ECB's Lagarde urges Europe to spend more

ECB president Christine Lagarde said her institution’s loose monetary policy is hitting savers and stoking asset prices, as she called on governments to do more to boost the economy.

The comments at the European Parliament in Strasbourg hint at rising concern among policymakers that the setup of the currency union is incomplete.

The ECB’s own credibility is at stake after years of failing to hit its inflation goal despite controversial measures such as negative interest rates and bond purchases, and Ms Lagarde has commissioned a review to reassess its strategy.

“The longer our accommodative measures remain in place, the greater the risk that side effects will become more pronounced,” she said. “When interest rates are low, fiscal policy can be highly effective: it can support euro area growth momentum, which in turn intensifies price pressures and eventually leads to higher interest rates.”

Unlike US Federal Reserve chairman Jerome Powell, who had addressed US lawmakers, Ms Lagarde didn’t mention the coronavirus outbreak in her opening remarks. The disease has become a pressing economic risk for central banks as it shuts factories and disrupts supply chains.

Mr Powell said he’s closely monitoring the potential for spillovers from China to the rest of the world, though stopped short of saying it had changed the Fed’s baseline outlook for the US economy.

Ms Lagarde reiterated longstanding ECB calls for fiscal support, structural reforms, a full banking union, and a capital markets union.

“A more resilient economic and monetary union with these elements would not just help to protect our living standards from adverse domestic and global developments,” she said.

It would also support Europe’s influence in the world, including by making the euro more attractive worldwide.

The eurozone economy is struggling after a dismal fourth quarter in which factories remained mired in a manufacturing recession.

While there are some signs that the worst of the economic slowdown is past, the coronavirus raises the prospect of more damage at a time when the ECB is running low on monetary ammunition.

That could stoke calls for budget stimulus in wealthier nations such as Germany -- where the industrial slump is especially bad. The European Commission has already highlighted the need for a revamp of the euro zone’s fiscal rules.

Ms Lagarde’s strategic review will primarily consider whether the institution should change its inflation goal of below, but close to, 2%.

- Bloomberg