Interview with Central Bank President Lagarde: “The ECB is crisis-proof”


interview

Status: 05/24/2023 4:09 p.m

The ECB has had to maneuver through many crises – and is one of the most powerful central banks in the world. In the tagesschau.deinterview, central bank chief Christine Lagarde responds to critics who see too many tasks.

tagesschau.de: Ms Lagarde, the European Central Bank is celebrating its 25th anniversary. You have been President of this institution for about three and a half years. From your point of view: What are the ECB’s great successes, what went wrong?

Christine Lagarde: I look at the ECB’s successes and potential failures from three perspectives: First, what were the original goals? Second: Who are the customers and are they satisfied? And thirdly: Are we well positioned for the future?

When I look at the goals, I believe that the founding fathers in the then only eleven member states wanted a monetary union that is stable according to our mandate, that makes us stronger and that brings us together. Those were the original goals.

are we stable Before monetary union, we had many devaluations of the individual currencies in the countries, it was a very eventful history. If I look at the last 25 years, with all the ups and downs, we’ve delivered an average inflation rate of 2.05 percent, which is quite remarkable. I’m not happy with the current high inflation. But the 2.05 percent was average.

Have we gotten stronger? Yes. The euro is the second most important currency in the world after the US dollar. During the last major crisis, the pandemic, the euro depreciated just a bit compared to the Japanese yen and British pound.

And did we stay together? Yes, for 25 years contrary to many predictions that were made at the time. I think by those three standards we delivered.

The second aspect is the customers – are they satisfied? The customers are the 346 million Europeans who own the euro. It’s their euro, we’re just the custodians of the currency. In the last poll, 79 percent of respondents said they trusted the euro.

And finally the third point, the future: I think we have shown that the ECB and the Eurosystem as a whole – including the Bundesbank – are crisis-proof. We went through so many crises and found the necessary tools and managed to keep the currency stable. We also look to the future through digital eyes. Europeans can pay in all member states with the same currency in cash, different means of payment and probably soon with the digital euro, because we need to be prepared for the future.

Bottom line: we delivered and fulfilled our mandate, served our owners, the Europeans, and prepared well for the future.

25 years ECB: A turbulent time lies behind the central bank.
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anti-inflation as the ultimate goal

tagesschau.de: Those were very difficult years. Essentially, the eurozone has lurched from one crisis to the next over the past decade. This has changed the role of the ECB – from an institution designed to ensure price stability to an institution where your predecessor had to save the monetary union. How has this changed the foundation of the ECB?

Lagarde: I think the foundation of the institution is the EU treaty, the legal basis on which we came into being. This is the foundation of the euro and certainly also of the European Central Bank. We have to stick to these rules.

Going through one crisis after another – from the big financial crisis, to the debt crisis, to the pandemic and then to the energy crisis – I think it has strengthened us. We have had to develop tools with which we have adapted to a world of very low inflation, fought possible deflation and are now fighting high inflation that has been going on for far too long.

Nietzsche said: “What doesn’t destroy you makes you stronger”. I think the euro is much stronger today than it was after all the crises. He is like a child who had to grow up very quickly because of many hardships.

The ECB has decided to raise the key interest rate in the euro area by 0.25 percentage points to 3.75 percent.
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More tasks for the monetary authorities

tagesschau.de: Has that also changed the structure of the institution? Do you and your staff see the ECB differently today?

Lagarde: The institution has grown as a result of a new mission entrusted to us after the Great Financial Crisis. This is the monitoring of the banking system, which we need so that we can transfer our monetary policy to the real economy.

As a result, the ECB now has more responsibility. It is monetary policy with the goal of price stability on the one hand. But it is also about monitoring the banks and the health of the banking system.

tagesschau.de: Some critics say the ECB has too many responsibilities. Over the years, the job has grown and changed, some tasks are also contradictory. How do you feel about this criticism?

Lagarde: I think there is no conflict there. There are no compromises between monetary policy, i.e. the goal of price stability, on the one hand, and financial stability on the other. And we also have different tools to address both. Both must come together, because there is no price stability without financial stability. We will not accept compromises and will use whatever tools are most appropriate.

Nor do I believe that our mandate is too broad. Because our mandate is price stability. To achieve this goal, we must also consider how the economy is developing, what risks are on the horizon and how we can counter them.

And to the critics who say that climate change, for example, should not be on our agenda, I say that it is now also part of the economy and is one of the risks that are looming on the horizon.

Now the critics will say that the ECB doesn’t have to worry about the horizon, its job is to deal with short-term issues. Unfortunately, the horizon gets closer and closer every year. And we must also pay attention, without deviating from our mandate of price stability.

Experts warn of a wage-price spiral.
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Strong identification with the euro

tagesschau.de: You said it – if we look at the whole period of 25 years, then the result of the average inflation rate is very impressive. If we just look at the past few years, that’s not the case. Are you and the Governing Council disappointed that this situation has arisen?

Lagarde: The whole world has experienced an unbelievable massive shock. At the beginning of 2020, not so long ago, the economy faltered. Sometimes it stopped completely, many people stayed at home. This came as a significant shock to all of us. The supply side and the demand side were completely disrupted, as was savings and investment.

And then on top of that came the horrific and unacceptable Russian invasion and war against Ukraine, followed by an energy crisis triggered by the Russian government. As a result, prices went up and inflation rose significantly to levels not seen in decades. We had to adjust to this situation very quickly.

And if you ask me if I’m happy with where we are now: No, I’m not happy. I will only be satisfied when we reach our goal, i.e. have inflation of two percent in the medium term. We’re not there yet. But we will make it.

Is inflation here to stay?
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The idea of ​​a common Europe

tagesschau.de: The ECB is a European institution and therefore very important for the idea of ​​a common Europe. To what extent have the ECB and the euro advanced this project?

Lagarde: The European Monetary Union and the European Central Bank, as well as the entire Eurosystem that works with them, have led to a unique identification among Europeans, namely around the euro.

We speak different languages. My German is not very good, your French may not be perfect, but we have the same currency in our pocket. We have the same banknotes, the same coins and we process our payments in the same currency.

In this sense, European unity was created and is real. And she won’t go away. When I ask my children or grandchildren what’s in their small savings accounts, they say: euros, of course. You don’t know any different. And that is an element of a very strong unity among us Europeans. It’s very expensive. We must protect them and take care of them.

ECB supervisors need to do more to ensure banks adequately manage their credit risks.
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“There will continue to be banknotes”

tagesschau.de: Finally, let’s look to the future: Where do you see the main challenges for the ECB in the coming years?

Lagarde: I think we have to keep adapting. We don’t want to give away what we have created. So there will still be banknotes. But we must carefully consider what happens next. And when, like so much else, we enter a digital age, let alone an artificial intelligence-influenced society, which I think also has threatening sides, the euro and central bank money must be ready for it.

That is why we are working really hard to be able to deliver a digital euro if needed and to make sure that there is no other currency in the world that takes the place of the euro and there is no other institution that takes the place of the European central bank occupies. Because it is an element of European sovereignty.

The interview was conducted by Klaus-Rainer Jackisch, Mr.

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