Global Uncertainty Could be Europe’s Moment of Opportunity: Lagarde

The Euro Area economy faces a global environment that is marked by uncertainty, but it can also be a moment of opportunity if the bloc approaches the challenge in the right way, Christine Lagarde said in her first speech as ECB President at the Frankfurt European Banking Congress. Ms Lagarde noted that the best way to respond to the challenges presented by trade tensions and technological disruption is to invest in the bloc's future, strengthen the common institutions and empower the world’s second largest economy, while called on European governments to boost public investment.
ECB | Joana Ferreira | 11/22/2019 10:33:15 AM
Excerpts from The future of the euro area economy, Speech by Christine Lagarde, President of the ECB, at the Frankfurt European Banking Congress:

The first is monetary policy, which I start with because it is my area of responsibility and which will undergo a strategic review due to begin in the near future.

The ECB’s accommodative policy stance has been a key driver of domestic demand during the recovery, and that stance remains in place. As laid out in the ECB’s forward guidance, monetary policy will continue to support the economy and respond to future risks in line with our price stability mandate. And we will continuously monitor the side effects of our policies.

But it is clear that monetary policy could achieve its goal faster and with fewer side effects if other policies were supporting growth alongside it.

One key element here is euro area fiscal policy, which is not just about the aggregate stance of public spending, but also its composition. Investment is a particularly important part of the response to today’s challenges, because it is both today’s demand and tomorrow’s supply.

Completing the digital single market, the capital markets union and the single market in services can provide the impetus Europe needs to launch new and innovative firms and to spread new technologies faster around the union. These are the building blocks of the European economy of the future.

And the projected gains are significant: new studies find that the full implementation of the Services Directive would lead to gains in the order of €380 billion, while completing the digital single market would yield annual benefits of more than €170 billion.

This growth dividend would in turn help close the circle with public investment by ensuring that public debt is sustainable.

Finally, empowering our internal market also means completing our Economic and Monetary Union. The design of EMU – and in particular the balance between risk reduction and risk sharing – is closely linked to the propensity to save and spend in Europe.

On the one hand, a monetary union focused too much on risk sharing is likely to produce moral hazard and too little saving, which harms the union as a whole. But on the other hand, prioritising risk reduction alone is likely to lead to the opposite problem: excess saving and fragile growth as countries are forced to self-insure by running persistent surpluses.

The solution to the famous “paradox of thrift” is institutions. Good institutions exist to ensure that people are not forced into actions that are rational at the individual level but self-defeating collectively.

So, completing EMU is about finding the right trade-off: enough protection against moral hazard to discourage under-saving, but enough mutual insurance to prevent over-saving. In this way, we could tap into new sources of growth that would otherwise be suppressed. And, in the spirit of this conference, that would truly represent a “new approach” for Europe.

Global Uncertainty Could be Europe’s Moment of Opportunity: Lagarde