Bloomberg Audio Studios, podcasts, radio news.
As Global Finance Chief's Way the fallout from the Iran War Bloomberg's Francine Lacrosse. It's down exclusively with the President of the ECB, Christine Lagarde.
Let's listen in.
How's the euro Area economy holding up in the face of the Iran War.
Well, let me take you back to February twenty seventh. Europe was really on a great path and was well positioned. So we had recovery underway. We were going to increase our projection most likely. Inflation had been under control, oscillating around our two percent target for almost a year, and unemployment was at rock bottom. An employment participation was still significantly high. And then the war started and that created
a situation of I think increased fragmentation. Everybody talks about the asymmetry of the shock, which is one of the largest energy shock that we have ever seen on a global basis, and with that going on, I think that there was a movement of.
More integration.
So you have a fragmented world which becomes I think more fragmented, more fragmentation and determination to better integrate. So we are at this interesting moment where there is damage caused, there is value lost, there is destruction of that. I don't think that Europe is that the epicenter of that. It's clearly Asia which is the first victim of the
situation in terms of economic losses. And I don't think that we should be forgetting the direct losses of people having being injured, being displaced, and the destruction that has taken place that will require reconstruction efforts, and that I think is and should be at the front of our mind as we look at the economic consequences.
On the world economy. How much of a drag does it have on GDP forecasts? Again, oil prices fluctuate.
So much, you know, the direct impact on GDP is going to be measured by the you know, the IMED, the World Bank, the OECD to a lesser extent because it doesn't have the whole constituency, but all of them are revisiting downward their projection. I think it's you know, minus zero point three compared with what they had expected. We are revisiting as well our growth forecast and our
inflation forecast. We have published that as you know, and we have revised inflation to two point six percent growth to zero point nine and then and then the evolution is going to be a factor of how long, how deep, how propagated the crisis is, and we central bankers are left with defining the baseline, which is based on the most accurate information we have, what we think will happen.
And because this information that we have is constantly changing and we have a high degree and predictability and uncertainty, we have to work on scenarios, factoring in how high oil and gas and all six A, NA and derivatives of those products will be, how long it will last, and how fast the situation will be recovered, And we keep looking at current data as they come in, and thanks to Bloomberg, for instance, this comes in on a very regular basis, and we try to figure out where
we are relative to the baseline and where we are relative to the various scenarios that we have laid out.
And I think you laid it out as three scenarios, baseline, adverse, and severe.
I would call the baseline the baseline and the other two the scenarios the scenarios.
So where are we now?
We are in between the baseline and the adverse, So we have baseline adverse severe. So currently, but you know, when I say currently, you have to look at you know, the price of the burial, the price of the various categories of fuel, the price of futures, and all of that applied to gas as well to determine where we are exactly relative to these two. But we are somewhere, I think, in between the baseline and the adverse scenario.
So how quickly can that change from baseline to scenarios?
It changes every day.
So the difficulty of US central bankers is that we need to take a medium term view. This is how we define our target. You know, this price stability that defines our mandate is done by reference to the medium term results and at the same time facts data. A number of ships blocked here, volume of oil extracted varies
almost on a daily basis. So we need to do this somehow schizophrenic exercise of keeping our eyes on the medium term and making sure that we deliver our mandate, but at the same time checking the data almost daily.
So what does it mean for monetary policy? Does the baseline already warrant a hike?
What it means for monetary policy is that we have to be It means two things. We have to be completely agile and ready to move in the direction that is required. And second we have to be data dependent, as we have repeatedly said. But it does not predicate, as we speak today from sin that we will go
in one direction or the other. And it's certainly doesn't you know, determine a rate path that I can confirm today, and any of the colleagues who are confident that is going to be one way or the other or don't know.
Honestly, does the ECB have a title?
But don't forget one thing. The baseline and all our scenarios are designed and formulated with the incorporation of what the market assumes and no other monetary policy or fiscal policy decision affecting baseline or either of the two scenarios.
Do you think there's a tightening bias the YOUCB?
No, I think there is.
We have a we have a compass which indicates price stability predicated on financial stability. Those are the two I wouldn't call them bias.
How different is it from the shark in twenty twenty two and how different will your response be?
Well, it's different from twenty twenty two in many ways. If you look back, inflation was completely different, interest rates were completely different. The shock was a combination of supply and demand. It was a vastly different situation, and I think Europe was affected in a much more significant way than it is at the moment because we had this sudden stop that came out of the war, the unjustifiable war of Russia against Ukraine, which brought to halt the delivery of gas that was very sudden.
I mean, at the time, central banks were blamed for acting too slow. Is there a danger? I mean, how does that impact Again you're thinking is time?
Look, I think we've said very clearly that we would need data to act, but that we would not hesitate to act. I think it really captures well the position that we have. We need the data in order to analyze whether it's you know, see through, it's going to be short lived, we will get back to you know, you know, back to the past if you will, although I don't think that's actually possible, and we need all that.
So it's either the see through, which doesn't require that we take any particular decision, or it's going to be long lasting, it will peak higher and it will require action on our part. Or it will be somewhere in between, which will then require judgment on the part of the Governing Council to decide whether or not the indirect effect and the risk of secondary effect might deanco expectations, which then you know, would require action as well.
So I was at a dinner yesterday with the Treasury Secretary who was saying that actually he thinks this will be short lived.
But he's a political leader as well as being a terribly competent person, But he's a political leader. I'm not
a political leader anymore. And our job as a central banker is to stay in our line, to observe our framework we have one, thank you very much, and to identify whether or not we are in a situation of short lived look through or long lasting act and possibly decisively or in between, which requires a very subtle identification of how much when in order to make sure that infection expectations are anchored and we do not get the secondary effect.
So that's that's the job.
It's the difficulty of what we have to do at the moment while at the same time very seriously looking at the medium term and being attentive to the short term.
And so your gut feeling for what we're living through. Now you'll act quicker than in twenty twenty two.
I don't have a gut feeling, you know when i'm you know, I hear the music of this is short lived.
We will go through that you can see through. First of all, we decide what we have to do point number one, point number two, you know, to explain to the fisherman who cannot go at sea because he cannot pay for is petrol, or when I think of, you know, the household that doesn't know whether they'll be able to pay for the refilling of the fuel tank, or whether I think of the guys who have to drive to work and who see the price of all at the
pump going up and up and up. Take I take the see through story into account, but this is not something that you can actually explain, which requires from our perspective, in order to align in the most effective way monetary and fiscal policies, It requires that we have a dialogue with the fiscal policy leaders and ask them to be targeted and temporary, transparent and tailored and all those TTTT when they design support packages or help for the people
who are the fisherman the housekeeper, the house hold or the guy who is driving his car.
Given where we are, now, what does worst case scenario for growth and inflation look like?
The worst case scenario is war in any event.
You know, as former head of the IMF, I have seen successful program being completely wiped out by war. So
war is in any circumstances the worst outcome. If you talk in strict economic terms and the movement of goods and all that, it's the you know, it's the Strait or fore or Moose not being open for shipping and transportation because you have to twenty percent of gazanol going through that as well as you know, the like of ingredients necessary for fertilizers, ingredients necessary for microchips and what have you not going through the Strait.
So what's the pain threshold for the Euro Area economy that the ACV would have to act on? Is it inflation at three four percent?
Or is it look we have forecast for inflation that vary between two point six which is the baseline that we have, and a little north of four percent based on what I told you earlier, you know, which is see through strong decisive reaction or somewhere in between, depending on the factors that we see. We will adjust because we will be agile, but one thing for sure is that we will keep out two percent.
Madame again, how worried are you about the discrepancy between spots and future oil prices and so potentially tighter markets that we're pricing in.
I think it's the whole dilemna that we have about short and medium term. And you know, the more anxious and worried economic actors are about the resolution of this crisis, the more pressure there will be on the spot market.
How much do you blame the US administration for what's happening to the European economy?
You know, it's not my job to do, you know, blame two point finger or to associate this or that with blame. I'm more in the hope section myself, and I very much hope that people can sit at the table, can come to their sense and understand that it will be in the best interest of the global economy of the people that a war settlement is reached and that not just a cease fire, and that we can navigate through the straits.
Of the world.
How long that's a ramification with international law, But let's not go there.
I'm a reformed lawyer. As you know.
We can go there if you want. I mean, is it something when you look at the economic fallout? Actually in general, even if there's a truce, if there's lasting peace, how long does that play out for?
I think there are two dimensions to that. One is for shipping to resume under regular, normal conditions, it will take I don't know whether it's two or three months. I listen to the experts and I try to understand how long it takes to fill in the ships again, to move the tankers around, and to deliver. I think most of them are saying that it's a two or three months job for the shipping and the distribution production.
Refinery that seems to be another matter. And when you look at the rafaelasan refinery facility in Qatar, they say that it's not months, it's years.
That we're talking about some of.
The facilities in Saudi where its pipeline probably shorter, but some of the other facilities will require long term fixing and adjusting and repairing and setting it up again.
I mean, given all of this, is there too much financial exuberance in markets?
You know, what is a little strange is that.
There is a tendency Bison to assume that it's business as usual. And I think there is a bit of a dichotomy between what between those who regard business as usual and those on the other hand, who are saying, watch out. It's a very significant shock and we are not about to see the end of that process because there will be ramifications. They will be impact on the price of you know, processed and unprocessed food. There will be an impact on the supply chain if it lasts longer.
And we are not going to see exactly the same disruption as during COVID, but something that will be in between normal and COVID disruption.
But do you worry about financial stability? I mean there's also private marked.
You always do.
Yeah, I always worry about financial stability and price stability because they are intrinsically.
Interdependent. So, you know, we.
In the supervision function of the ECB and all supervisors around the world have to be very attentive to financial risks, whether sort of declared and disclosed risks which hopefully have mitigating factors associated with it. At least that's what the regulation is doing. And the rampant risks the various you know black swans that are there.
What worries you the most in all of this, you.
Know, it's what worries me, both in good and in good and bad, and I hope we'll never have. The ugly is the impact of artificial intelligence on our economies and the outcome and the governance of artificial intelligence. And what I mean by that is what impact will it have on just not just on productivity where our star will go, which obviously matters to US central bankers, but
what impact will it have on our societies? How many people will be unemployed, how many people will require retraining, risk killing?
Who will pay for that?
The whole you know, fiscal equilibrium that will result from the massive transformation that is expected in many corners. That that keeps me not awake at night.
Because I try to get some sleep.
But it's it's it's.
A big issue. It's a really big issue.
Are governments thinking about that? Given given there they're also dealing with this massive energy crisis.
Now I've been in government few years of my life.
What is really difficult is is to focus on the day to day, to mind the next election, to respect your program or or the expectations that your voters have, and yet at the same time to anticipate what will be the effect of major breakthrough innovations, significant developments. And I think that in that category, AI is something that we need to have at the front of our mind because it is moving so fast and because the impact of it can be so.
Disruptive for good or for bad.
I think the development we've seen with Anthropic and Metals is a good example of a responsible company that is suddenly thinking, Ah, that could be really good, but if it falls in the wrong hand, it could be really bad. We need to do something about it. I don't think there is a framework. You know, everybody is keen to have a framework within which to operate. I don't think there is a governance framework that is there to actually mind those things we need to work on that.
Do you think financial institutions are prepared for I think there's been called to meetings in various corners of the world, and I know that we at the ECB will be talking are talking to financial institutions to alert them to those risks. Yes, and then Maritell we also had elections in Hungary over the weekend. What does Orban's defeat mean for Europe and the world.
I think I'm looking at Magyar Peter magiar victory, which was significant, you know, landslide result.
He has two thirds majority.
He can change this new prime minister, can change the constitution, remove you know, a number of obstacles to both growth and integrity in the governance of that country, and I
think that that is really to be welcomed. The second thing that you know, it tells me is that Hungary is in the European family, and what I heard recently is that this new Prime Minister, Peter Magyar, is indicating that he would like to see Hungary join the euro Area and the florent of Hungary be replaced by the euro which I think is the natural path of all twenty seven, well twenty six actually it excludes Denmark, but six member states are expected to be part of the family,
and we have twenty one. If Hungary goes through the process of integration, the convergence and all of that, it would be a great achievement and it would coincide with what was expected by the founders.
Do you think that the talks on adoption of the Europe by Hungary will happen in your mandate.
Wow, you'd have to extend my mondate a little bit, which I think is not in the cards.
I'm happy to stay, but.
No, because you know, convergence requires a number of reforms, some of which I think Hungry is going to consider and hopefully implement. The judicial one is appointed case, and then it requires an adjustment period, which is usually you know, anywhere between two and a few more years, depending on which country you look at in terms of other practices. But the convergence process takes a bit of time. You know, you need to align a lot of parameters, you need to have the same legal basis.
On many many aspects.
But I'm delighted that you know, he's he's looking at it with with with a very positive approach, and he's picking up on that basis which has not been the case for a long time.
Talking about your mandate. Will you see it out? Will you fully finish your mandate?
Look, when you know, when there is.
Big clouds on the horizon, the captain does not leave the ship. And this captain is not going to leave the ship because I see clouds, the biggest cloud.
Well, you know, then what do you see?
Well, we all, we're all facing the same situation with asymmetry, as I indicated. But when you see you know, major disruption, the energy supply being being reduced, when you see threats to growth, upside risk to inflation, this is, this is, These are a serious matters that we have to to be attentive to and and to keep under control so that our price stability, our two percent target is not going to be varied from