Page 15 - ISQ UK JANUARY 2020

JANUARY 2020

Eurosystem Staff Macroeconomic Projections

Euro area, annual figures

Source: European Central Bank, Eurosystem

that is, more concern will be attributed to an inflation level Chancellor ponders her political legacy - and the likelihood
below the current two percent target, rather than one above. (or not) that her chosen successor will be elected later on this
If this does become a new policy conclusion then expect decade - Lagarde’s diplomatic skills are going to be critical.
influential regional bond yields such as the ten year German
bund to move back into positive yield territory, reflecting a So the real value-add that Christine Lagarde can bring is -
real push back against the forces of disinflation which have using the ECB Presidency platform - to channel the experiences
gathered - Japanese-style - progressively over the last decade. she garnered at the IMF and effectively encourage highly
After all, a real sign that the eurozone is on a sustainable influential eurozone governments to complement the
recovery path is when the region’s interest rates finally return continuing ultra-loose ECB policy with expansionary fiscal
to not just zero but positive levels again. policy boosts and flexibility improving structural shifts. In
short, the best contribution Lagarde can make in her new
This is some way off... which brings us nicely back to Christine job... is to start highlighting its limitations.
Lagarde’s relationship with Angela Merkel and Ursula von der
Leyen. I note Lagarde’s words during December’s press
conference that ‘my ambition is to... bring the best out of the
members of my monetary council’. This speaks to the
consensus-building skills which were apparent during her
tenure at the International Monetary Fund. But surely to rank KEY TAKEAWAYS:
her presidency of the ECB a success by the middle part of this • The appointment of Christine Lagarde as the new
decade, making Angela Merkel feel comfortable with signalling President of the European Central Bank (ECB) could
a subtle shift away from recent German balanced budget (and be a tipping point.
in reality budget surplus) dogma is going to be important. • There is much to do across eurozone policymaking
After all, Germany is the biggest and most influential economy given continuing relatively dull economic data
within the region. Additionally, in the last year or so - impacted forecasts for 2020.
by global trade matters as well as specific industrial malaise -
the German economy has flirted with recession. Therefore any • Watch not just the ECB policy review but also
notion of eurozone recovery would be given a big boost if the ability of Lagarde to encourage influential
Germany was to be seen to be getting on the front foot from a economies such as Germany to undertake extra
fiscal stimulus perspective. As 2019 turned into 2020 there stimulus policy.
were a few signals that maybe this shift is not impossible in • Any successes in changing the debate will be seen in
the upcoming few quarters. Merkel’s coalition remains very the eurozone bond markets first before eventually
fragile and public angst over economic growth and spilling over into higher formal interest rates.
infrastructure issues remain high. As the long-serving

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