Christine Lagarde trolls Germany and asks for more fiscal stimulus

This morning has seen the first set piece speech of the new ECB President Christine Lagarde and it would not be her without some empty rhetoric.

The idea of European renewal may, for some, elicit feelings of cynicism. We have heard it many times before: “Europe is at a crossroads”; “now is Europe’s moment”. Often that has not proven to be the case. But this time does in fact seem different.

To her perhaps, just like the Greek bailout was “shock and awe” which I suppose in the end it was just as a doppelganger of what she meant.

We also got some trolling of Germany.

Ongoing trade tensions and geopolitical uncertainties are contributing to a slowdown in world trade growth, which has more than halved since last year. This has in turn depressed global growth to its lowest level since the great financial crisis.

These uncertainties have proven to be more persistent than expected, and this is clearly impacting on the euro area. Growth is expected to be 1.1% this year, i.e. 0.7 percentage points lower than we projected a year ago

A lot of the reduction and impact has been on Germany but what Christine does not say is that this has become a regular Euro area issue where economic growth has been downgraded or poor or both. Briefly around 2017 we had the Euro boom but that required the monetary taps to be wide open. Missing here in the analysis is the fact that the stimulus was withdrawn into a growth slowdown.

Did I say there was some trolling of Germany?

At the same time, there are also changes of a more structural nature. We are starting to see a global shift – driven mainly by emerging markets – from external demand to domestic demand, from investment to consumption and from manufacturing to services.

Then we move onto rhetoric that is simply misleading.

The answer lies in converting the world’s second largest economy into one that is open to the world but confident in itself – an economy that makes full use of Europe’s potential to unleash higher rates of domestic demand and long-term growth.

She is setting policy for the Euro area and not Europe and the ECB itself tells us this about the Euro area.

Compared with its individual member countries, the euro area is a large and much more closed economy. In terms of its share of global GDP, it is the world’s third-largest economy, after the United States and China.


It is revealing that the next section was titled “resilience and rebalancing” words which these days send a bit of a chill down the spine. This chill continues as we see a call for this.

And when global growth falls, stronger internal demand can help protect jobs, too. This is because domestic demand is linked more to services – which are more labour-intensive – while external demand is linked more to manufacturing, which is less labour-intensive.

We are seeing that shield in action in the euro area today: the resilience of services is the key reason why employment has not yet been affected by the global manufacturing slowdown.

The word “yet” may turn out to be rather important. Also there is a catch which is sugar coated..

In the euro area, domestic demand has contributed to the recovery, helping to create 11.4 million new jobs since mid-2013.

But then reality intervenes.

But over the past ten years, domestic demand growth has been almost 2 percentage points lower on average than it was in the decade before the crisis, and it has been slower than that of our main trading partners.

In addition there is a problem.

The ECB’s accommodative policy stance has been a key driver of domestic demand during the recovery, and that stance remains in place.

This is highlighted if we think what Euro area domestic demand would have been without all the ECB stimulus. Her predecessor Mario Draghi suggested that this was in the area of a 2% boost to both GDP and inflation. I guess Christine left that out as it would be too revealing, or it could be that she is simply unaware of it.

A Double Play

The space for monetary policy is limited as Mario Draghi in what I think was a revealing move tied the new ECB President’s hands for a bit by resuming QE ( 20 billion Euros a month) and cutting the deposit rate to -0.5%. So we are left with what some might call interference in politics.

One key element here is euro area fiscal policy, which is not just about the aggregate stance of public spending, but also its composition. Investment is a particularly important part of the response to today’s challenges, because it is both today’s demand and tomorrow’s supply.

The problem is defining what investment is and which bits are  genuinely useful. For example I recall in the Euro area crisis the example of new toll roads in Portugal which were empty because people could not afford them.

However as with some many central bankers these days Christine firmly presses the climate change klaxon.

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.

There is a clear problem below if we look at growth prospects in the light of this speech alone.

But a stronger domestic economy also rests on higher business investment, and for that raising productivity is equally important. Firms need to be confident in future growth if they are to commit long-range capital.

Because as even Christine is forced to admit the US has done better in this area.

Though all advanced economies are facing a growth challenge, the euro area has been slower to embrace innovation and capitalise on the digital age than others such as the United States. This is also reflected in differences in total factor productivity growth, which has risen by only half as much in the euro area as it has in the United States since 2000.

How do we deal with this? Well she is a politician so bring out some large numbers that most will immediately forget.

And the projected gains are significant: new studies find that the full implementation of the Services Directive would lead to gains in the order of €380 billion], while completing the digital single market would yield annual benefits of more than €170 billion.


The most revealing part of all this is below as you know you are in trouble when politicians start talking about opportunities.

We have a unique possibility to respond to a changing and challenging world by investing in our future, strengthening our common institutions and empowering the world’s second largest economy.

Maybe by the next speech someone will have told her it is the third largest. Also what growth and why has it not be tried over the past 20 years?

In this way, we could tap into new sources of growth that would otherwise be suppressed.

Let me switch tack and welcome a new female head of a central bank but if we look at the other main example we see yet another problem. Here is Janet Yellen on CNBC.

“Some of the most disturbing notes came from people who said, ’I work and I played by the rules and I save for retirement and I have money in the bank, and you know, I’m getting absolutely nothing,” Yellen recalled. “Savers are getting penalized. It’s true.”

This is even more true in the Euro area as we looked at on Tuesday but Lagarde  just skates by.

fewer side effects

The problem has been highlighted this morning by the Markit PMI business surveys.

The eurozone economy remained becalmed for a
third successive month in November, with the
lacklustre PMI indicative of GDP growing at a
quarterly rate of just 0.1%, down from 0.2% in the
third quarter.

Another nuance is that you can read the speech as in essence the French trolling Germany which seems to be a theme these days and a source of Euro area friction.

Also if we look at money markets there may be trouble ahead.


Why the 20th of the month?

We end by returning to an all too familiar theme, why do we always need stimulus?




19 thoughts on “Christine Lagarde trolls Germany and asks for more fiscal stimulus

  1. There are actually a lot of issues here.

    Europe is of course the third largest economy, however the world economy is rebalancing, and we see that with the US and protectionism.

    There is little wonder Europe didn’t want the UK to leave Europe we are still one of the richest countries and our leaving Europe will in fact weaken their position.

    The world is evolving faster than Europe can implement changes to rebalance the economy and I wouldn’t like to guess how this is going to pan out.

    So far as the UK is concerned we have to get through the election and see which part wins, as the two main parties are wide apart on policies all of which will have considerable ramifications for Europe and world trade.

    The latest data on PMI from Europe and the UK made grim reading imo and the £ fell on UK data.

    I read Shaun’s twitter comments this morning which hinted that the BOE may have to consider an interest rate cut in the UK after election results at their next meeting in December.

    With world interest rates on the decline and with the world economy still slowing down, coupled with poor manufacturing and service PMI this morning, there will be more BOE members voting for a cut imo. The FT article below points to more stimulus in the UK never mind Europe:

    • Hi Peter

      My tweet was in fact suggesting that an interest-rate cut at the December meeting is in play, not that I am a fan of it. Adding to what I type earlier we had 2 votes this month for a cut and we could see the internal Bank of England votes swing en mass meaning it would be 7-2 but the other way around. If that happens the other 2 external members might vote for it as well, so the road from only 2 voting for an interest-rate cut to all of them is a lot shorter than it might appear.

      Should the election result be as the polls tell us now then we might have seen a £ rally as well from Brexit being settled.That would further add to the likelihood of a rate cut.Of course the polls might change between now and the General Election.

  2. Hello Shaun,

    re :” why do we always need stimulus?”

    1, because last time it wasn’t enough

    2, because the “true” wealth of shares and property is going to fall and that’s not allowed

    3, because we have a majick money tree – what could go wrong ?

    Christine will never run out of other people’s money as she can (and will ) print what ever is needed …..


    • Here here.

      What should happen is debt reined in and banks and institutions allowed to go bust and only lend whenever its reasonably guaranteed it can be repaid.

      Its a long time since we had proper credit control but there is a need to rethink that.

      The world economy is just one big bubble at the moment and in truth Lagarde and others know this but they wont admit it.

      But it will crash in one form or another the tools they are using will run out in due course and defaults will happen.

      A sovereign debt default would be one of the worst scenarios which cannot be ruled out.

    • Printing money and ZIRP. What where the central banks doing for the last hundred years? All they needed to done was print money and reduce rates, its the panacea to all our problems. And if it doesn’t work, keep repeating the same exercise. You just need to change the acronym to confuse the proles.

      When will negative rates stop -1%? -10%. In fact we could stop all taxation and just print 1tr every year.

      It saddens me to see how far the UK has fallen. And thats with the highest revenue and spending ever. Who will save us from these central bankers and spiv politicians.

      • Well, for over 300 years the BoE never saw the need to reduce the bank rate below 2%. But LTCM and the Greenspan put started a new wave. Not like a Mexican wave but close

  3. When questioned about the loss of income to savers over the last ten years, which runs into hundreds of billions, she replied Marie Antoinette style that they should be grateful they have a job thanks to zero rates and QE, perhaps the reporter should have pointed out that pensioners don’t usually work and rely mainly on the income that her, Draghi and Carney have stolen off them to pay for a property bubble that should have been allowed to burst years ago.
    But of course central bankers are never challenged on the crap that comes out of their mouths.

    • I am waiting for the day when the pensioners start to vote against tories in the UK.. only young people and renters are voting against them at the moment.. Probably pensioners are not aware of the daylight robbery unless they depend on interest income from cash deposits.

      I am a saver myself and lost 10s of thousands in interest income due to the low interest policies… And the property that I was saving up for is about out of reach now. Painful 🙂

      • Like yourself I have lost a lot of interest on my savings I had planned to use in retirement however I can’t see why this would make me vote against the Conservatives? It’s a global problem fuelled by the race to the bottom in exchange rates and the need to keep asset prices high ( to avoid a crash in pension funds amongst other things). It’s the central bankers that i blame and their inability to coordinate a return to a ‘normal’ interest rate level. This would have to be done at the same time by all major central banks to be effective to to avoid currency volatility. Some hope!

        • Yes Pavlaki. +1,
          The problem with elections is that you can only vote “for” somebody.
          There’s no space on the ballot paper for voting “against”

        • “I can’t see why this would make me vote against the Conservatives?”

          How about the conservatives are conning the electorate into thinking we are leaving the EU when we will still be tied and restricted in so many ways and have yet to negotiate a trade deal which, with another delay could be dragged out over the next three-four years – just in time for the next election and we start all over again, in addition they plan to do nothing about immigration whilst importing half a million immigrants a year with no restrictions or checks – criminal records or health – at the same time the NHS is virtually collapsing due to the demands put on it – have you tried to get a doctors appointment or seen the waiting times to see consultants recently?

          We are told that we need foreigners to pay our future pensions but noone then asks who will pay theirs -oh we must get more immigrants then – I’m sure you see where this is going and yet voters haven’t got the brains to link the two things together – unlimited uncontrolled immigration and longer waits for NHS treatment and they still vote Labour and Conservative. There is no hope for this country.

          And to all the downvoters, just remember these words the next time you complain about how long you have to wait for a doctors appointment

  4. “why do we always need stimulus?” How else would central bankers bestride the globe like colossi? Got to get a footnote in the history books somehow, no?

  5. Great blog as usual, Shaun.
    As you say, the euro area is the world’s third largest economy, not the second, and if India continues to grow strongly it may before too long be the world’s fourth largest economy. It really is disturbing to see this kind of thing coming from the head of the ECB.
    It’s a little odd that Lagarde would not mention one of the most obvious things about the future of the euro area economy. It is likely to become larger through accession of new members over the next five years. It is quite possible Romania, Bulgaria and Croatia could all adopt the euro by 2024. Of these countries, Bulgaria is the best-placed to join. The head of the European Banking Restructuring Council, Elke König, told Bulgaria it could join ERMII in the first half of 2020. It would then start contributing to the European Restructuring Fund, not its national fund. Bulgaria will be the only country in ERMII if it gets there in the first or second quarter of next year. It will have to stay there for at least two years and have its restructuring plans for Bulgarian banks approved before it can adopt the euro. Nevertheless, it seems likely to happen.
    Bulgaria has the largest economy of the South Slavic states that are EU members (Croatia) or candidate countries (Serbia, North Macedonia, Montenegro) now outside of the euro area. In 2019 its economy measured on a PPP basis was about 85% as large as that of Slovakia, which is in the euro area, and it’s economy is about 42% larger than Serbia’s, the next largest economy. So what’s with Lagarde? It’s like people in the Balkans don’t exist for her.

    (“Moja draga” means “My darling” in Serbian.)

    • Hi Andrew and thank you

      I do not know if ignoring the Balkans is a French thing.Back in the days of Churchill interest in the Balkans was definitely a British thing. Perhaps Christine Lagarde is bothered by the potential accession of weaker and poorer economies as these generally are. Or she is afraid that they will turn out to be like Hungary.

      We used to have someone ( expatinBG) to keep us in touch with local issues and I remember the ensuing discussions about corruption and the banks. So the accession of Bulgaria would bring plenty of possible problems.

  6. Jean Monnet would have been highly delighted, only a few more steps and his ultimate dream will be realised, his stealth approach is working. Heaven help us.

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