For Christine Lagarde, it was the moment to stamp her authority on the European Central Bank – and she blew it. Back in 2012, Mario Draghi announced his arrival at the ECB with his now famous “whatever it takes speech”: a commitment to use all the weapons at the bank’s disposal to halt a run on Italian and Spanish bonds that was threatening the existence of the eurozone.
The serious economic repercussions from Covid-19 provided Lagarde, the former head of the International Monetary Fund, with the opportunity to do the same. Two other leading central banks, the US Federal Reserve and the Bank of England, had already responded aggressively to crashing share prices and the intensifying risk of recession. Now, the markets assumed, was the time for the ECB to do the same.
Lagarde disappointed on two counts. Firstly, she committed a cardinal sin of central banking: failing to deliver as much as the markets had been expecting. The ECB package of support for businesses, banks and households was clever and technical but ultimately underwhelming. It lacked any sense of shock and awe.
To make matters worse, Lagarde then committed a gaffe at a later press conference, where she said it was not the job of the ECB to close bond spreads. The bond spread is a gauge of the market perception of how sound government finances are across the eurozone. After Draghi’s “whatever it takes speech, the bond spread between German and Italian bonds narrowed markedly. Within minutes of Lagarde’s ill-judged remark, it widened as Italian bond yields shot up.
To be fair to Lagarde, she was trying to make the point that there were limits to how much the ECB could do in response to Covid-19, and it was now up to national governments and the European Commission to stimulate activity through tax cuts and spending increases.
It is a profound structural weakness of the eurozone that it lacks the institutions that would allow the sort of coordinated monetary and fiscal response that the Bank of England and the Treasury delivered for the UK this week.
But Lagarde has made a bad situation even worse.