I devour every speech and interview given by ECB board members, relishing each word. Yet, despite my enthusiasm, Christine Lagarde’s turns at the podium often leave me cold. Her discussions frequently veer away from monetary policy, straying into territories like climate change and other non-financial realms, seldom touching on the critical issue of money growth—a topic history deems crucial.
However, when Lagarde shifts her focus to broader economic narratives, her words gain substantial weight. A recent example was her address at Yale University in the U.S., where she spoke eloquently about the seismic shifts reshaping our world. Non-Western nations are rising in prominence, yet globalization is retreating under the strain of global tensions.
During her speech, Lagarde posed the question, “How do we ensure progress in this new world?” Her response was straightforward and compelling: foster new ideas and innovations through the right environments. According to the ECB president, such environments are characterized by strong currencies, low inflation, robust public finances, and open trade—elements that foster low interest rates, stability, and the cross-pollination of ideas.
Countries like the Netherlands exemplify this successful formula, having sustained it across decades, even centuries. This blueprint, while not easy to replicate, offers a clear path for others to follow. But here, we must pivot to focus squarely on the role of central banks, particularly in this ECB Watch column.
Pivotal role
Central banks play a pivotal role in shaping these ideal conditions by controlling inflation. The most significant contribution the ECB can make, as Lagarde noted, is to maintain low inflation at any cost. Yet, here’s where reality bites. In her very speech, the term ‘inflation’ scarcely appears, mentioned just once in passing, related to America’s Inflation Reduction Act.
Meanwhile, inflation rates in the Eurozone remain troublingly high, and signs are emerging that monetary devaluation may stabilize at uncomfortably elevated levels. External pressures like rising oil prices and other structural factors suggest that high inflation could persist. Despite these challenges, the ECB appears poised to cut interest rates significantly.
This move seems counterintuitive to creating an environment conducive to innovation and new ideas. If I had been in the audience during Lagarde’s U.S. speech, I might have echoed a distinctly American sentiment: “Practice what you preach!”
Edin Mujagić, chief economist at OHV Asset Management and author of “Turning Point 1971,” provides a monthly analysis of European Central Bank monetary policy for Investment Officer.