The president of the European Central Bank (ECB), Christine Lagarde, has learned her lesson. Contrary to what he did shortly after arriving at the office he now occupies, he staunchly defends the fact that an objective of the institution he directs is to prevent the markets from targeting any of the countries that make up the euro zone and end up causing them crisis of debt. It is a “precondition” to ensure that there is an “adequate transmission” of the ECB’s monetary policy to the 19 member states that make up the single currency, which has a 2% medium-term inflation target carved into its mandate. .
With this reasoning, Lagarde defended this Monday before the European parliamentarians the reaction of the body she presides over, which last week pressed the accelerator to launch a mechanism that avoids large differences in risk premiums now that it has decided to “normalize” the policy currency and reinvest the money you receive from the maturities of the bonds you now have in your portfolio. In addition to the response to the questions that it has received in the European Parliament, it has also been to statements such as those of some Finance Ministers of the countries that are most in favor of fiscal consolidation and aggressive monetary policies, such as the German Christian Lindner, who one day after the ECB’s reaction, he pointed out upon his arrival at the Eurogroup meeting that it was normal for there to be differences in risk premiums, suggesting that the regulator had overreacted.
A few days after the pandemic exploded, Lagarde made one of her great slips at the head of the ECB by declaring that one of her functions was not to monitor risk premiums, as the Spanish socialist MEP, Jonás Fernández, reminded her in his question . Shortly after that slip, the central bank launched a sovereign bond purchase program to avoid financial tensions during the covid-19 crisis. This month the ECB will stop increasing its public debt portfolio -it will continue to renew the one it already has- and will raise rates by 0.25% in July.
These steps, pushed by inflation that reached 8.1% in May, have brought market pressure to the bonds of the countries with the worst fiscal situation (Italy, Greece, Spain) and to the ECB’s reaction last week . Regarding the tool that he prepares to avoid fragmentation, he has not given details, but he has indicated that it will need “flexibility”. The former managing director of the IMF has also indicated that the instrument she is preparing “will be effective, proportionate and within the mandate.” When Lagarde talks about flexibility, she comes to say that she will be able to intervene in the market by focusing on the purchase of bonds from those countries that are in a worse situation in the markets.
He did not want to give more details on this point, despite the fact that several parliamentarians have insistently claimed it, including the Spanish Luis Garicano (Citizens). “I greatly respect you have this issue in mind and in that of many. But the work is underway at the moment”, he replied, adding that the final design “will be within the mandate” of the ECB. This last clarification was for those who have asked him about inflation, pointing out that monetary policy should be more aggressive and focus almost solely on the fact that inflation is skyrocketing.
Following the manual of the good central banker, Lagarde has looked at wages when she has warned of the risks that there are for inflation in the medium term and to answer the questions that warned of the possible harmful consequences of an increase in interest rates, such as the excessive cooling of the economy and the entry into recession of the euro zone. And, in response, Ernest Urtasun, from the Los Verdes group, has indicated that the ECB “carefully monitors the increase in salaries, both those negotiated and those observed in the markets.” In fact, even in his initial intervention he had already warned about remuneration as one of the pressure elements to take into account in the future of inflation: “Wage growth has begun to pick up, although it remains moderate . We expect it to strengthen slightly through 2022 and then remain above average levels […]supported by tight labor markets, increases in minimum wages, and some offsetting effects from high inflation rates.”