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Lagarde calls on European governments to launch fiscal stimulus

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Christine Lagarde has called on European governments to co-operate more closely over fiscal policy to stimulate the stuttering eurozone economy, in her first public appearance as president-elect of the European Central Bank.

Ms Lagarde, who is set to succeed Mario Draghi at the Frankfurt institution this autumn, made the comments in an address to the European Parliament on Wednesday as part of her nomination process.

Telling MEPs that “central banks are not the only game in town”, Ms Lagarde urged richer eurozone governments with low deficits to bolster their crisis-fighting capacities by spending during downturns. “I’m not a fairy”, she said. 

In remarks aimed at rich economies like Germany and the Netherlands, she said governments who “have the capacity to use the fiscal space available to them” should spend on improving their infrastructure.

“It’s a majority of countries in the euro area”, she said. “There is clearly co-operation to be had if all the institutions in Europe — and the eurozone in particular — want to respond to the threat of populism.”

Noting that she had been present when Mr Draghi promised to do “whatever it takes” to save the eurozone at the height of the 2012 sovereign debt crisis, Ms Lagarde said: “I hope I never have to say something like that — I really do — because if I do it will mean that other economic policymakers have not done what they have to.” 

Her comments come ahead of an expected further wave of monetary loosening by the ECB next week, which could include cutting interest rates further into negative territory and restarting its €2.6tn bond-buying programme.

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Other major central banks — including the US — have also recently moved to loosen monetary policy. This has prompted some economists to warn that central banks are running out of tools to fight recessions as interest rates are already at record low levels. Ms Lagarde’s comments reflect broader pressure on governments in Germany and elsewhere to take some of the burden by launching fiscal stimulus measures.

The eurozone’s attempts to create a common budgetary instrument for crisis times -pooling money in a central pot to help out troubled economies — have been beset by divisions.

Countries led by the Netherlands have pushed back against the initiative, which was championed by Emmanuel Macron. The budget does not yet have a size or any spending priorities. 

Ms Lagarde said the “embryonic” eurozone budget would not be enough to help stabilise the bloc during a major downturn and urged EU policymakers to bolster the instrument. 

European Commission officials are also exploring ways to revamp the EU’s stability and growth pact budget rules, which have been criticised for being overly complex and forcing struggling economies into austerity.

Ms Lagarde, who — if she wins approval by European parliamentarians — is due to take charge of the ECB on November 1, signalled that she intended to continue Mr Draghi’s policies. “Highly accommodative monetary policy” was still necessary to respond to near-term challenges for a prolonged period, she said.

During a two and a half-hour hearing with MEPs, Ms Lagarde promised to make tackling climate change a macroeconomic priority at the ECB. The central bank could “direct” its corporate asset purchases towards green bonds once the EU and other regulators have agreed on a common framework for green finance she said. 

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The former head of the IMF, who previously served as French finance minister, said she supported calls for the ECB to review its monetary policy strategy, including clarifying its inflation target of close to, but below, 2 per cent.

“What is the meaning of close to, but below 2 per cent — are we talking about 1.6 or 1.9 [per cent]? There is clearly flexibility in between” she said. 

Ms Lagarde also threw her weight behind radical plans floated by Mark Carney, governor of the Bank of England, for the world’s central banks to create a reserve digital currency. Mr Carney’s ideas, laid out in a speech last month at Jackson Hole, were worth “exploring” said the incoming ECB chief.

Via Financial Times

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