Zanny Minton Beddoes, Editor-in-Chief of The Economist newspaper, interviews Christine Lagarde, President of the European Central Bank (ECB) about the EU’s pandemic response and more. Frances Cowell reports.

Christine Lagarde describes herself as a perennial optimist. Right now, with new variants of Covid-19 and mass vaccination programmes, even where they appear to be going well, still to make a difference to most people’s lives, she needs to be.

Given that the job of a central banker is to see problems coming and to head them off, that optimism may seem odd, but Ms Lagarde is in charge of, arguably, the biggest economy in the world – or at least its monetary system, so what she says matters.

She starts by batting off some now-hackneyed criticisms of the EU and its handling of the Covid-19 crisis.

The vaccine roll out

The first is, of course, delays in vaccine deliveries. She reminds us that the EU was one of the first group of governments to finance vaccine development, notably its part funding of the Pfizer-BioNtech vaccine. Hit early and harder than nearly any other big economy, when much less was known about the virus than is today, the EU took quick and decisive action to contain the pandemic. With impressive leadership and resolve, it cut short destructive competition between member states for protective equipment and testing kits, and encouraged sharing of resources while leaving responsibility for health care in the hands of national governments, where Europeans want it.

EU leaders were also quick to get moving on a giant stimulus package, taking the historic and hitherto unthinkable decision to assume collective debt so as to provide loans and grants to the most severely stricken members at the lowest possible cost. The EU showed that it is stronger than the strongest of its member states.

€750 billion may seem puny compared to the $ trillion or so invoked in the US – until you consider that this is in addition to massive stimulus action by individual members. Add that all up and the enormity of the action – economically and politically – becomes clearer, putting the post-WWII Marshall recovery plan in the shade, even after adjusting for inflation.

Sitting alongside and much less known than the recovery fund is the EU’s Pandemic Emergency Purchase Programme, a flexible and temporary €1.8 trillion initiative in which the ECB buys bonds to head-off failure by otherwise healthy organisations, thereby saving jobs. €800 billion has so far been deployed, so there is still plenty of firepower, with more to come if necessary and Ms Lagarde was at pains to stress that fiscal support needs to continue until economies gather momentum toward recovery. That applies to all economies, not just in Europe.

So the EU is not sitting on its hands. But let’s not pretend that Covid-19 isn’t damaging people’s lives. It may seem very un-central-bankerly, but Ms Lagarde sees this as a golden opportunity to do something about arguably the world’s two most pressing pre-pandemic problems: inequality and climate change.

Like many of us, Ms Lagarde worries that the pandemic and the necessary economic shut-downs are inflicting disproportionate harm on poorer people, thereby worsening inequality of income, wealth and, worst of all, of opportunity. The EU is hardly alone there, and in fact is much less unequal than most other global regions, rich or small, having already done much more than most to protect the most vulnerable. True, specific initiatives mostly rest with national governments, but the ECB has an interest too, as Ms Lagarde points out.

But, aren’t central bankers supposed to take care of price stability – inflation and interest rates and leave everything else to treasury departments? What can a central banker do about inequality, and why would it care about climate change?

Opening the bottleneck

Start with interest rates. Ms Lagarde notes that one of the worst consequences of inequality is that so many people can never hope to own their own homes – inequality between generations, as she puts it. A central banker cares about that a lot because it can lead to economic imbalances and bottlenecks in, for example, labour supply – all of which push up prices and inflation artificially. The ECB can help by keeping interest rates – and therefore the costs of borrowing to buy a home – low.

The EU leads the world in using this crisis to boost the shift toward a more climate-friendly economy, and Ms Lagarde cites a recent survey in which 60% of Europeans are reportedly in favour of its climate initiatives. Holding it back is international coordination on this front, but she hopes the new management in Washington might help, although its still too soon to tell.

But isn’t this just a bromide? Why would a central banker care about climate change? Ms Lagarde makes very powerful points when she notes that extreme climate conditions affect economic and monetary conditions, for example, when an unusually warm winter reduced the flow of the Rhine, slowing goods transport and pushing up freight costs. The ECB also holds a big portfolio of bonds and is massively exposed to collateral susceptible to climate-related risks.

The optimist looks for positives in the worst situations, and often finds them, including with Covid-19. Ms Lagarde cites the reduction in climate-damaging airline travel, as video-conferencing proves its usefulness. And when airline travel does recover, it will be in much cleaner aircraft. Regular commuting, too, will probably never regain its pe-pandemic levels, as people who can, will almost certainly continue to telecommute, at least part of the time.

Imaginary currencies

Asked about Bitcoin, Ms Lagarde thinks it very unlikely that the ECB will ever include it in its portfolio and doubts that any central bank will ever hold it as a reserve currency. After all, its not really a currency: it may serve, more or less, as a unit of exchange in some contexts, but, given the wild gyrations in its monetary value, it is unlikely ever to serve the other two functions of a currency: as a store of value or as a viable accounting unit. That said, she thinks that the ECB’s use of digital currency is closer than most people think: having already completed a period of consultation, it is now addressing concerns related to privacy and how to gain consumers’ confidence.

Is Ms Lagarde’s optimism infectious? Probably not as infectious as Covid-19, but she is convincing when she talks a central banker’s interest in, and the contribution it can make to, addressing our most pressing problems.

Frances Cowell
Australian-born and European by adoption, Frances Cowell writes and speaks at conferences about investment risk and governance, financial market stability and business ethics in financial markets – and the implications for the wider political economy. She believes Europe must urgently assume the lead in protecting and preserving liberal democracy, the rule of law and the multi-lateral institutions and alliances that it depends on.

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