Christine Lagarde is the President of the European Central Bank (ECB). Previously, she served as the Managing Director of the International Monetary Fund (IMF) and as a minister in the French government. Lagarde spoke with Garrett Walker in the early fall.
In normal times, the goal of any central bank is to keep the boat steady; suffice it to say, these are not normal times. How is the role of the ECB changing?
Keeping the boat steady is even more important in turbulent waters. While this may require some extraordinary maneuvers, one should not lose sight of the course to reach the destination. This has very much been our role. Faced with the severe economic consequences of the pandemic, we have taken a number of extraordinary measures to support the economy and to help euro area citizens through this extremely challenging time. Failing to do so would have blown us off course in the delivery of our mandate to maintain price stability.
The key pillars of our crisis response have been asset purchases and targeted liquidity operations. Under our Pandemic Emergency Purchase Programme (PEPP), we are purchasing assets with a total envelope of [euro]1,350 billion (US$1,582 billion), at least until the end of June 2021, to support favorable funding conditions for all sectors in the economy. Moreover, we have substantially eased the conditions under which banks can obtain liquidity under our targeted longer-term refinancing operations.
Given the bank-centered financial system in the euro area, these operations are of great importance to ensure the flow of credit, especially to smaller and medium-sized firms and to households. As a result of our measures, we have been able to avert the most adverse real financial feedback loops, and financing conditions for governments, firms, and banks have improved again. But inflation is still very distant from levels in line with our inflation aim. So we need to maintain ample monetary policy stimulus to reach our objective.
You've called for a "safety net" until at least July 2021. While that may be the only option for the ECB, what long-term economic consequences do you anticipate?
The pandemic has driven the euro area economy into an economic contraction of a magnitude and speed that are unprecedented in peacetime. Confronted with such an unparalleled shock, otherwise sound companies saw their liquidity buffers dwindle which risked turning into unnecessary bankruptcies and job losses. In response, macroeconomic policies in the euro area have acted forcefully, geared towards protecting productive capacity and jobs. National fiscal authorities have offered massive loan guarantees and other liquidity support measures to mobilize banks and deliver liquidity to firms as fast as possible.
Monetary policy has flanked these measures by providing cheap central bank liquidity to the banking sector with the aim of supporting the maintenance of credit provision by the banking sector. In parallel, our asset purchases have supported financing conditions throughout the economy and have helped to stabilize financial markets. This package of measures has contributed to avoiding an even deeper recession and...