Christine Lagarde’s three blunders as president of the European Central Bank (ECB) did not cause the revival of right-wing populism across Europe, but they have reinforced it mightily.
The first gaffe cost Italy billions, and the ECB many of the reputational gains that Mario Draghi, Lagarde’s predecessor, previously worked so hard to secure. Recall March 2020: the world was gripped by anxiety and markets were panicking, especially about the solvency of Italy, a country with huge debts and no central bank of its own.
When asked at a press conference if the ECB would stand by Italy’s debt to contain interest rate spreads within the Eurozone, Lagarde did not reassure markets and the public by repeating Draghi’s famous promise to do “whatever it takes”. Instead, she declared: “We are not here to close spreads.” Within seconds, Italy’s debt-servicing costs skyrocketed. Though Italy’s government was apoplectic, populist opposition leader Giorgia Meloni, who has since become prime minister, was undoubtedly delighted.
The second blunder was less visible but has had longer-lasting effects. After 2014, when official interest rates were negative, the ECB was essentially paying bankers to accept hundreds of billions of euros in their ECB accounts. But instead of lending that money to businesses, the bankers simply kept it in their ECB accounts and continued collecting the bribes the ECB was paying them in the form of negative interest rates.
Now that inflation has returned with a vengeance, the same bankers have kept billions parked in their ECB accounts to collect on the higher interest rates, while continuing to pay their depositors minuscule interest. Yet, instead of using the ECB’s powers to put the fear of the divine into these bankers, Lagarde has let them run rings around the institution at the expense of small businesses and depositors.
Her third blunder was her slow reaction to rising inflation, reflecting a long sequence of spectacularly disastrous ECB forecasts.
Lagarde’s luck ran out early on in her tenure when pandemic-induced supply-chain disruptions triggered inflation, which Russian President Vladimir Putin later turned into an even bigger problem by invading Ukraine and causing an energy-cost crisis.
Before long, Lagarde was saddled with a cruel dilemma. She could keep interest rates below 5%, let inflation run away from her and unwittingly do the bidding of the right-wing Alternative für Deutschland (AfD). Or she could raise interest rates to levels that would quell inflation but bankrupt Italy and many European banks and corporations in the process. In the event, she chose to delay until it fell between these two stools.
Could Lagarde have done something different? As I argued at the time, yes: she could have increased interest rates earlier to burst the housing bubble while buying (or merely promising to buy) bonds issued by governments, the European Commission, the European Investment Bank and private companies, with the proceeds going to finance a green public investment drive.
Instead, she wasted her energy and political capital on calibrating the ECB’s collateral policy to favour phoney environmental, social and governance commitments.
Where are we now? Lagarde’s rare blend of ineptitude and conceit has helped to revive the political fortunes of the AfD in Germany, Meloni in Italy, the right-wing Vox party in Spain, and so forth. All we can do now is hope that these parties’ own incompetence will lead them to squander their gains before next year’s European Parliament elections.
Copyright: Project Syndicate, 2023.