ECB’s Lagarde: Incoming Data Confirming Baseline Economic Scenario

23 July 2020

By David Barwick – FRANKFURT (EconoStream) – Recent data are confirming the appropriateness of the European Central Bank’s baseline forecast of economic growth in the euro area, ECB President Christine Lagarde said Thursday.

In a video interview with The Washington Post, Lagarde, according to a transcript made available by the ECB, said that incoming data ‘comfort us in the idea that our baseline is probably in the right place.’

The ECB’s central scenario calls for output in the region to contract by 8.7% this year before rebounding by 5.2% in 2021 and 3.3% in 2022.

A major second wave of the pandemic would change the outlook, she said, though current projections already ‘do incorporate a minimal element of second waves, you know, the flaring up that we see here and there in small clusters and against which instant action is taken by the various policymakers.’

A second wave on the order of magnitude of the first ‘would be a different story’, she added.

Lagarde expressed satisfaction with the agreement by EU leaders earlier this week to establish a €750-billion coronavirus fund including €360 billion in loans and €390 billion in grants to those member countries hardest hit by the crisis, funded partly by joint borrowing on international markets.

‘What I think was important was the right allocation of how much was going to be grants … and how much was going to be loans’, she said. And I think the proportion is reasonable. … It could have been better, but it's a very ambitious project, actually.’

Asked about the situation of banks in Europe, Lagarde repeated monetary policymakers’ standard assertion that these had entered the current crisis in better shape than they were when engulfed by the global financial crisis. They are not as profitable as U.S. banks, she conceded, ‘[b]ut I wouldn't say that European banks are, have solvency issues, not at all. Not at all.’

She continued: ‘[W]hat would be desirable and what we are certainly encouraging is more consolidation, because there are banking systems in some European countries that are too fragmented, where there are many small institutions, and where clearly consolidation would reinforce them. And if we can see cross-border consolidation as well, even better.’

European authorities are trying to adjust banks’ regulatory environment so that it doesn’t stand in the way of consolidation, she said.