This is an audio transcript of The Economics Show podcast episode: ‘Martin Wolf speaks to Christine Lagarde — Europe’s ‘existential crisis’’
Martin Wolf
Hello, I’m Martin Wolf, chief economics commentator at the Financial Times, and this is The Economics Show. A little earlier this month, I sat down with Christine Lagarde, president of the European Central Bank, as part of the FT’s annual digital conference, The Global Boardroom. We spoke about how Europe’s economy has proven more resilient than expected, the structural barriers the bloc needs to break through and how Europe should fund the defence of Ukraine. Lagarde sits at the very heart of the European economy and is extremely well placed to discuss these issues. The interview was first broadcast live on the 10th of December as part of the FT’s Global Boardroom conference. It has been edited for concision. I hope you enjoy it.
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So it’s a great pleasure to be with you, Christine, again. I’ve known you for about 30 years and when I first met you, you were agriculture minister of France. And what a career it’s been since then. So subsequently, of course, you were finance and economy minister during the financial crisis, which was quite an event and we talked a lot then. Then of course managing director of the International Monetary Fund. And now of quite a few years, you have been president of the European Central Bank. And one can safely say that throughout all that period, the world has been very exciting and in a way getting even more exciting. Let’s start with what doesn’t look so exciting right now, namely the Eurozone economy.
It looks as though things are going rather well in terms of your targets, the state of the economy. So give us your assessment of where you see the Eurozone economy and how happy you are with where monetary policy has brought you.
Christine Lagarde
Martin, it’s lovely to be with you. And I would say that we haven’t changed much in those 30 years.
Martin Wolf
Well, you’ve got younger of course.
Christine Lagarde
Yeah. Used to say we are in a good place, and of course I talk about our monetary policy, I talk about price stability, which is the primary objective of the European Central Bank. And with a track record of around 2 per cent inflation and a medium-term projection at 2 per cent, I would say again that we are in a good place. Now, of course, that is with the landscape of a Eurozone economy, which is doing better than was feared. So we keep saying that it is more resilient and that growth is resisting. The Eurozone area is resisting better than what we had anticipated back in April. When the tariffs hit, when the uncertainty grew, when war was raging, everyone thought that growth in the Euro area would fall very badly. And this hasn’t been the case. Europe has resisted. There was no retaliation on tariffs. The euro did not depreciate as we could have anticipated. And I think that when we look at the, you know, whether it’s the composite numbers, surveys of manufacturers’ intentions, we look at employment numbers, whether we look at employment participation, record high, the whole economy is faring better.
Is it as good as it should be? We are, I think, quite close to potential, but there is a lot to be done in terms of improving the situation and improving the productivity of the Euro area.
Martin Wolf
I’d like to come in a second to these longer-term concerns. But if we look at where the Eurozone is now, are there other things that worry you a bit? I mean, one of the issues that has obviously been raised, it’s not extreme, but even in the case of your own home country, France, has fiscal policy, fiscal situation. Is that from your point of view in any way critical? Are there issues of that kind, that one in particular, that sort of, you feel that it really needs to be fixed quite soon?
Christine Lagarde
I think what needs to be fixed soon, and I will come back to soon because I think that’s critically important, is the structural impediments, the barriers, the obstacles that we put in the way of productivity, in the way of innovation, in the way of investment. And we have a special art in doing that to ourselves. It’s a bit of a challenged set of numbers, but we have recalculated the IMF numbers. We have produced our own to determine how much self-inflicted tariff we impose on ourselves.
And the numbers are just staggering. It’s a 110 per cent equivalent tariff on services crossing between member states and 60 per cent on goods crossing between member states. Everybody can debate numbers, but directionally that’s where it is. We are constraining the traffic of goods, the transactions on services among member states, which are supposed to be a single market, and this is what we need to fix and we need to fix it soon because I think that time is of the essence.
I did say almost a year ago that Europe was going through an existential crisis. I still believe that we are in the midst of that existential crisis, but I also think that there is a euro and possibly a Europe moment. And if we are smart and fast at addressing those issues, the obstacles that we put in our way and at focusing on having a good and efficient capital market union within the Euro area, I think we have ways to actually transform that Euro moment into an answer to that existential crisis.
Martin Wolf
What you’ve just said then really interested me because, to be honest, when I saw those IMF numbers, I found them very difficult to believe. And if you . . .
Christine Lagarde
I did, too. That’s why I told the team . . . I said . . .
Martin Wolf
. . . but you now are saying, and I think it’s very important, they’re sort of basically, right.
Christine Lagarde
Yes. So there’s some people who challenge them because they say that we have not taken enough into account: the taste, the cultural appetite. And that’s a difficult one to factor in in the equation. But assume for a second that it was only half right, it is still massive. And if we could just fix those numbers like the Netherlands, because the Netherlands have actually found a way to reduce those amounts, we would wipe out the negative impact of the trade barriers resulting from the US tariffs. Actually, if we only did a quarter of what the Netherlands does, we have a situation which is not good, but that we can address in short order.
Martin Wolf
And of course it’s a, to some extent, these barriers exist — or many of them — because the politics are still in favour of them. So there is, it’s quite a big challenge for governments and for people to get rid of the residual national preference, which is obviously in different ways, so important in the Eurozone.
Christine Lagarde
Absolutely. And you know where I sit now as president of the European Central Bank, I can see it, whether it’s banking supervision, whether it’s regulation on products, on services, there are principles that are decided in Brussels. Always blamed. But then the real bulk of the added barriers, added obstacles, added requirements, added reporting is generally decided at the national levels because everybody wants to sugarcoat, gold plate and do just a bit more.
Martin Wolf
Now let me move on to some of the longer-term issues. The president of France, Emmanuel Macron, has recently done an interview. He said, it seems to me that European monetary policy can be significantly adjusted today. And he went on to say reasserting the value of the European internal market means we can’t let inflation be our sole objective, but also growth and employment. And that gets us very, very close to supporting adoption of the US twin objective framework, inflation and unemployment equally weighted. The EU had the passionate debate on these issues at the time of the Delors Committee in the late ’80s and the creation of the Eurozone. It sounds to me as though he’s recommending a change, changing the treaty. But what is your reaction to these, I must say, quite extraordinary remarks?
Christine Lagarde
Martin, if I was to lower interest rates rock bottom, if I was to do massive quantitative easing, which are the key tools that have been used historically by the ECB, would it change the barriers that I was talking about? Would it facilitate the movement of goods and the provision of services across the member states? No, it wouldn’t. So it’s a good debate to have and it’s interesting to consider a possible treaty change.
I contend that under the current treaty, we focus on price stability, but we have to take into account growth, employment, innovation, productivity, climate change. Nothing has prevented us from taking climate change into account and quite forcibly so. But the rest we take into account as well. So I think the key priorities is to actually get results on the effective internal single market and to give it more life and to remove the barriers that we have imposed upon ourselves, and that will have nothing to do with monetary policy.
Martin Wolf
Do you think really that this is a case of political leaders essentially frustrated at their inability to fix the problems you mentioned? And quite intelligent enough to realise this, casting around for some saviour and the European Central Bank and central banks quite frequently play that role? But that can be quite dangerous, can’t it?
Christine Lagarde
Central banks are often seen as the scapegoat. That’s a fact. And in various places around the world. But I think that the duty of a central bank and its leaders is to focus on the mission that was given to us by the governments at the time when they decided that the central bank had to organise the monetary order in a particular zone. And we have a pretty clear mandate, which has two, you know, primary objective price stability, secondary objective, which is aligned with the economic policies decided by the authorities in Europe. And we do that. And you know, proof of it is that we are delivering on price stability and we are operating in an environment which is financially stable as well.
Martin Wolf
And if you look around the world, and I don’t expect you to comment on this, but if you look at the US, it does appear that you’ve got some policies, the trade policies, hugely destabilising and destructive. And the administration, of course, starts blaming the Federal Reserve for not slashing interest rates when inflation is above their target. So this is quite a dangerous way for politicians to go, in my view. (Christine laughs) I suspect you agree with that. You don’t need to comment further.
Now, going to something that is quite a big set of issues. We’re just interested in your view on this. One of the proposals that were, of the ideas that made in the Draghi and Letta reports is that the EU is a huge surplus that has excess savings. So what should happen is that the savings should be invested domestically. The external surplus of the Eurozone should be diminished. But there is presumably nothing that the central bank can do about that. But do you think that targeting in some way in macroeconomic policy in the Eurozone, fiscal policy or other ways, the aim of absorbing excess savings into productive investment should be a central part of the growth programme of the Eurozone now?
Christine Lagarde
Yes, it should definitely be a central part of our growth programme because it all starts with money. We have talent, we have innovators. We have people who can develop vaccines, who can develop artificial intelligence, but the key thing is for them to have access to enough financing during second and third round of financing and to reach the stage where they can go public and prosper here in Europe at large. And I think that, you know, when some of us say capital market union is an urgent matter that everybody should focus on, that’s exactly the point. It’s not for the sake of concentrating powers with Esma or the sake of having a single investment product. It’s to say those innovators, inventors who can improve productivity, who can help develop new drugs, new ways of operating should be financed in Europe.
And instead of having this, you know, massive savings travelling across the Atlantic to be invested in the US and for US investors and venture capitalists to then come back to possibly invest in some selected projects which suits them, we should just indicate that there is a will and there is a way to invest in Europe. I think, by the way, that the commission is getting that message loud and clear, and I believe that the delivery of the saving and investment project that the commission is working on, the reinforcement of supervision with more power delegated to Esma are going in the right direction.
But there is a lot of pushback. I can guarantee you that in the next six months, there will be pushback from multiple corners that I can almost identify today that will say, well, there is no need to do a big capital market union. We are functioning well. We’re very happy in our corner of Europe. Leave us alone.
Martin Wolf
Would this mean that one possibility is to be substantially more relaxed about fiscal deficits if the increased spending is pretty clearly invaluable investment? And this seems to be where the German government is now very clearly going. It will be an implication of this where countries in a reasonably good fiscal position, manageable, they should be encouraged to spend more provided it is — I’m not gonna go into the defence issue that’s separate — but in productive assets, you would support that?
Christine Lagarde
Absolutely. There’s a dual objective. One, you have to have decently solid, stable and compliant public finance. But of course, you have to invest in what is productive investment and what is going to improve the conditions of growth in Europe. So directionally, it has to be in line with public finance principles that have been agreed within the club, but the spending is needed and necessary provided, as you just said, that it is in productive domains and will improve the conditions of growth.
Martin Wolf
And does that mean more spending at the European level? Do you think that’s a direction that they should be thinking about?
Christine Lagarde
I hope you don’t mind, but I’m going to come to defence now because I think that this is the perfect direction.
Martin Wolf
It fits together perfectly.
Christine Lagarde
Yes, absolutely. So I know that, you know, my predecessor and some colleagues argue that we should have the equivalent of Treasury bonds here in Europe. And that as a result, Europe should be issuing jointly, severally and da da da.
Martin Wolf
To fund defence.
Christine Lagarde
To fund defence. We did so for Covid because it was a matter of survival and emergency.
Martin Wolf
And that may be true here.
Christine Lagarde
Defence is equally a matter of survival and emergency, and I think that this is the perfect case in point to actually go for this joint issuance.
Martin Wolf
Oh, well, that’s very important.
Christine Lagarde
That’s a personal view that I hold. You know, it’s not been vetted or validated.
Martin Wolf
Not the official position of the ECB as an institution. Now let’s move to the euro, the dollar as a global currency. So the broad question I’d start with, do you see what’s going on in America the way the administration is behaving in various ways as an opportunity for the euro to stand up and be a genuine rival for the dollar?
Christine Lagarde
I think the perception of investors has significantly evolved over the course of the last six months.
Martin Wolf
Yes, I agree.
Christine Lagarde
If you go back to April the second and sequitur, the approach, attitude, and perception of investors is not as positive, forthcoming as it used to be regarding investment in dollars. And we did observe a movement out of dollar assets into other investments, including euros, predominantly hedge funds.
Then there was a reverse. But there is still, when you talk to investors, when you talk to sovereign funds, a reticence now that used not to be expressed. And I think this is very opportune for the euro and for Europe to deliver on our commitment to stability. Price stability. That’s our business. Financial stability and respect for the principles that we abide by, which is the rule of law, the respect of property rights, and so on and so forth. And I believe that the euro has a role to play.
I’m not suggesting that we should be in that race or competition for dominance in terms of currency because these things take a lot of time. But I think that from the 20-ish position that we hold at the moment in terms of reserve currency . . .
Martin Wolf
Share of world’s . . .
Christine Lagarde
Yup. Of 52 per cent of invoicing of transactions around the world, we can offer more. And I believe that when I look at the number of repo lines or swap lines that we are receiving, it’s an indication that sovereign nations look at the euro as a solid currency.
Martin Wolf
In that context, are you now reasonably comfortable with using Russian assets in support of Ukraine, given what’s happening with America, or is there still a concern that this might undermine trust in European financial institutions and management?
Christine Lagarde
First of all, I think that it’s our duty as Europeans to continue to support, defend and act in favour of Ukraine. Second, I believe that the scheme that has been put in place and which is going to be debated at the next European Council is the most achieved solution that I have seen so far that would, as I understand it, because I’m, you know, I don’t know what the ultimate result will be, but is the closest I have seen to something that is in compliance with the international law principles. That’s question number one because we have to respect those international principles.
Martin Wolf
I know you’ve always insisted on that.
Christine Lagarde
And I think if we can explain our position as it stands, I believe that investors in euro-denominated assets and in Europe will appreciate that this is not a practice that we have to deprive people of their property or to remove sovereign assets because it suits us. It’s a very, very exceptional case. And it does not remove the title of Russia to the assets. I think that’s a critical point.
Martin Wolf
Let’s move on. Since we’re talking about the dollar and the euro, there’s a lot of issues being raised, and I wrote a column about it very recently about the attempt of the US administration to promote US dollar-based stablecoins, privately issued stablecoins, including in Europe, which we just discussed. So, to what degree do you feel that the possibility of these coins become very widely used in Europe as a threat, to put it bluntly, to stability, security and to monetary sovereignty?
Christine Lagarde
I think it is a real threat to sovereignty and to monetary policy. It is a threat because it is the intrusion of private money. And as I think you pointed out in your piece, an extortion of seigniorage. But more importantly, what I’m concerned about is the possibility that some stablecoins might use discrepancies between the Genius Act in the US, and MiCAR, which is the set of rules applying to stablecoins in Europe, so that they might use this discrepancy to issue dollar-denominated or multicurrency-denominated stablecoins that could attract European savings, which would not be governed particularly in the situation of redemption, particularly in the situation of reserves, particularly in the situation of resolution by European rules.
And that could be an introduction of great marketing for US-denominated stablecoins, which would be backed by US Treasury bonds. So I think that it’s a matter that evolves very fast, where the interests at stake are still regarded as non-systemic, but could become systemic and which really warrants that people like you, as you did, look into it, and that we all be as vigilant as we can be because those things evolve over time. They’re 250bn today. There might be $2tn tomorrow.
Martin Wolf
Some people think it will be, but let’s get to the alternatives and perhaps one question which you can answer. The alternative is a central bank digital euro. You’ve got ideas for really rather small issuance. The other is private issuance regulated in Europe by European entities, European banks. Both can be used. How fiercely are you now gonna promote these ideas in this rather disturbing context?
Christine Lagarde
We are going to promote those ideas fiercely and passionately and in particular as far as the one we are directly concerned, the digital euro, we are going to push as hard and as fast as we can to get it out.
Martin Wolf
Will it be issued while you’re still president?
Christine Lagarde
No, because no matter what, given that we are dependent on the European parliament issuing a bill, and then we have technical checks and testing that will take about a year and a half. I’ll be gone at the time when it’s finally launched, and I really hope it will be launched. You know, there is a very strange situation at the moment where people can be barred from access to any financing because of a decision made on the other side of the pond. There’s the case of the International Criminal Court judges at the moment who have no access to finance.
If we had a digital euro in place, that person could use financing in whichever way he wants and should, because he would not be deprived of his financial sovereignty himself. That is the case at the moment, and that gives you one very specific example of how we are not effectively sovereign in our own garden.
Martin Wolf
And the issuance of euro-based stablecoins by European private entities, what are you gonna do about that?
Christine Lagarde
You know, if they are, if they’re governed by MiCAR, which is the framework that has been decided by Europe, this is fine. You know, this is another digital payment that I don’t really understand the business case for it other than, you know, fear of missing out and wanting to be part of the game. But if it is in compliance with MiCAR and protects the one for one and has all the attributes required. Fine.
Martin Wolf
Well, if you look at the US stablecoins, I mean the business case seems to be criminal. I mean, at least a large part of it. Presumably, Europe will not want to promote the development of currencies that encourage corruption, criminality, fraud. So there are some big issues here.
Christine Lagarde
Absolutely.
Martin Wolf
And, you know, but here we are really talking about protecting fundamental attributes of sovereignty, aren’t we? And unfortunately, the US doesn’t look right now, particularly after the national security strategy, very friendly. So these are actually quite pressing issues.
Christine Lagarde
And to give you an example, you know, it . . . under MiCAR, anti-money laundering, countering the financing of tourism would actually be conducted. Not sure it’s the case everywhere.
Martin Wolf
There’s so much more to discuss, but I’m told I must stop now. Thank you very much. It’s been a wonderful interview, and I’ve enjoyed it very much.
Christine Lagarde
So have I.
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