ECB’s Lagarde Warns of Impact of Fragmenting Global Economy on Inflation
17 April 2023
By Xavier D’Arcy – FRANKFURT (Econostream) – The fragmentation of the global economy into two blocs between the US and China may impact supply elasticity and price stability, European Central Bank President Christine Lagarde said on Monday.
In a speech at the Council on Foreign Relations in New York, Lagarde said that central banks in economies with similar interests would benefit from acting together, and monetary policy would have a strategic role to play in the new economic order.
‘We are witnessing a fragmentation of the global economy into competing blocs […] this fragmentation may well coalesce around two blocs led respectively by the two largest economies in the world’, she said. A ‘profound [effect] on the policy environment for central banks’ could be ‘more instability as global supply elasticity wanes’, she said. Globalisation had led to a period of ‘relatively low and stable inflation’ which ‘may now be giving way to one of lasting instability resulting in lower growth, higher costs and more uncertain trade partnerships.’
The coming period of economic fragmentation would call for ‘greater policy cohesion’ between partners, she said. ‘Not compromising independence, but recognising interdependence between policies, and how each can best achieve their objective if aligned behind a strategic goal.’ There would be a ‘multiplier effect of common action’ from economies acting together rather than alone, she said.
Looking at recent developments, she said that ‘international currency status should no longer be taken for granted’ for the dollar and the euro, as ‘new trade patterns may have ramifications for payments and international currency reserves.’
'Central banks also have an important role to play here – even as protagonists', she said.
Projects such as the digital euro and the availability of swap lines would be central in ensuring that currencies retain their position, she said. The completion of capital markets union would also be ‘pivotal in determining whether the euro remains among the leading global currencies or others take its place.’