FRANKFURT (Reuters) - Christine Lagarde delivered her first policy speech as President of the European Central Bank on Friday, providing the first clues about how she hopes to shape Europe’s most powerful financial institution during her eight year term.
The following are five key takeaways from her speech.
1. New style: Refraining from almost any policy message, Lagarde is demonstrating her commitment to restoring peace in the Governing Council.
Her predecessor pushed thorough a controversial stimulus package in September against the opposition of a third of policymakers, provoking rare public conflict.
In her first meeting with the Governing Council — chiefs of the euro zone’s 19 central banks plus the ECB’s board — colleagues asked Lagarde not to front run policy through public speeches like Draghi did and strive for consensual decisionmaking, involving all policymakers.
2. Policy continuity: Although she did not go into policy at length, Lagarde essentially confirmed the ECB’s policy stance.
With inflation still weak and growth well below what is considered the bloc’s potential, the ECB has promised rock bottom borrowing costs for years to come, even as banks complain that this is eroding their margins and hurting profits.
Markets now expect the ECB to maintain extraordinary stimulus for years to come and Lagarde said nothing that would suggest an about-face.
“The ECB’s accommodative policy stance has been a key driver of domestic demand during the recovery, and that stance remains in place,” Lagarde said. “Monetary policy will continue to support the economy and respond to future risks in line with our price stability mandate.”
3. Domestic demand: Lagarde made the case for Europe to boost domestic demand to shield the bloc from imported weakness and uncertain trade growth.
“Stronger domestic demand puts economies in better position to withstand swings in the global business cycle and disruptions in world trade,” Lagarde said.
She argued that monetary policy will do its part but the main responsibility lies with other policymakers, which requires more and smarter investment and better use of fiscal policy.
“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,” she added.
4. Fiscal space: Lagarde’s ECB will keep the pressure on governments to help out an increasingly constrained monetary policy, much as former ECB chief Mario Draghi did.
Deep in unconventional territory, the returns on ECB stimulus are starting to fade and the negative side effects are becoming more pronounced. While the ECB has not even hinted at taking its foot off the accelerator, it has long argued that more budget spending and spending reforms would make its life easier.
Lagarde has largely reaffirmed this line, arguing that better government spending is needed to strengthen the domestic economy.
“It is clear that monetary policy could achieve its goal faster and with fewer side effects if other policies were supporting growth alongside it,” she said.
“Investment is a particularly important part of the response to today’s challenges, because it is both today’s demand and tomorrow’s supply.
5. Economic diagnosis: Lagarde largely confirmed the ECB’s economic outlook, highlighting strength in the domestic economy and pointing to imported weakness on the back of trade uncertainty.
“Uncertainty abounds and conventional wisdom is being challenged, in politics, in diplomacy and in economics. And, unavoidably, this calls on Europe to consider its place in the world and reset its ambitions,” she argued.
Reporting by Balazs Koranyi, Editing by William Maclean