The eurozone needs to create more of its economic growth at home, including via greater public investment, if it is to withstand weakness abroad and become more balanced internally, new European Central Bank (ECB) President Christine Lagarde has said.
Lagarde did not discuss monetary policy in her first major speech on Friday, since becoming ECB president at the start of this month, merely saying the central bank would continue to do its part to support the economy.
Instead, she chose to send a message to eurozone governments, calling on them to strengthen domestic demand after a global trade war brought a decade of export-driven growth, largely led by Germany, to an abrupt end.
She also compared Europe’s economy with global superpowers.
“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,” Lagarde said.
Venturing outside the traditional remit of a central banker, she singled out public investment as a key driver of this rebalancing, calling on pan-European funds to be invested in green and digital projects.
“Investment is a particularly important part of the response to today’s challenges, because it is both today’s demand and tomorrow’s supply,” Lagarde said.
“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.”
Her predecessor, Mario Draghi, had long called for greater spending and investment by countries that run surpluses, such as Germany, but was never so specific. His pleas fell on deaf ears in Berlin, however.
Lagarde’s avoidance of monetary policy issues, however, marked a departure from Draghi, who often used major speeches to drop hints about upcoming ECB moves – typically increasingly aggressive stimulus measures.
The trait angered some other ECB rate-setters, particularly those from conservative, cash-rich countries like Germany and the Netherlands.
“Lagarde meets the expectations that she could become the leading economic and political voice for Europe rather than quickly shaking up the ECB,” Carsten Brzeski, an economist at Dutch bank ING, said.
In a symbolic olive branch to the host country of the ECB, Lagarde began her speech by greeting the audience in German and promised to deepen her knowledge of that language.
She had already sought to mend fences with disgruntled policymakers last week, taking the whole Governing Council on a retreat, where they called for more inclusive decision-making.
In her only policy-related remarks, Lagarde confirmed she would “soon” start a review of the ECB’s policy framework, a wide-ranging effort that is expected to involve a redesign of its inflation aim.
She then stuck to the central bank’s pledge to keep the money taps open while monitoring the side effects of its stimulus policies.
“Monetary policy will continue to support the economy and respond to future risks in line with our price stability mandate,” Laggard.
This well-rehearsed stance places her roughly in the middle of advocates of easy money in indebted southern European countries and policy “hawks” north of the Alps.
“She might have to be more specific following her first Governing Council meeting in December, but for now the data does not look weak enough for the ECB to make any change to its monetary stance,” said Frederick Ducrozet, a strategist at Picket Wealth Management.
When Lagarde was first nominated as the ECB chief, the likelihood of her continuing Draghi’s policy of loose monetary controls pleased global bond investors and rallied the bond market.
A Lagarde policy of “more of the same” is considered likely given that, despite leading the International Monetary Fund for the past eight years, she is a relative newcomer to the intricacies of central banking and will likely take her time before seeking to stamp her own mark on the role.
“There are concerns about her not being an economist, not having monetary policy experience,” Professor Michele Chang, of the College of Europe’s European Political and Governance Studies department, told Al Jazeera when Lagarde was nominated. “We have heard these types of concerns before when she was appointed to lead the IMF, but she has proven herself an effective manager.
“The problem with the ECB is the high turnover in the Executive Board coincides with the selection of the new ECB president. Markets are looking to see if the ECB will continue its unconventional monetary policy, and if she has the capacity to lead the ECB in new monetary policy innovations if needed as Draghi did.
“People are going to be looking for her to have her own perspective on that and not only relying on the monetary policy experts around her, like Philip Lane (the Irish chief economist of the ECB). Jobs like the ECB presidency will need more technical capacity than that of the IMF job, but she has shown herself to be an excellent leader of a multinational economic organisation.”