ECB’s Lagarde urges governments to boost public investment
Christine Lagarde has called on European governments to boost public investment and increase harmonisation in services, banking and capital markets to rebalance the region’s economy away from exports to domestic demand.
Giving her first major policy speech since replacing Mario Draghi as European Central Bank president on November 1, Ms Lagarde said Europe had a “moment of opportunity” to tackle the challenges presented by trade tensions and technological disruption.
“We have a unique possibility to respond to a changing and challenging world by investing in our future, strengthening our common institutions and empowering the world’s second-largest economy,” she told a banking conference in Frankfurt on Friday.
The ECB would “continue to support the economy and respond to future risks”, she said, adding that monetary policy “cannot and should not be the only game in town”.
The new ECB president drew a distinction between general government spending and what she called “productive expenditure — which in addition to infrastructure includes R&D and education”. She said productive investment had fallen as a share of overall public expenditure in most eurozone countries, adding that “new investment needs are emerging”.
Promising to “continuously monitor the side-effects of our policies”, she said the ECB would launch “in the near future” the first strategic review of its policy objectives and tools since 2003.
Her speech was warmly welcomed by senior bankers at the event. Christian Sewing, chief executive of Deutsche Bank, said: “This was the most encouraging speech I have heard for several years in Europe.”
But other economists were underwhelmed by the lack of detail on her monetary policy plans. “For the time being, [Ms] Lagarde meets the expectations that she could become the leading economic and political voice for Europe rather than quickly shaking up the ECB,” said Carsten Brzeski, economist at ING.
Echoing a core message of her predecessor, Ms Lagarde pointed out that eurozone public investment remained “some way below its pre-crisis levels”. She said: “It is clear that monetary policy could achieve its goal faster and with fewer side-effects if other policies were supporting growth alongside it.
“While investment needs are of course country-specific, there is today a cross-cutting case for investment in a common future that is more productive, more digital and greener,” she said.
She argued that the eurozone had been slower to embrace innovation and new technologies and as a result total factor productivity growth had risen by only half as much in the region as it had in the US since 2000.
“To help us close this gap, we have a very potent tool at our disposal: empowering our internal market,” she said.
To achieve this, Ms Lagarde said that the EU needed to achieve further integration in areas such as services, capital markets and the banking sector. “All of this would be a game changer, not just for our own stability and prosperity, but for that of the global economy, too,” she said.
“The answer lies in converting the world’s second-largest economy into one that is open to the world but confident in itself — an economy that makes full use of Europe’s potential to unleash higher rates of domestic demand and long-term growth.”
As the person responsible for setting eurozone interest rates, controlling the supply of euros and overseeing the biggest banks in the 19-country group, Ms Lagarde’s every word is closely scrutinised by investors for clues on the direction of financial markets.
Unlike most central banking heads, Ms Lagarde is not an economist and she has never devised monetary policy, making the 63-year-old former head of the IMF, French finance minister and lawyer an unconventional choice to lead the central bank.
Yet, underpinning her objective to give fresh impetus to European economic policy, she cited St Francis of Assisi, saying: “Start by doing what’s necessary; then do what’s possible; and suddenly you are doing the impossible.”
The ECB has endured a bruising backlash that overshadowed Mr Draghi’s final weeks in charge after it decided in September to cut interest rates further into negative territory and to restart its bond-buying programme in response to slowing growth and inflation. The heads of the German, Dutch, French and Austrian central banks all publicly criticised the move.
After her first meeting of the ECB governing council — which includes the 19 national central banking heads — Ms Lagarde invited them to a more informal discussion in an attempt to rebuild unity over dinner at the plush Schlosshotel Kronberg in the hills north of Frankfurt.