Lagarde calls for government help in first major ECB speech

Bloomberg

European Central Bank (ECB) President Christine Lagarde called for a new policy mix, saying public investment should be stepped up to ease the burden on monetary stimulus and ensure the region can thrive in an uncertain world.
In her first major speech, three weeks into the job, the new ECB chief said her institution will continue to support the euro-zone economy. But she also said fiscal policy is a key element for overcoming the challenges of changing global trade and declining domestic growth. Minutes after she finished, fresh data showed the current slowdown worsening.
“Twin external and domestic challenges call on us to consider — as Europeans — how we should respond to the new environment,” Lagarde said at a banking conference in Frankfurt. “The answer lies in converting the world’s second-largest economy into one that is open to the world but confident in itself — an economy that makes full use of Europe’s potential to unleash higher rates of domestic demand and long-term growth.”
The size of the challenge was highlighted by purchasing managers indexes, which showed the economy unexpectedly weakened this month, with a downturn in services activity. That suggests a slump in manufacturing, especially in Germany, is starting to spread to other sectors.
That kind of data, which drove the euro lower, is something Lagarde will need to address at her first policy meeting on December 12.
“It is remarkable that she spoke only about responding to ‘future risks,’ even though in our view there is a problem with low inflation and below-potential growth right now,” said Greg Fuzesi, an economist at JPMorgan. “Clearly, the wait for more clarity about the ECB’s thinking goes on.”
Lagarde is picking up where her predecessor Mario Draghi left off. In his final speech, he called for euro-zone fiscal support so that monetary policy isn’t “the only game in town” — a phrase that the new president also used.
With her remarks, the French woman is building on an idea she expressed in Berlin earlier this month, when she urged Europe to overcome its self-doubt and show strength and resolve instead.
“We have a unique possibility to respond to a changing and challenging world by investing in our future,” she said. “All of this would be a game changer, not just for our own stability and prosperity, but for that of the global economy, too.”
Lagarde also said she’ll announce a strategy review of the central bank “in the near future.” That’s a step that may help to heal the divisions that opened up among policy makers after Draghi drove through another stimulus package in his final weeks. She already started building bridges earlier this month by taking the 25-member Governing Council on a retreat to a luxury hotel to discuss their decision-making processes and communication.
Bundesbank President Jens Weidmann, one of the most vocal opponents of the recent package and a longtime critic of the ECB’s bond-buying programme, said at the same conference that he supports such a review. He said it must consider the side effects of loose policy. After years of unprecedented stimulus fears are growing over consequences such as rising real-estate prices and excessive risk-taking by investors in search of higher yields.