Interview with Redaktionsnetzwerk Deutschland

Interview with Christine Lagarde, President of the European Central Bank, conducted by Andreas Niesmann and Tim Szent-Ivany

11 February 2022

Madame Lagarde, do you still do your own grocery shopping?  

Answer: Of course I buy my own groceries. And I also pay my own gas and electricity bills.

So you know the feeling of everything becoming more expensive. 

I certainly do. I see that prices are going up and I am by no means indifferent to it. There are members of my family whose business is hampered by the rise in energy prices. That concerns me very much.

You are the guardian of the euro. Why don’t you do something about it?

You are right in saying that the ECB is the custodian of the euro. Our task is to maintain price stability. If that is in danger, we will take action. But we have to ask ourselves when is the right time to do so. We have to consider that the full impact of any decision we make is generally not felt until nine to 18 months later.

So shouldn’t you take action all the sooner? Inflation in the euro area is at a record high…

Hold on! We first need to understand the source of the rise in prices. Just over 50 per cent of it can be attributed to the surge in energy prices. Oil, gas and electricity have become more expensive. And as we import a lot of energy, these prices are, to some extent, beyond the sphere of influence of our economy. The second main factor driving up prices is supply bottlenecks: shortages of microchips, container jams, disrupted supply chains. Let me ask you: what can the ECB do about that? Can we resolve supply bottlenecks? Can we transport containers, lower oil prices or pacify geostrategic conflicts? No, we can’t do any of that. 

You could fight inflation by raising interest rates.

That would not solve any of the current problems. On the contrary: if we acted too hastily now, the recovery of our economies could be considerably weaker and jobs would be jeopardised. That wouldn’t help anybody. 

So your attitude is still wait and see?

No, we have already begun to take measures. In March we will discontinue the pandemic emergency purchase programme. The ECB will reduce the overall volume of its net asset purchases. Ending net asset purchases is a precondition for increasing interest rates at a later point in time.

When do we reach that point in time? 

We currently see inflation figures increasing and we are taking that into account in our projections. Inflation may turn out to be higher than we projected in December. We will analyse that in March and then take it from there. 

Why did the ECB fail to foresee the problem of high energy prices?

We were not the only ones. Just under two years ago there was so much oil that tankers were lined up in the ports. And buyers were actually given money if they purchased oil. This collapse in demand was unprecedented – as were, shortly afterwards, the recovery in demand and the geopolitical upheavals, which have driven up prices. In truth, neither of these movements could have been rationally anticipated.

How can we be sure that you have got it right this time with your forecast that inflation will be a passing phenomenon?

Please don’t get me wrong: high energy prices are not a temporary phenomenon; they will be with us for some time to come. But the price level is already very high. The oil price has gone up from less than €20 in April 2020 to €90 per barrel and it is highly unlikely that it will continue climbing at that pace. So even if only for that reason, inflation will slow down.

With respect, inflation in January stood at 4.9 per cent compared with the same month of the previous year. At 5.3 per cent, it was only a little higher in December – particularly when you consider that the temporary reduction in VAT is no longer distorting the statistics. 

Inflation will stay relatively high in the coming months. However, I am confident that it will fall back in the course of the year. 

Does that mean there is no need to act?

We need to carefully analyse how the high energy prices are affecting other prices. Expensive energy pushes up the price of fertiliser, expensive fertilisers push up the price of food, and so on. We will scrutinise that closely in March, and in every subsequent meeting in the coming months. We will act if necessary. But all of our moves will need to be gradual.

As recently as December, you deemed an interest rate increase this year to be “very unlikely”. Have you now struck out the word “very”?

We have not yet reached the goal of durably stabilising inflation at our target of two per cent over the medium term. But we are making progress and getting closer to it. That would allow us to gradually withdraw some of our interventions. But that can only be done step by step. I would compare it to preparing to take a turn when driving a car. Nobody does that at full speed in fifth gear; you take your foot off the accelerator and shift down the gears in stages. That’s exactly what we’re doing now. As soon as the pace is right and the situation allows it, we will turn the wheel.

Other central banks, such as the Federal Reserve in the United States and the Bank of England, have taken the turn – i.e. put up interest rates − long ago, or have announced that they would do so. Why are you so hesitant to act? 

The situation in the United States or the United Kingdom cannot be compared to the euro area. The US economy is overheated, whereas our economy is far from being that. That’s why we can – and must – proceed more cautiously. We don’t want to choke off the recovery.  

On the back of your monetary policy, the markets have rushed from one record high to another. At the same time, people who wanted to save for their retirement through life insurance policies have lost tens of thousands. Why are the sensitivities of investors more important to you than those of small savers? 

I’ve been ECB President for two years now, and within three months of me taking office the coronavirus (COVID-19) pandemic broke out – with a huge impact on the economy. Amid this enormous crisis we made money available so that families and firms could continue to access loans. This meant that thousands of insolvencies were avoided and millions of jobs were saved. We gave crutches to the economy so that it could continue on its path. We will soon remove the crutches, because firms can once again operate unaided.  

Was there no alternative to the policy of low interest rates?

We already had negative interest rates when the coronavirus crisis hit. Raising interest rates would have driven the economy straight into the wall. We would have ended up with a financial crisis on top of the pandemic and the economic crisis. But we managed to avoid that. Now we can adjust – calmly, step by step – our monetary policy instruments. And when the economic data allow it, we will do it.

Everyone is talking about “greenflation” – the fear that the shift towards renewable energy is fuelling inflation. Are you also worried?

No. The current impact of decarbonisation on prices is minimal – be it from emissions trading or carbon taxes. We must complete the green transition of the economy to prevent the Earth from turning into a frying pan.

Those who are warning about greenflation do not just mean carbon prices, but also the prices of the resources that are needed for the green transformation: silicon, nickel, copper and others.

The impact that the prices of these specific resources have on general price developments is small, at least at the moment. I think that the greenflation debate is exaggerated.

What do you make of the threat of second-round effects, meaning higher collective wage settlements as a result of the price increases? The head of the chemical trade union IG BCE, Michael Vassiliadis, has said that protecting his members from inflation is the main goal of the next round of wage negotiations.

First of all, I think it’s understandable and legitimate for trade union leaders to demand higher wages to maintain workers’ purchasing power in these circumstances. Wage developments are generally linked to productivity increases and medium-term inflation expectations, which are currently close to our inflation target of two per cent. Only if the wage settlements were to significantly and persistently exceed these measures could this accelerate inflation. But we are not seeing that at the moment at all. In most euro area countries, including Germany, wage demands are very moderate.

Let’s move on to a different topic. The ECB wants to redesign euro banknotes by 2024. The current ones show European architecture. Why is that no longer appropriate?

First of all – the euro is popular, not only in the countries that already use it. People have confidence in the single currency, which is why more countries want to join the euro area – Croatia in 2023, Bulgaria in 2024. The euro is popular internationally, too: the second-most important currency in the world after the US dollar is not the Japanese yen or the Chinese yuan – it is the euro. This is yet another reason why we should really think about what we want to showcase as Europeans.

What’s wrong with architecture?

Nothing. But have you ever looked closely at the banknotes? The structures shown on them do not exist in reality. Twenty years after the euro was introduced, it is time we asked ourselves whether there is something Europeans can identify with even more. Something we all see as typically European, something that unites us.

What do you have in mind?

Personally, I can envisage portraying famous Europeans: Leonardo da Vinci, Ludwig van Beethoven, James Joyce. I have fond memories of the five franc banknote showing Victor Hugo, which was in circulation in France 50 years ago. But I’m sure there are other ways to show European identity, for example with a famous painting or an architectural monument.

Can you imagine different countries having banknotes with different motifs, as is the case with coins?

This is just my personal opinion, as we have not yet discussed it at the ECB, but redesigning the banknotes is a good opportunity to show unity. This is what the European project is about – transcending borders to strengthen the economy and prevent war together. It would be a mistake to start reintroducing national differences now. We should identify things that unite rather than divide us.

The ECB is working on another project, too: the introduction of a digital euro. How would people benefit from that?

In some countries, most transactions are now cashless, and Europeans like to make payments on their computers and smartphones. At the same time, there are private providers trying to establish cryptocurrencies. We need to have an answer to that. We cannot allow users’ personal data to be monetised. Moreover, the technology used in private digital currencies also creates new, alarming opportunities, e.g. for terrorism financing and money laundering. This is why creating a digital euro must be a public project. It also strengthens Europe’s sovereignty.

What do you mean?

Many digital payments are now made using non-European systems, such as Visa, Mastercard or American Express. If you look at the situation around the supply of oil, gas or microchips, you notice the high price of dependence on external suppliers. This is where we lack autonomy. I think that we need to be just as cautious in the area of finance.

Is setting up a digital payments system part of the ECB’s tasks?

Yes, but the decision will be made together with the EU Member States and EU institutions. In any case, the ECB will remain the guardian of the euro, whether it’s digital or analogue. It will still be our job to supply cash. Even if we do get a great new digital euro, banknotes and coins will continue to exist. People are used to cash and are not willing to give it up. This is why I don’t think we need to have a discussion about scrapping cash. I also like having banknotes in my purse. And now they even have my signature on them (laughs).