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On the need for a common fiscal authority (budget) in line with common monetary authority (ECB), Lagarde said the common recovery stimulus of €750B should be considered as a permanent fiscal tool for such an unprecedented COVID situation (financial crisis). But the concept of a common fiscal authority or at least a common budget should be discussed more proactively by the EU member states as some frugal states are also opposing the idea:
“This recovery plan tool is a response to an extraordinary situation. We should discuss the possibility of it remaining in the European toolbox so it could be used again if similar circumstances arise. I hope that there will also be a debate about a common budgetary tool for the euro area and that it will be enriched by our current experience.”
“Such a debate will be tricky: some countries, like the Netherlands, already had strong concerns about the recovery plan----This sort of opposition is not at all surprising: that’s how Europe works. During the last crisis too, at the height of concerns, it took time to set up the ESM. For many governments, acknowledging that a collective response is a right response to a common shock takes time.”
On the possibility monetarization or cancellation of huge debts by the ECB for some fragile EU member states, Lagarde said it’s almost impossible as par Article-123 of the EU treaty, which prohibits direct financing of any Member State’ budget:
“Article 123 of the Treaty on the Functioning of the EU forbids the ECB from financing the budgets of Member States, pure and simple. Debt cancellation would be exactly that. Breaking European Treaties is not on my road map.”
On her 1st anniversary as ECB President (1st Nov), Lagarde said her biggest experience is the severe and quick COVID-19 shock. Lagarde also narrated the ECB story of PEPP and sounded like Trump on CARES Act 2.0: ‘go big or go home’.
“The severity of the shock--- I experienced the 2008 crisis: between the summer of 2007 and the summer of 2008, problems increased gradually. There were signs that the crisis was coming, of stress in the financial system. This time, the speed and the scale of the shock were unprecedented.”
“At the Governing Council meeting on 12 March, we decided to increase our asset purchases by €120 billion. As the situation was deteriorating between 16 and 18 March, we worked relentlessly and under lots of pressure to prepare the decision about the PEPP that was eventually taken during the night of 18 March. I spent that day on the phone with my staff from my dining room in Frankfurt, as we were all in lockdown at that point. Then in the evening, all 25 members of the Governing Council met by teleconference. We had to act quickly and decisively. It was a collective decision: “We go big, or we go home!” At 23:30 we published a press release announcing our extraordinary €750 billion purchase program”.
On Germany’ apparent change in austerity stance as for the 1st time it advocated for a common EU recovery plan by shared borrowing, Lagarde said the transformation came amid the COVID-19 recession as an excessive financial crisis for small economies may also destabilize larger ones in the EU:
“This transformation came at just the right moment. Faced with such a severe crisis, Europe had to seriously reconsider its approach to issues related to balancing the budget, debt, and state intervention. There was also a realization that we were all in the same boat: if already weakened economies were to become even weaker, stronger economies would suffer too.”
On the prospect of a digital EUR and whether it’s intended to support economic growth or to address geopolitical issues such as the emergence of a digital Yuan- Lagarde said the main purpose is for a digital, green payment echo system and easy international transaction in EUR to strengthen its role as global currency:
“It’s simply a matter of making our currency fit for the digital age. When we see how quickly digital payments are spreading, especially among young people, it’s important to meet this demand. If the digital euro were to see the light of day, it would not replace banknotes. It would be a complement to them. If we can have a means of payment that is more efficient, costs less, causes less pollution, can be used as easily as cash, protects privacy while ensuring traceability, reduces the cost of transferring money between countries, and strengthens the international role of the euro, we would be remiss not to study it! That’s what we are doing at the ECB by starting to experiment and by launching our public consultation on the digital euro.”
On ECB’s active role in perusing ecological transition, Lagarde said it’s vital as it will eventually affect ECB’s mandate of price stability:
“It’s a fundamental issue, and I am going to try to encourage the Governing Council to at least agree to reflect on what a central bank can legitimately do to contribute to the fight against climate change. I am aware that some commentators have their doubts. Very well, it’s something we will debate. But we must take climate issues into account because they have an impact on price stability, our primary mandate.”
“Everybody must step up to address what is the main risk of the 21st century. If we don’t do so now, it will no longer be possible for us to tackle climate change. It will be too late! Every one of us, no matter where we are, would be to blame if we didn’t ask ourselves: what do I need to do to play my part? What can I do? My instinct tells me that we can do more than we think.”
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