Christine Lagarde: ECB must adapt to changing world

In POLITICO interview, central bank chief says strategy review will leave 'no stone unturned.'

Christine Lagarde: ECB must adapt to changing world

FRANKFURT — Christine Lagarde is working on a version of the European Central Bank that’s more like herself — not bound by traditional views of central banking.

In an interview at her office on the 40th floor of the ECB’s south tower, the bank’s president said her institution was “riveted” to its core mission of keeping prices stable but must also reflect a changing world.

Speaking as the bank puts the finishing touches to its first strategy review in nearly 20 years, Lagarde made a passionate plea for the ECB to adapt to new challenges, such as the fight against climate change and the rise of digital currencies. She also said the bank had to get better at listening to — and communicating with — European citizens.

“There had been no strategy review since 2003 and I thought it was overdue,” said the 65-year-old Frenchwoman, who took the helm of the ECB in November 2019. “When we started this strategy review, I said we would leave no stone unturned.”

Lagarde’s appointment as ECB chief ruffled feathers as she had never previously been a central banker, although she had earned a formidable reputation as a lawyer, French Cabinet minister and head of the International Monetary Fund.

But Lagarde made clear she sees her background as an asset, not a disadvantage. Asked whether she thought not spending her career in central banking made it easier for her to take a broader view, Lagarde said: “I like to think so but maybe others don’t. If I didn’t think so I would be very unhappy every morning when I wake up and I come here.”

Despite being a newcomer to the ECB, Lagarde quickly absorbed its mantra. But, she said, that should not mean being closed to the way the world is evolving.

“Price stability, price stability, price stability … I must have heard it 1,000 times in my first couple of months. So you are riveted to that. But at the same time, the world changes around you,” she said. “And you have to constantly be attentive to the interactions and the changes that are occurring.”

Lagarde hopes that the new strategy will address new dimensions such as climate change and the possibility of a digital euro and serve as proof that that the ECB is able to reinvent itself.

“It will be an indication of the fact that the ECB is attentive and capable of adjusting and adapting. Climate change is an example, digital euro is another one. We are riveted to our price stability objective, and we are the custodian of the euro, but we have to be attentive to the big developments around us as well.” 

Lagarde has been accused of focusing too much on issues such as gender equality and climate change rather than the core business of monetary policy. She faced particularly harsh headwinds after a communication gaffe in a March 2020 press conference, right when the coronavirus crisis came to a head. Her remark on the ECB’s position on government bond spreads raised doubts that she was willing to do “whatever it takes” as her predecessor Mario Draghi had pledged and sent markets into turmoil.

The new president quickly walked back her remarks and now has her own way of expressing unwavering support for the single currency.

“Our commitment to the euro has no limit,” she said.

“That’s what I said. And that’s what I tweeted on the night of 18 March 2020, when the Governing Council decided the pandemic emergency purchase program (PEPP),” Lagarde said, referring to the bank’s flagship measure to support the eurozone economy through the pandemic.

“I think it was very explicit and those in the know understood the message very well … And I think we delivered. Not to brag about it but we sure delivered.”

Draghi was no doubt a magician with markets. “Whatever it takes” will go down in history as one of the greatest verbal market interventions. But his direct line to financial markets never extended to the broader public.

In a sharp contrast to Draghi and the deeply technocratic traditions of the ECB, Lagarde sought the input of the public for the central bank’s strategy review.

The latest Eurobarometer survey showed for the first time that more people trust the ECB than do not. Still, support for the common currency remains significantly higher than for its guardian. Lagarde ascribes the discrepancy to the role the ECB played at the time of the eurozone crisis, as part of the Troika of EU institutions.

“There was this sentiment of abandoned sovereignty — people feeling that they were no longer in control of their destiny, that the ‘men in grey suits’ were coming to dictate the rules, which is a caricature of what was hoped for and expected,” she said. “That may have caused some of this discrepancy between the trust in the euro and trust in the ECB.”

Lagarde said listening to people’s ideas regarding the strategy was helpful. “We had very good questions, such as ‘Why do you want to pursue this 2 percent inflation goal — I’m happy with a zero increase in prices?’ So, it certainly told us that we have to better communicate why we need some inflation and that we have to be more explicit and use less jargon than we did — and still do actually — in our various communication channels,” she said.

“As custodian of the euro, we fight for the citizens but explaining that price stability is a fight for them, that’s sometimes difficult,” she said.

POLITICO’s Johanna Treeck and Florian Eder with ECB President Christine Lagarde | ECB

High on the list of concerns Europeans expressed in the review was the central bank’s current inflation index failing to take housing prices into account, Lagarde said. She recalled some “vivid examples” of people expressing discontent over the massive rise in housing prices pushing up people’s cost of living even as official data pointed to subdued price increases. Lagarde signaled that there had been progress toward including owner-occupied housing prices in the overall index, which is set to push up headline inflation figures, bringing the ECB closer to reaching its target.

Lagarde stopped short of offering more insights into whether the central bank may follow the lead of the U.S. Federal Reserve and switch to average inflation targeting under which policymakers take periods of inflation undershooting or overshooting the price target into consideration when setting interest rates. Some ECB policymakers, including Finland’s Olli Rehn have publicly argued for such a move.

“We learn from either the past or from the neighbors. So of course we looked at what the Federal Reserve had come out with,” said Lagarde, citing both inflation targeting and a focus on employment. “This is what they do, this is what worked for their strategy review. It does not prejudge what will work for us, and our work has not yet been finalized.”

Lagarde has worked hard to get ECB policymakers to work together and portray a more unified face to the outside world. This is a stark contrast to Draghi’s reign, when policymakers disagreed often and many, including Draghi himself, took personal swipes at those disagreeing with him.

Lagarde said she supports more regular strategy reviews in future but argued that a five-year cycle that has been floated might not be ideal. Instead, each president could have one at the beginning of their term to mold the institution more to their liking. “It could be aligned with the presidency. That way, the first year, every presidency will continue with the previous strategy implementation while getting a new review underway,” she said.

“It’s somewhat of a constitutional moment, when you think about the route, the anchor, the instruments, the relationship of monetary policy with fiscal, with financial stability, for example. It’s really foundational in a way. Therefore, you shouldn’t have to do that on a too-frequent basis.”

Still, the ambition to change things has limits. In reviewing the strategy, “we are working within the parameters and the boundaries of the Treaty. That’s very clear,” said Lagarde, in reference to the legal treaty underpinning the EU. “The commitment I had made was to leave no stone unturned, but equally to get something that is going to work. What would have been unreasonable would have been to go through that process and declare that we needed a Treaty change.”

Read the full transcript of the interview here.

Source : Politico EU More   

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Biden embraces NATO, but European allies are weak

As US sees threat from China, lack of equipment and capabilities raise doubts about Europe's role.

Biden embraces NATO, but European allies are weak

Donald Trump mostly bullied European NATO allies for being cheap. Joe Biden’s problem is they’re weak.  

As leaders of the 30 allied nations gather for a summit at headquarters in Brussels on Monday, the new U.S. president among them, one big topic will be a push by Washington to focus more on threats posed by China. But European allies have long been ill-prepared to protect themselves closer to home — from Russia, NATO’s historic rival. Against China, defense experts say, many European militaries would be utterly useless.

“European forces aren’t ready to fight with the equipment they have,” analysts from the Center for American Progress, a progressive think tank close to the White House, wrote in a recent report. “And the equipment they have isn’t good enough.”

The report said that after decades of decline, “much of Europe’s military hardware is in a shocking state of disrepair. Too many of Europe’s forces aren’t ready to fight. Its fighter jets and helicopters aren’t ready to fly, its ships and submarines aren’t ready to sail, and its vehicles and tanks aren’t ready to roll.” And more crucially, for operations far away, Europe lacks capabilities like air-refueling for fighter jets, transport aircraft for troops, and high-end reconnaissance and surveillance drones.

Even with Biden robustly proclaiming his commitment to NATO, the harsh reality of Europe’s unreadiness could create tensions within the alliance that are even more difficult to smooth over than Trump’s badgering of allies to increase their military spending — something they had all pledged to do at a leaders’ summit in Wales in 2014. But if the threat is in Asia, a real question may emerge about the relevance of allies that can barely act on their own home turf.

While the test of NATO loyalty often focuses on Article 5, the collective defense provision in the NATO treaty, which proclaims that an attack on one is an attack on all, uniformed U.S. military commanders have long insisted that European allies should be focused on meeting their obligations under Article 3, which demands they “maintain and develop their individual and collective capacity to resist armed attack.”

“I think it’s very, very clear that we are living in a much more dynamic world,” said Retired General Philip Breedlove, NATO’s former supreme allied commander for Europe. “We still have large formations of Russian capability parked along the edges of Ukraine and Crimea, there is plenty to be concerned about in a security context. These nations know what they need to do. They know what their shortcomings are and I think we need to use every tool they have to begin to live up to Article 3 requirements.”

Breedlove, who is now a professor at the Sam Nunn School of International Studies at Georgia Tech university, said European allies provided serious value, despite their spotty capabilities, simply by providing crucial military installations — army bases in Germany and throughout Eastern Europe, for example, or air bases in Italy.

“How would we ever protect American interests in Europe if we didn’t have a NATO and NATO allies that allowed us to come there on their soil and prepare for conflict if it happens?” Breedlove asked. “An even better example — northern Africa. How would we ever do what we do in northern Africa, without the NATO bases on the northern side of the Mediterranean? We learned in Benghazi we were not positioned currently to respond to those types of incidents.”

Strategic choice

In recent days, NATO Secretary-General Jens Stoltenberg has sought to assure the Biden administration that he shares the priority being placed on China, just as he repeatedly sought to assure Trump he was pressing for more spending.

“The good thing is that, it is a bipartisan understanding in the United States, of the importance of having 29 friends and allies in NATO as they have, not least, when they address the security consequences of the rise of China,” Stoltenberg said at a pre-summit news conference on Friday. Stoltenberg has also stressed that China should be brought into discussions on nuclear arms control, echoing a view widely held among Biden’s security team.

For Stoltenberg, insisting that he shares Washington’s priorities carries risks because some allies, notably France, don’t believe NATO should expand its purview beyond the transatlantic sphere mandated in its founding treaty, and others, especially in Eastern Europe and the Baltics, want the focus to remain on Russia.

But some experts are warning that a major breach could soon emerge.

“The absolute crux in all of this is China — how do the European allies position themselves vis-à-vis China in light of America’s absolutely clear determination to see China as the biggest strategic challenger or threat?” said Maximilian Terhalle, an expert in security policy and visiting professor in strategic studies at King’s College London. “As long as these perceptions of China do not converge, NATO will have a big problem.”

Terhalle said that with Washington focused on China, Europe would need to step up to defend itself. “This disagreement will come out,” he said. “Biden has been much more eloquent, much more diplomatic than Trump has, but the threat perception is so vastly different that I see a huge problem for NATO’s cohesion to be emerging. If America gets absorbed in a war with China, NATO’s eastern flank is wide open because the Americans cannot defend both.”

But even if all allies came around to the U.S. point of view on China, claiming consensus with Biden is cheap and easy compared to preparing European militaries for faraway missions.

In a new book, “The Responsibility to Defend,” Terhalle and a co-author, Bastian Giegerich, call on Germany to vastly strengthen its military, saying its current weaknesses endanger all of Europe.

European allies, with the exception perhaps of France and the U.K., don’t deny their limitations. Eastern European countries and the Baltics speak openly about relying on Washington for security guarantees against Russia. And many European allies admit they do not have sufficient equipment, including helicopters and other basic materiel, to manage on their own, let alone the sophisticated command and control capabilities that only the U.S. can provide.

European nations currently provide the majority of the allied presence in Afghanistan. But the Europeans have long said they could not protect their own forces there. Instead, they rely on the U.S. for security and are now preparing to exit Afghanistan by September 11, a deadline set by Biden, even as some allies fear what will happen in the country when they leave.

Different hymn sheet

Some allies don’t share Biden’s perception of China as a military threat.

At a news conference on Sunday following the G7 leaders’ summit, French President Emmanuel Macron made clear that he was focused more on threats closer to the European homeland, and said it was crucial for the alliance to recognize its true adversaries, including Islamist terrorism. France has no soldiers left in Afghanistan and its operations abroad are largely focused on the Sahel region of North Africa.

“Who is the enemy?” Macron asked. “Every power, every actor that wants to harm the territorial integrity of the members of the alliance, that threatens the security of members of the alliance. For me, that’s the enemy. And so, today, if any regional power wants to threaten the territorial integrity of one of the members of the alliance, it would be the enemy. So we must prepare, in our plans, ways and means to protect ourselves in the face of that. And of course, Islamist terrorism is the enemy of NATO since it is clearly, it threatened our societies in their intimacy. That’s also what justifies the presence of NATO within the international coalition in the Iraqi-Syrian zone. On this we very clearly are aligned.”

In the context of military threats, Macron did not mention China.

Biden, at his own news conference, emphasized his support for NATO. “Now I am going to be heading off to Brussels, to NATO,” he said, “and to make the case we are back, as well. We do not view NATO as a sort of a protection racket. We believe that NATO is vital to our ability to maintain American security for … the remainder of the century. And there’s a real enthusiasm.”

Biden noted that the only time Article 5 had been invoked was after the September 11 terror attacks on the U.S. — a point Stoltenberg and European allies often reiterate.

“Remember what happened on 9/11. We were attacked. Immediately, NATO supported us. NATO supported us. NATO went until we got [al-Qaeda founder Osama] bin Laden. NATO was part of the process.” He called the commitment to the alliance “a sacred obligation.”

But some seem to worry that Biden will be too soft on the alliance — including Macron, who has pushed for better political cohesion among allies, and also demanded recognition of Europe’s broader efforts to develop so-called strategic autonomy, the push to build up capabilities on the Continent.

The authors of the Center for American Progress report said Washington was responsible for many of Europe’s military shortfalls, by historically resisting military cooperation among EU allies in the name of avoiding redundancies at NATO. The report said Biden should instead encourage European military integration, pushing allies to cooperate so they can do more to protect themselves, rather than just pressing them to spend more on their individual national forces, which creates waste and inefficiencies.

“The EU could help strengthen the alliance by building a stronger European pillar, creating a more unified, efficient, and capable partner for the USA through NATO,” the report said, adding:  “European defense today remains anemic, despite noticeable increases in spending.”

Rym Momtaz contributed reporting.

Source : Politico EU More   

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