Yeah, we understand. Mario Draghi has also warned. But Christine Lagarde, as the new head of the European Central Bank (ECB), seems to bring a little more clarity to the matter, at least in her words. The warning seems clearer and louder! The only question is: are the politicians in Brussels, Berlin, Paris, Rome etc. even listening? And do they even want to listen? But to the point. Yesterday Christine Lagarde spoke before the EU Parliament. Part of the speech was also monetary policy.
We all know it. The ECB likes to praise itself. And so it did yesterday. With its measures (abolishing interest rates, printing money) it has given a strong boost to the economy in Euroland. With an unemployment rate of 7.4%, it is currently even as low as since 2008, said Lagarde (here you can find the whole speech text). Already on Friday Mrs Lagarde made an appeal to a committee of the EU Parliament. And today then the speech directly in the parliament.
The ECB’s monetary policy (interest rates, bond purchases, providing liquidity to banks) cannot and should not be the only measure (our comment: to support the economy in the Eurozone). According to Lagarde, the longer the ECB’s measures are in place, the greater the risk that the side-effects will be more noticeable. The ECB is fully aware that the low interest rate environment has an impact on savings, asset valuation, risk appetite and house prices. And they are closely monitoring possible negative side-effects. This is to ensure that they do not outweigh the positive effects of ECB policy on credit conditions, job creation and wage incomes.
ECB is aware
This makes (we think) once again clear: the ECB knows very well that it is actually acting as an economic government in Europe. This is because the national governments are simply not able to get their way. They wrap it all up as monetary policy to supposedly keep prices stable. But it is just too obvious. The aim is that the national governments should stimulate the economy with their measures (more investments, economic development etc.) in order to relieve the ECB. And so that the ECB can one day change its monetary policy again? Here Mrs Lagarde in extracts in the text:
But monetary policy cannot, and should not, be the only game in town. The longer our accommodative measures remain in place, the greater the risk that side effects will become more pronounced. We are fully aware that the low interest rate environment has a bearing on savings income, asset valuation, risk-taking and house prices. And we are closely monitoring possible negative side effects to ensure they do not outweigh the positive impact of our measures on credit conditions, job creation and wage income. Such reflections played a role, for example, when the Governing Council decided to introduce a new regime for remunerating the excess reserves held by banks with the Eurosystem.
Other policy areas – notably fiscal and structural polices – also have to play their part. These policies can boost productivity growth and lift growth potential. And thereby underpinning the effectiveness of our measures. Indeed, when interest rates are low, fiscal policy can be highly effective. It can support euro area growth momentum, which in turn intensifies price pressures and eventually leads to higher interest rates. The European Green Deal and national initiatives to finance the ecological transition could add to these dynamics by contributing to stronger and more sustainable growth.