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Not much change at the European Central Bank

As falling global car sales prove a major problem for the European economy, Christine Lagarde starts her tenure as head of the European Central Bank. What lies in store?

As falling global car sales prove a major problem for the European economy, Christine Lagarde starts here tenure at head of the European Central Bank. What lies in store?

by
John Redwood

in Features

10.12.2019

This week we will hear from Christine Lagarde after her first meeting of the European Central Bank’s (ECB’s) Monetary Policy Committee under her chairmanship. Markets will want to know where she stands on the substantial relaxation of monetary policy that occurred under her predecessor this autumn. Is she a hawk or a dove?

Mrs Lagarde has already answered that question. She has told the European Parliament that monetary policy is now accommodative. She has argued that the Euro area economy is growing too slowly so it needs just such a stimulus. Whilst she tells us she is an owl, neither a hawk nor a dove, that is her positioning herself above the factions she wishes to manage to achieve a clearer consensus. It is a strange call to allow the divisions of the Committee to become such a public issue, as she may find it is difficult to get much more than a temporary truce. The attitude of Germany, the Netherlands and Austria around the Board table is very different to that of France, Italy and Spain, with a strong northern resistance to continuing Quantitative easing and to ultra-low interest rates.

It's not just the global trend

Mrs Lagarde thinks that the poor performance of the Euro area economy compared to, say, the US is the direct result of global trends. She buys into the proposition that the global trade war has reduced world trade opportunities hitting manufacturing where the Euro area in general and Germany, in particular, are exposed. The fall in manufacturing has then started to affect services as well. She does not, in public, recognise that German and wider manufacturing in the Euro area has been hit by the big move against diesel and some petrol cars at home as well as in China, nor argue that the fiscal tightness of the Euro area as a whole is a cause of slow growth. She has, it is true, said that selective fiscal reflation would be a good idea, but not in the countries with the biggest unemployment problems because they tend to be the ones that EU discipline prevents from expanding budget deficits.

A green dream

Mrs Lagarde is understandably a keen proponent of the EU system. She is unlikely to want to tear up the Maastricht criteria limiting any country to an annual deficit of 3% and wanting lower deficits in many cases to get the proportion of state debt to GDP down to nearer the much broken 60% limit. She hopes that Germany and the Netherlands will spend a bit more or tax a bit less as they have scope under the rules to do so. She is as keen as Ursula Von der Leyen, the Commission President, on finding ways to boost investment in green projects and products. She recommends to states with budget problems that they tighten the current balance by raising more revenue or spending less, whilst expanding their investment expenditures, preferably with a green emphasis.

The latest German figures for October showed industrial production as a whole was down 5.3% over the year. Vehicles have been badly hit during the downturn. If Mrs Lagarde is truly worried about growth rates, she should ask herself about this big decline and how the introduction of greener products can be handled without such a hit to a crucial industry for Germany and the wider Euro-area economy.

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