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Lagarde calls on European governments to launch fiscal stimulus

Lagarde calls on European governments to launch fiscal stimulus

ECB president-elect warns that greater co-operation is needed to tackle populism

Christine Lagarde has called on European governments to co-operate more closely in efforts to stimulate the stuttering eurozone economy, in her first public appearance as president-elect of the European Central Bank.

Ms Lagarde, who is set to succeed Mario Draghi at the Frankfurt institution this autumn, made the comments in an address to the European Parliament on Wednesday as part of her nomination process.

She told MEPs that “central banks are not the only game in town”, adding that “there is clearly co-operation to be had if all the institutions in Europe — and the eurozone in particular — want to respond to the threat of populism”.

Noting that she had been present when Mr Draghi promised to do “whatever it takes” to save the eurozone at the height of the 2012 sovereign debt crisis, Ms Lagarde said: “I hope I never have to say something like that — I really do — because if I do it will mean that other economic policymakers have not done what they have to.”

Some governments “have the capacity to use the fiscal space available to them . . . it’s a majority of countries in the euro area”, she said.

Her comments come ahead of an expected further wave of monetary loosening by the ECB next week, which could include cutting interest rates further into negative territory and restarting its €2.6tn bond-buying programme.

Other major central banks — including the US — have also recently moved to loosen policy. This has prompted some economists to warn that monetary policy is losing its effectiveness as interest rates hit record low levels; as a result, pressure is building on governments in Germany and elsewhere to take some of the burden by launching fiscal stimulus measures.

European Commission officials recently floated the possibility of rewriting the bloc’s stability and growth pact, which has been criticised for its fiscal rules that have proved difficult to enforce.

Mr Draghi has repeatedly insisted that eurozone governments should not rely on monetary policy alone to save the bloc’s economy. But the topic of fiscal reform is hugely controversial.

Ms Lagarde, who — if she wins approval by European parliamentarians — is due to take charge of the ECB on November 1, signalled that she intended to continue Mr Draghi’s policies. “Highly accommodative monetary policy” was still necessary to respond to near-term challenges for a prolonged period, she said.

Other countries without the fiscal capacity to increase expenditure could instead implement structural reforms to improve their financial strength, she added.

Ms Lagarde said her time at the ECB would focus on making climate change a macroeconomic priority. The central bank could “direct” its corporate asset purchases towards green bonds, she added.

The former head of the IMF, who previously served as French finance minister, said she supported calls for the ECB to review its monetary policy strategy, including clarifying its inflation target of close to, but below, 2 per cent.

She said: “What is the meaning of close to, but below 2 per cent — are we talking about 1.6 or 1.9 [per cent]? There is clearly flexibility in between.”

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