22 November 2019

New Europe: Lagarde says EU should turn to domestic demand for growth

Making clear that in her view that is a systemic or eurozone issue, Lagarde called for investment that would bolster productivity, allowing Europe to remain at the forefront of global value chains. Lagarde made clear that was a challenge that was not “country-specific.”

“While investment needs are of course country-specific, there is today a cross-cutting case for investment in a common future that is more productive, more digital and greener,” Lagarde said, sounding more like a former Minister of Finance than a Central Banker.

And taking on a more strategic outlook, Lagarde noted that “stronger domestic demand puts economies in a better position to withstand swings in the global business cycle and disruptions in world trade.”

Lagarde’s single reference to monetary policy underscored the long-distance dividing the ECB headquarters in Frankfurt from the Bundesbank in the same city.

“Monetary policy will continue to support the economy and respond to future risks in line with our price stability mandate,” Lagarde said.

Speaking later at the same conference, Bundesbank President Jens Weidmann underscored his opposition to the ECB policy on quantitative easing. The combination of negative interest rates on bank deposits and a bond-buying program is considered by the German banker a problem. But with inflation weak and growth well below what is considered the bloc’s potential, Weidmann is politically isolated.

However, Deutsche Bank’s CEO Christian Sewing backed Lagarde’s view.

In an interview with CNBC at the European Banking Congress in Frankfurt, Sewing called for a focus not only on “aggregate” public spending but also its “composition,” making thee case for investment on digital infrastructure and education.

And yet there is little question that Weidman is expressing broader banking sector concerns in Germany. Moody’s last week downgraded the German banking system outlook to negative as profitability and credit-worthiness weaken. [...]

Full article on New Europe

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