Trouble mounts for the ECB and Christine Lagarde

Today is ECB ( European Central Bank ) day where we get the results of their latest deliberations. We may get a minor move but essentially it is one for what we have come to call open mouth operations. This is more than a little awkward when the President has already established a reputation for putting her Hermes shod foot in her mouth. Who can forget this from March 12th?

Lagarde: We are not here to close spreads, there are other tools and other actors to deal with these issues.

If you are ever not sure of the date just take a look at a chart of the Italian government bond market as it is the time when the benchmark ten-year yield doubled. As many put it the ECB had gone from “Whatever it takes” to “Whatever.”

This issue has continued and these days President Lagarde reads from a script written for her which begs the issue of whether the questions from the press corps are known in advance? It also begs the issue of who is actually in charge? This is all very different from when prompted by an admiring Financial Time representative she was able to describe herself as a “wise owl” like her brooch. Whoever was in charge got her to change her tune substantially on CNBC later and got a correcting footnote in the minutes.

I am fully committed to avoid any fragmentation in a difficult moment for the euro area. High spreads due to the coronavirus impair the transmission of monetary policy. We will use the flexibility embedded in the asset purchase programme, including within the public sector purchase programme. The package approved today can be used flexibly to avoid dislocations in bond markets, and we are ready to use the necessary determination and strength.

Next comes her promise to unify the ECB Governing Council and have it singing from the same hymn sheet, unlike the term of her predecessor Mario Draghi. This has been crumbling over the past day or two as we have received reports of better economic expectations from some ECB members. This has been solidified by this in Eurofi magazine today.

Now that we have moved past the impact phase of the shock, we can shift our attention toward the recovery phase. Recently, forward looking confidence indicators look robust, while high frequency data suggest that mobility is recovering. These developments solidify the confidence in our baseline projection with a more favorable balance-of-risks. However, even if no further setbacks materialize
economic activity will only approach pre-corona levels at the end of 2022.

That is from Klass Knot the head of the DNB or Netherlands central bank and any doubts about his view are further expunged below.

Relying too heavily on monetary policy to get the job done might have contributed to perceptions of a “central bank put” in the recovery from the euro area debt crisis, where the ECB bore all of the downside risk to the economy.

Might?!

Also it was only a week ago we were getting reports ( more “sauces” ) that the ECB wanted to get the Euro exchange-rate lower. Whereas so far on announcement day it has talked it up.

The Economy

There are several issues here of which the first was exemplified by Eurostat on Tuesday.

The COVID-19 pandemic also had a strong impact on GDP levels. Based on seasonally adjusted figures, GDP
volumes were significantly lower than the highest levels of the fourth quarter of 2019 (-15.1% in the euro area and
-14.3% in the EU). This corresponds to the lowest levels since the the first quarter of 2005 for the euro area.

Such a lurch downwards has these days a duo fold response. What I mean by that os that central banks have got themselves into the trap of responding to individual events which they can do nothing about. The real issue is where the economy will be by the time the policy response ( more QE and a -1% interest-rate for banks) can actually take effect. I still recall an ECB paper which suggested response times had got longer and not shorter as some try to claim.

Accordingly I can only completely disagree with those who say this should be an influence.

In August 2020, a month in which COVID-19 containment measures continued to be lifted, Euro area annual
inflation is expected to be -0.2%, down from 0.4% in July according to a flash estimate from Eurostat,

For a start there are ongoing measurement issues and anyway the boat has sailed. The more thoughtful might wonder how this can happen with all the effort to raise recorded inflation? But they are usually ignored.

Next the new optimism rather collides with this from a week ago.

In July 2020, a month marked by some relaxation of COVID-19 containment measures in many Member States, the seasonally adjusted volume of retail trade decreased by 1.3% in the euro area and by 0.8% in the EU, compared
with June 2020, according to estimates from Eurostat.

That is for July so in these times a while ago but we also face the prospect of more restrictions and maybe more lock downs. If we look at the news from France earlier production was better in July but still well below February.

 Compared to February (the last month before the start of the general lockdown), output declined in the manufacturing industry (−7.9%), as well as in the whole industry (−7.1%).

Italy has different numbers but a similar pattern.

In July 2020 the seasonally adjusted industrial production index increased by 7.4% compared with the previous month. The change of the average of the last three months with respect to the previous three months was 15.0%.

The calendar adjusted industrial production index decreased by 8.0% compared with July 2019 (calendar working days in July 2020 being the same as in July 2019).

The unadjusted industrial production index decreased by 8.0% compared with July 2019.

Comment

We start with two issues which are that some of the ECB are singing along with D:Ream.

Things can only get better
Can only get better if we see it through
That means me and I mean you too.

That is a little awkward if you want to talk the currency down as we note the FT has a claimed scoop which catches up with us from a week ago.

Scoop: For the first time in more than two years, the
@ECB  is expected to include a reference to the exchange rate in today’s “introductory statement” – here’s four things to watch for as the euro’s strength raises alarms at the central bank.

Then there is the background issue that Mario Draghi who knows Christine Lagarde well thought he was setting monetary policy for her last autumn when the Deposit Rate was cut to -0.5% and a reintroduction of QE was announced. So she would have a year or more to bed in and read up on monetary policy. What could go wrong?

This is a contentious area so let me be clear.Appointing a woman to the role was in fact overdue. The problem is that diversity is supposed to bring new talent of which there are many whereas the establishment only picks ones from their club. In this instance there were two steps backwards. The first is simply Christine Lagarde’s track record which includes a conviction for negligence. Next is the fact that the ECB is now headed by two politicians as the reverse takeover completes and it can set about helping current politicians by keeping debt costs low and sometimes negative. The irony is that if you go back to the beginning of this post Christine Lagarde seems to have failed to grasp even that.

The Investing Channel

4 thoughts on “Trouble mounts for the ECB and Christine Lagarde

  1. Hello Shaun,

    Re : ” Appointing a woman to the role was in fact overdue”

    sorry Shaun , and everyone , but these days we appoint on ” diversity points ” and not capabilities.

    I have met and been helped by those in the so called alpha betties who were and are skilled , compentive and bloddy good in their respective feilds. Its funny how they don’t get a look in in todays ‘mockary.

    La-Disregarde is not one of them…….

    pfft !

    Forbin

    • Hi Forbin

      I agree about Lagarde who was a very bad choice. Some praise Isabel Schnabel but that is only because she toes the official line. So we find that diversity at these bodies merely means finding women who think the same as the men, which rather waters down any progress.

      They have in Lagarde at the ECB and Charlotte Hogg at the Bank of England managed to pick women who are even worse than the men.

  2. I don’t know about trouble mounting for the ECB with Lagarde’s foot in mouth operations, but sterling is certainly in trouble, losing almost 2% in one day against the Euro today, helped by ultimatums – sorry – threats by the EU against us, the plan is being followed to the letter, the collapse of sterling starts now in advance of our departure without a trade deal, add in the economic devastation from the increasing lockdowns based on a worthless false positive or real positive covid swab test results from asymptomatic people and the outcomes are entirely predictable

    • Hi Kevin

      Yes it was quite a move as the UK Pound £ went lower after the Lagarde inspired rally for the Euro. We were below 0.91 versus the Euro earlier and are 0.9233 as I type this so quite a day! No doubt a few stops were triggered…

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