FRANKFURT (Reuters) - The euro zone needs to create more of its economic growth at home, including via greater public investment, if it is to withstand weakness abroad and become more balanced internally, new European Central Bank President Christine Lagarde said on Friday.
Lagarde did not discuss monetary policy in her first major speech since becoming ECB President at the start of this month, merely saying the central bank would continue to do its part to support the economy.
Instead, she chose to send a message to euro zone governments, calling on them to strengthen domestic demand after a global trade war brought a decade of export-driven growth, largely led by Germany, to an abrupt end.
“The answer lies in converting the world’s second largest economy into one that is open to the world but confident in itself – an economy that makes full use of Europe’s potential to unleash higher rates of domestic demand and long-term growth,” Lagarde said.
Venturing outside the traditional remit of a central banker, she singled out public investment as a key driver of this rebalancing, calling on pan-European funds to be invested in green and digital projects.
“Investment is a particularly important part of the response to today’s challenges, because it is both today’s demand and tomorrow’s supply,” Lagarde said.
“While investment needs are of course country-specific, there is today a cross-cutting case for investment in a common future that is more productive, more digital and greener.”
Her predecessor Mario Draghi had also called for greater spending and investment by countries that run surpluses, such as Germany, but he was never so specific and his pleas fell on deaf ears in Berlin.
Lagarde said stronger internal demand would also help smooth out imbalances between euro zone members, who are unable to devalue their currencies when the economy weakens.
“If internal demand is too weak and inflation too low, such rebalancing across countries obviously becomes harder. And to some extent, this is what we saw in the euro area after the crisis,” she said.
Lagarde’s avoidance of monetary policy issues marked a departure from Draghi, who often used major speeches to drop hints about upcoming ECB moves - typically increasingly aggressive stimulus measures.
This trait of Draghi’s angered some other ECB rate-setters, particularly those from conservative, cash-rich countries like Germany and the Netherlands.
Unlike Draghi, who took office at the height of the euro zone’s debt crisis in 2011 and took immediate, bold steps to stop the market rout, Lagarde was not under pressure to change the ECB’s policy stance just yet.
“Lagarde meets the expectations that she could become the leading economic and political voice for Europe rather than quickly shaking up the ECB,” Carsten Brzeski, an economist at Dutch bank ING, said.
Speaking later at the same conference, Bundesbank President Jens Weidmann reiterated his country’s qualms about the ECB’s easy-money policy.
“Monetary policy cannot be complacent if its policy stance raises long-term risks to price stability through the build-up of financial imbalances,” Weidmann said.
In a symbolic olive branch to the host country of the ECB, Lagarde began her speech by greeting the audience in German and promised to deepen her knowledge of that language.
She had already sought to mend fences with disgruntled policymakers last week, taking the whole Governing Council on a retreat, where they called for more inclusive decision-making.
In her only policy-related remarks, Lagarde confirmed she would “soon” start a review of the ECB’s policy framework, a wide-ranging effort that is expected to involve a redesign of its inflation aim.
She then stuck to the central bank’s pledge to keep the money taps open while monitoring the side effects of its stimulus policies.
“Monetary policy will continue to support the economy and respond to future risks in line with our price stability mandate,” Lagarde said.
This well rehearsed stance places her roughly in the middle of advocates of easy money in indebted southern European countries and policy “hawks” north of the Alps.
“She might have to be more specific following her first Governing Council meeting in December, but for now the data does not look weak enough for the ECB to make any change to its monetary stance,” Frederick Ducrozet, a strategist at Picket Wealth Management, said.
Reporting By Francesco Canepa and Balazs Koranyi, Editing by Kirsten Donovan and Toby Chopra