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17th Aug 2022

Rich EU states should spend more, Lagarde says

  • The 63-year old French woman has led the IMF since 2011 (Photo: World Economic Forum)

Wealthy EU nations should spend more to help central banks protect the economy, the likely next head of the European Central Bank (ECB) has said.

"I'm not a fairy", Christine Lagarde said on the limitations of what the ECB can do in Brussels on Wednesday (4 September).

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"Central banks are not the only game in town," she also told MEPs on the economic affairs committee.

A "majority of countries in the euro area" had "the the capacity to use the fiscal space available to them" to invest in sectors such as infrastructure, she said.

And cooperation between national governments and the ECB was needed "if all the institutions in Europe - and the eurozone in particular - want to respond to the threat of populism," she added.

Lagarde's hearing was the first in a long round to install the new generation of top EU officials after recent European Parliament elections.

MEPs will voice their political opinion in a vote, but, unlike most EU top jobs, the ECB appointment will be decided by member states alone.

The 63-year old former International Monetary Fund chief and French finance minister recalled the worst years of the recent financial crisis in Europe.

Her predecessor in the ECB post, Mario Draghi, said in 2012 it would do "whatever it takes" to save the euro in what led to a trillion-euro emergency bond-buying scheme.

"I hope I never have to say something like that - I really do - because if I do it will mean that other economic policymakers have not done what they have to," Lagarde said on Wednesday.

She spoke amid concern of a fresh recession in Germany and further afield at a time when central banks have already slashed interest rates to stimulate spending.

Draghi is expected to cut rates further and possibly restart bond-buying before Lagarde takes over on 1 November.

And she would continue his "highly accommodative monetary policy" she said.

But if worst came to worst, the "embryonic" eurozone budget was not strong enough to stabilise the bloc's finances, she warned.

Lagarde's mention of "populism" referred to concern that populist and nationalist politicians could profit from a major economic downturn in Europe.

And her ECB would do its bit on pro-euro advocacy, she noted.

"I want to dust off our language and do without excessive technocratic jargon to allow citizens ... to understand what the ECB is for," she said.

Her ECB would also make climate change a bigger priority than Draghi had done, the French politician added.

"Primary mandate is price stability, of course. But ... climate change and environmental risk are mission critical," Lagarde said, mentioning potential investment in green bonds.

"Any institution has to have climate change risk and protection of the environment at the core of their understanding of their mission," she told MEPs.

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