomic context showing signs that the eurozone growth slowdown is stabilizing. In this regard, MAPFRE Economic Research, which published its 2020 Outlook report last week, forecasts a growth of 1 percent for 2020 compared to the 1.2 percent estimated for the end of 2019. This is two tenths below the ECB’s own estimates.
What remains certain is that the French banker and former Managing Director of the International Monetary Fund starts her term at a time when there is some consensus that monetary policy has reached its limits in most developed markets. In short, the current measures allow little scope for action if economic activity deteriorates further. But there is also a school of thought that monetary policy, especially in the eurozone, is having undesirable effects on the financial sector, “eroding basic functions such as the transformation of terms (credit) and long-term financing (investment), leading to negative consequences for the system,” as indicated in the report.
MAPFRE Economic Research identifies several challenges facing Lagarde at the helm of the ECB
Given this situation, MAPFRE Economic Research has identified several challenges facing Lagarde at the helm of the ECB. Her first challenge will be to maintain the credibility and determination of Mario Draghi’s farewell speech. At the same time, according to the Outlook report, the economic cycle must be stabilized “in real and nominal terms, while re-anchoring expectations with sustainable inflation paths.” Her third challenge will be to drive monetary and regulatory progress in a comprehensive approach to improve “macroprudential management and eliminate the latent pro-cyclicality of liquidity regulation.”
And the final challenge highlighted by economists is to “reform monetary policy in line with the times.” This means linking policy to sustainability; aligning interests with the new European institutions and the new political spectrum; preserving the leadership of her predecessor in a period of uncertainty (such as that created by Brexit); and seeking a consensus to promote the path to completing the European area (bringing together banking, tax and capital markets).
A monetary policy with more limited effects will, as was the case with Draghi, lead to an appeal to governments for fiscal policy to take over. MAPFRE experts point out that there is a consensus on “the need for structural and institutional reforms and with fresh demands that fiscal policy play a greater role.” Let’s see if Lagarde hints at this on Thursday.
To access the Outlook report in full (available in Spanish), click here.
To access the interactive chart on macroeconomic forecasts in the eurozone (available in Spanish) , click here.