Column chart of Quarter on quarter change in GDP (%) showing Eurozone economy faces sharpest contraction on record

Christine Lagarde’s learning curve: ECB boss on ‘brutal’ coronavirus crisis

When Christine Lagarde replaced Mario Draghi as president of the European Central Bank in November, many economists assumed her Italian predecessor had exhausted most of its monetary policy toolkit to keep the eurozone economy afloat.

As the first ECB president with no prior economics training or monetary policy experience, Ms Lagarde was expected to focus more on using her political experience to cajole governments into boosting fiscal stimulus measures in order to ease pressure on the central bank.

Instead, the coronavirus pandemic sent the global economy into a tailspin, dragging the eurozone into its worst postwar recession. It was a baptism of fire for Ms Lagarde and it put the ECB firmly back on the front line of crisis-fighting.

“It’s been a very steep learning curve, no question about that,” Ms Lagarde told the Financial Times in a video interview. “We tried to respond as fast and as efficiently as we could, in a situation that was deteriorating very brutally.”

The 64-year-old Frenchwoman has drawn on the lessons she learnt in navigating the 2008 financial crisis as her country’s finance minister and then helping to negotiate the 2012 Greek bailout that avoided a eurozone break-up when she was head of the IMF.

“I’ve been through quite a few crises,” she said. Though she does not want to be labelled as “a veteran of all crises”, she added: “This one (with) Covid-19 was very, very brutal . . . we saw a quasi seizure of the financial markets.” 

But when the pandemic first hit, Ms Lagarde made an early communications blunder that only intensified the market sell-off. At a press conference in March, she said it was not the ECB’s role to “close the spread” in sovereign debt markets — referring to the gap between Italian and German bond yields that is a key political risk indicator for the eurozone. Her comment triggered the biggest single-day fall in Italian bond prices in a decade. 

The whole set of relationships and business models of countries will have to be revisited

She quickly corrected her remarks and has since overseen a robust crisis response by the ECB, which flooded the economy with vast amounts of ultra-cheap money that has so far prevented the pandemic from spiralling into a fully fledged financial crisis. The central bank has ramped up its bond-buying and lent to banks at deeply negative rates.

In an echo of Mr Draghi’s pledge during the eurozone debt crisis to do “whatever it takes”, Ms Lagarde promised there would be “no limits” to the ECB’s efforts to defend the euro.

The central bank’s actions have “demonstrated their efficiency, their effectiveness and were just right in responding to the situation”, she said, adding that markets had “calmed down enormously”. This week, eurozone government borrowing costs fell back to levels last seen before the coronavirus crisis.

As economists debate the shape of the recovery — from V-shaped to L-shaped — Ms Lagarde rejected “this alphabet soup that we are hearing about” and warned that the recovery would be constrained, uncertain and fragmented as countries rebuild at different speeds.

She appeared to confirm expectations that the ECB will hold off on fresh loosening measures at its monetary policy meeting next week, saying: “We have done so much that we have quite a bit of time to assess (the incoming economic data) carefully.”

The day after next week’s ECB meeting, EU leaders will discuss a planned €750bn recovery fund to support countries hit hardest by the pandemic. The plan faces opposition from some countries over the idea of distributing most of the money as grants rather than loans.

Ms Lagarde said the fund was a “real game-changer . . . if a good chunk of it is in the form of grants, rather than loans” because it would “establish a degree of unity and solidarity to benefit those that have suffered most”.

Economists fear that Europe will have a two-speed recovery, as stronger northern countries pull away from their more indebted and tourism-dependent southern neighbours — once again exposing cracks in the eurozone’s incomplete monetary union.

This concern was raised by the European Commission this week, when it cut forecasts for the Italian, French and Spanish economies while upping its forecast for German gross domestic product.

“It’s always a risk that going into the crisis there was that degree of divergence and that coming out of the crisis that divergence (persists) and is possibly worsened,” said Ms Lagarde, stressing the need to “re-establish a level playing field” with the recovery fund.

Column chart of Monthly net purchases, €bn showing ECB ramps up stimulus efforts

The ECB president forecast that the pandemic would leave a lasting impact on global trade, which could pose a challenge for export-dependent countries such as Germany. “The whole set of relationships and business models of countries will have to be revisited,” she said. “Countries cannot be exclusively driven and supported by trade and trade only.” 

Given the impact that the pandemic has had on global supply chains, Ms Lagarde said: “It may well be that this particular crisis will transform our perception of globalisation, proximity, short supply chains (and) control over one’s destiny.” 

She warned that Europe’s economic woes could be compounded if the UK leaves the EU without a trade deal at the end of the year, adding: “How one will reinforce the other I don’t know, but they are heading in the same direction, which is not an easy one.”

Despite the economic shock from the pandemic, Ms Lagarde is still determined to “explore every avenue available in order to combat climate change”, indicating the ECB could be the first central bank to use its €2.8tn bond-buying scheme to pursue green objectives.

Looking ahead, Ms Lagarde worries about a surge in unemployment when governments wind down furlough schemes that have kept more than 40m people across Europe in jobs. 

“Are we going to have a co-ordination between the phasing-out of unemployment benefits and furlough schemes and a pick-up of activity?” she asked. “Or are we going to face a gap in between, which would then see unemployment numbers rise significantly? That’s really one of the big issues.”

The pandemic has hit the most vulnerable members of society hardest, and as one of only two female members of the ECB’s 25-member governing council, Ms Lagarde is particularly worried about its disproportionate impact on women.

“In times of natural disasters, pandemics, earthquakes and the like, women are the first victims,” she said. “I do think, when you look at those sectors that are going to be most affected, whether it’s in retail, whether it’s in the hospitality business . . . there are lots of women workers and those jobs will be first gone.”