The euro zone and the United States are “clearly in different situations” as regards the outlook for inflation, said Christine Lagarde, the president of the ECB, on Monday, while minimizing the risk of an impact of price developments Americans on that of European prices.
Officials at the US Federal Reserve unpleasantly surprised financial markets last week by announcing that they had started to discuss the future end of Fed bond purchases (“tapering”). The Fed also announced that it was planning to raise its key rates in 2023 (and not in 2024 as expected so far), or even at the end of 2022, given the strength of the economic recovery across the Atlantic after the coronavirus crisis.
During a virtual quarterly hearing before the European Parliament, Christine Lagarde however warned against a simplistic comparison between the two shores of the Atlantic, explaining that the recovery in the United States was much more advanced than in the euro zone.
“The United States and Europe are clearly in different situations,” she told MEPs. “It is tempting to compare them but it is not very wise given the many differences between the two economies.”
Not yet the time to raise rates in the euro zone
She acknowledged that accelerating inflation in the United States could have “spillovers” through import prices or consumer inflation expectations in the euro area. “Overall, however, the effects on euro area HICP inflation are expected to be moderate,” she said.
Christine Lagarde also reiterated that it was not yet time to allow a rise in market interest rates, which justified the maintenance by the ECB of favorable financing conditions.
“A sustained increase in market rates could translate more broadly into a tightening of financing conditions for the whole economy”, she explained, repeating remarks made at the end of the policy meeting. June 10 monetary policy.
“Such a tightening would be premature and pose a risk to the ongoing economic recovery and inflation outlook.”
More flexibility required for the European Stability Pact
In addition, the boss of the ECB pleaded to give more “flexibility” to the European stability pact once its suspension due to pandemic will have been lifted. “Europe needs a modernized framework with transparent, flexible and credible fiscal rules that will allow counter-cyclical and sustainable fiscal policies,” said Ms Lagarde.
Too often, “national fiscal policies have limited the possibility” of stimulating the economy and the central bank has found itself “the only player in town,” she explained.
Due to the coronavirus pandemic, which has led euro area countries to increase their debt to support their economies, the Stability Pact has been suspended until 2023.
Beyond this horizon, the European Commission has been in favor of reforming this mechanism, which limits national public deficits to 3% of GDP per year, and public debt to 60% of GDP. One of the avenues being studied as part of this reform would be to raise the deficit and debt ceilings, an idea supported by France, but to which Germany is opposed.
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