In the modern fairy tale Alice in Wonderland, the girl Alice falls down a rabbit hole after going after a talking white rabbit. After a long fall, she ends up in a fairytale world, where she experiences all kinds of amazing adventures before waking up in the normal world. Like Alice, the European Central Bank (ECB) fell into a monetary hole some time ago, where the bank is experiencing quite a few absurdities.
Just like Alice, the European Central Bank (ECB) fell into a monetary hole some time ago, where the bank is experiencing quite a few absurd things. However, the moment of awakening still seems far away. This conclusion can be drawn after the appearance of Christine Lagarde, Mario Draghi's intended successor as president of the ECB, in the European Parliament on Thursday, September 5. She was there to answer questions from members of the economic and monetary committee.
Will policy differ?
Since she is appointed for a period of 8 years, the relevant question is how likely it is that ECB policy under Lagarde will deviate from that under Draghi. After her performance in the European Parliament, something can be said about this with more certainty. In short, she continues Draghi's line. Lagarde has not placed any criticism on the ECB policy under her predecessor. In fact, she praises it. So: more of the same.
What she did say is that the ECB has not reached a floor with its policy rates at current levels. In other words: those interest rates, which are now 0% and -0,4%, can be lowered even further. Whether Lagarde uses the space to further lower interest rates depends on whether she is a central banker who leans towards lower or higher interest rates. Is she a dove or a hawk? To describe it in familiar terms.
No fewer than three questions gave Lagarde plenty of opportunity to show her feathers clearly. These are: 1. How does it view the criticism that ECB policy has negative side effects? 2. Under what circumstances will the bank increase interest rates? 3. What about the timing and sequence of normalization of the bank's policy?
Monitor side effects
Lagarde says it is important to keep a close eye on negative side effects of the measures taken in the future. These will be fun conversations with the common man. Lagarde says he wants to do this with the ECB, because the bank works for the general public. However, a large part of those 'ordinary people' are not concerned with the question of whether these negative side effects will occur, but have been complaining for a long time that those side effects have already occurred and overshadow the positive ones.
In response to criticism of the low interest rate policy, Lagarde does not go further than some well-known platitudes. About the ECB's primary objective that this policy has prevented deflation and stimulates growth. While that may all be true, it speaks volumes that she hasn't even bothered to say she understands the criticism. To her it is apparently nonsense and nonsense.
This also contains an important clue to the modus operandi of the Lagarde-ECB. If you just claim that monetary measure is worse off, then apparently everything is allowed. “The ECB's unconventional measures can be extended and expanded if necessary,” Lagarde said.
Policy standardization is not an issue
When asked about the timing and sequence of policy normalization, Lagarde limited himself to saying that policy normalization is not on the agenda at the moment. Fine, but all things considered, such a response is unworthy of a central banker. It implies disdain for parliament not to look further into the future and indicate how policy normalization can proceed. Unless she believes that the policy no longer needs to be normalized.
However, what I liked best was her answer to the question under what conditions the interest rate can increase. The interest rate changes 'should not become a source of disruptive effects.' Dear Mrs. Lagarde, those are interest rate changes! And certainly increases, always and especially if they come after a decade of interest rate cuts or 0% interest! If interest rate increases are not allowed to have too much effect (the criterion becomes in the decision whether or not to make borrowing money more expensive), then interest rate increases in the euro zone are not expected for a very long time.
All in all, it looks like we will be dealing with an ECB president until 2027 who will not break the trend with the Draghi era. Alice in Wonderland falls into the genre of absurdist literature, a form of literature in which characters and situations are described that have nothing to do with reality. I fear that Lagarde will take us into a monetary wonderland, in which all absurd situations and measures are reality.