ECB Brief: Lagarde Takes a Further Step in the Direction of the Inevitable

14 June 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde’s comments to Politico published Monday represented a further tentative step in the direction of conceding the inevitable: an economic recovery that would make extraordinary policy support unnecessary and hence require discussion about withdrawing related measures.

For starters, Lagarde offered an even more upbeat assessment of euro area economic prospects than at Thursday’s press conference, predicting a return to pre-Covid levels of output already in the first quarter of next year.

‘In terms of real gross domestic product (GDP) we are likely to be back to the pre-Covid-19 level that we had in December 2019 – if the Delta variant doesn’t ruin our plans – in the first quarter of 2022’, she said. ‘That is one quarter earlier than we had expected in our projections in March.’

In fact, a full six weeks after the updated March macroeconomic forecasts were issued, Lagarde still sounded profoundly reluctant to concede not just a return to pre-pandemic activity in the second quarter of next year, but even in the second half of the year:  

‘…our assessment at this point in time is that we will – the euro area economies will return on average to the pre-pandemic economic level in the second half of 2022’, she said on April 22. ‘I'm taking precautions here because when I say on average, there will be divergences. There will be heterogeneity. There will be countries that will be lagging behind because of multiple factors, but on average we are seeing the euro area economy back to pre-pandemic level, second half of 2022.’

What to make of Lagarde’s flimsy pretence now of having done anything besides strenuously play down the recovery until, to be precise, four days ago and hence one day before the interview with Politico was conducted? If such an unvarnished turnaround can be executed at no cost in terms of credibility, the ECB will have gotten off easily.

But it does strain credulity a bit to hear her now: ‘We are at a turning point where, bearing in mind alternative variants, we are on that recovery path, heading firmly towards a return to the pre-Covid-19 level’, she told Politico. ‘That said, I am not suggesting that the pandemic emergency purchase programme (PEPP) is going to stop on 31 March. We have plenty of flexibility, but in terms of economic outlook we are heading in the right direction.’

The more general question of the interview to which this was the culmination of a wordy answer was how much longer she expected the euro area to require the ‘crutches’ to which Lagarde had on a couple of occasions referred. As such, she may have protested a bit too much in her haste to nip in the bud the idea that she might ever envision an end to the PEPP according to plan.

Asked to at least confirm the presence of indications that PEPP could end in March 2022, she equivocated. ‘I wouldn’t say it that way, because the wording in the introductory statement, including yesterday’s, is very specific and says until at least March 2022 and, in any case, until the Governing Council judges that the pandemic crisis phase is over’, she reminded.

And then added reason to think that precisely this could be the case: ‘But our projection, and the design of the PEPP as we have it, seems to be heading in the right direction.’

Of course, she observed perfunctorily, ‘But as stated previously, it is far too early to debate these issues.’

Other than an oblique reference to inflation anchoring, Lagarde made no further mention of inflation or inflation expectations in the critical parts of the published interview, in which she also referred not once to financing conditions.

One way or another, the ECB naturally needs to adjust the tone of the discussion that it did its best until recently to inject with a note of doom and gloom. The now probably unavoidable abruptness of this adaptation will require some verbal acrobatics, and Lagarde having spearheaded the earlier refusal to acknowledge a clearly visible upturn, her future doubtless includes a few more leaps of the kind she has now executed for Politico.