WHEN: Today, Tuesday, April 16, 2024
WHERE: “CNBC Leaders”
Following are excerpts from the unofficial transcript of a CNBC exclusive interview with ECB President Christine Lagarde on “CNBC Leaders” tonight, Tuesday, April 16. Video will be available on CNBC.com.
All references must be sourced to CNBC.
LAGARDE ON MONETARY POLICY, THE EUROPEAN ECONOMY, HER ROLE AS ECB PRESIDENT & MORE
SARA EISEN: Do you think we’ve seen peak China growth?
CHRISTINE LAGARDE: Well, if you look at the evolution of that economy, compare it with other, you know, they like to call themselves a developing economy. But, I mean, if you, if you observed the path that developing economies have taken, you observe the demographics and all that, it’s likely that in terms of GDP growth, that the high numbers in the high 8s, 9s, are probably behind.
EISEN: But it’s part of the transition–
LAGARDE: We shall see. Yep.
EISEN: One more on monetary policy, which is the balance sheet. It doesn’t get a lot of attention. It’s not as sexy as interest rates, but it’s definitely a consideration. How are you thinking about the size of the balance sheet right now and where it should be going?
LAGARDE: Our balance sheet has significantly been reduced as a result of the reimbursement of major financing plans, schemes that we had offered during COVID.
EISEN: LTROs?
LAGARDE: Yeah. LTROs, targeted long-term refinancing operations. And there has been the normal reimbursement and a bit more. So there is clearly a reduction of balance sheet on that front. Added to which we are, we had a very large portfolio of assets that we are now letting in complete runoff. No, no net asset purchases, no, none of that. It’s complete runoff. And the PEP, which is the pandemic emergency program that we had put in place during COVID, as of the first of July will be in partial, we will be reducing the reinvestment by 50%. And at the end of ’24, it will be on, in complete runoff as well. So that balance sheet is decline has significantly declined and will continue to decline gradually over the course of time as those bonds and other assets that we purchased come to maturity and will not be replaced. It’s, you know, it’s running in the background because the key tool that we have to use currently, and under the circumstances, is the interest rate. And we will continue to have that decline of the balance sheet in that sort of runoff mode in the background of what we are really focused on, which is interest rates.
EISEN: How do you think about whether there have been any structural changes to economies, the European economy, inflation post-COVID? Are there discussions that you’re having at the ECB?
LAGARDE: You know, the post-COVID situation has been scrutinized in multiple ways because it has probably changed the behavior of many economic factors. The destination of investment, if you look at the real estate market, for instance, commercial or office real estate market, that’s changed massively. The behavior of employees, workers has changed as well. The attitude towards work has probably changed, too. I mean, we are trying to understand from the numbers that we analyze and that we receive what is causing it. And COVID and the attitude of people is certainly one of the reasons why we are seeing much higher sick leave numbers, for instance. Higher part-time work. High employment participation, but with reduced productivity, given the, the growth that we have. Those are significant changes at the sort of behavioral level. But then if you look at the macro level, we have seen fragmentation of the global economy. And regional coalition being, being formed, either because of geography destination and the reduction of risks as a result of having your supply chain nearby, not too far. Or as a result of geopolitical determination, I want to only work with my friends and not with my foes. And I want to secure my supply chain as much as I can, particularly concerning, you know, critical raw materials. So this I’m not suggesting that this is directly the result of COVID. But there is a sort of coalition of developments that happen at the same time.
EISEN: This new world of fragmentation, ultimately do you think it results in lower potential global growth? Trade barriers, restrictions, that sort of thing?
LAGARDE: Fragmentation will have multiple impacts. But, you know, on the sort of instant deduction is that it will reduce the upside that we drew from growth. I mean, growth was a, sorry, trade. Trade was a massive accelerator of many, many things. Lots of good things. Not so propitious things as well. And if that movement of trade is restricted, either deliberately or by regulation, that will have an impact on growth. Yes, of course. Of course.
EISEN: Wonder how you see Europe fitting into this new world of fragmentation. We talked about Europe’s strong trade relationship with China and an increasingly tense U.S.-China geopolitical relationship. What does it mean for Europe?
LAGARDE: Europe is probably in a more vulnerable position than others because it’s a very open economy at large. Europe is, in a way, a little bit protected because a lot of that openness is openness within itself. So of the large openness numbers, part of it is the trade that France does with Germany, that Italy does with Spain, that Latvia does with Portugal. So all that intra– European trade is, in a way, a protection against, you know, the headwind that we will all face if we move towards a more aggressive fragmentation and more hostility developing between the United States and China.
EISEN: Is Europe dangerously dependent on China for trade?
LAGARDE: You know, we thought we were dangerously dependent on Russia for energy. And, you know, human nature, animal spirit I think the wish to control your destiny led us to find alternative sources, to develop alternative sources of energy, to move faster in renewables, and to now be very, very little dependent from Russia, if at all.
EISEN: The–
LAGARDE: You know, things, you know, things are not cast in stone. And that’s the beauty of human nature. You have to bounce back. You have to show resilience.
EISEN: I was gonna say, the topic of Ukraine has been little more divisive politically here in the U.S. and in Washington. And I know it’s an important issue for you, for Europe. The U.S. does stop funding, giving money to Ukraine’s military effort, what would that mean for Europe?
LAGARDE: I think the Ukraine situation is important for all of us who believe in the international legal order, which is predicated on borders, which cannot be crossed, and countries that cannot be invaded. And that’s an international legal order that the United States and the Europeans after the Second World War promoted actively and strongly, and which has served us well. So I think that to maintain that international order and to take all the steps necessary to protect it and to make sure that this is not the jungle are necessary. That’s from, you know, the international legal order. And you know, I’m a lawyer by background, by history. And I think it’s terribly important to have that in mind. I think the second point is that, given the economic situation of Ukraine, given the confrontation between these two countries, it’s critically important that we help and support as much as is possible. And in that respect, the commitments that were made have to be delivered upon. This, this is a question of respect of the word, respect of the commitments. In Europe, we, it was a bit laborious. Leaders took a little time to come to that firm commitment of delivering 50 billion euros to Ukraine. It’s now agreed, consolidated. It is happening. I just hope that the United States will deliver on its commitment as well.
EISEN: Euro turned 25 this year. And, I mean, I remember, I don’t have to tell you, that when it was formed 11 countries, using the euro. So many skeptics. So many doubters. Wasn’t gonna hold together. Here we are now, 20 countries using the euro. What did the naysayers get wrong?
LAGARDE: I think they underestimated the political and symbolic meaning of that that incredible move. I’m, I don’t think that any time in monetary history there has been that collective move by 11, soon-to-be 20 countries, towards one single currency, and the decisive and determined move away from the local, national currency. When France gave up the franc, when Germany gave up the Deutsche Mark, Italy the lira, and da-da-da-da-da-da, it was a no-way-back adventure. And I think the political will that was behind it and the meaning it had for a continent that had been torn apart from by war was something that was underestimated. And so if you look at, if you look at the textbook, it shouldn’t be 25 years of age. It should have collapsed. But it hasn’t. And I think the political will was demonstrated time and again in times of crisis. You know, the European Sovereign Debt Crisis was a case in point. Our predecessor was very articulate in saying, “We will do whatever it takes.” During the COVID period when all the Europeans decided to go together and borrow jointly and be accountable to each other to support the hardest hit countries, that was also a defining moment. If and when the time comes to close ranks and be together, we will do so. Is it easy? Do I have to deal with one single Treasury? No. I have to deal with 20 ministers of finance, with 20 Treasuries. But do we have do we put a lot of effort and a lot of time and energy behind reaching consensus, debating ideas, and having decisions on a 20-country basis? Yes.
EISEN: Which actually gets to my next question, which is how you came into this role. You’re, you mentioned you were a lawyer–
LAGARDE: Inadvertently I suppose.
EISEN: Exactly. I mean, some I’m still, as someone who covered you first from French Finance Minister, all throughout your tenure as leading the IMF, as a Central Banker. It’s not necessarily what I would’ve expected.
LAGARDE: Offline, you will tell me what you would have expected. I’d be interested in that.
EISEN: I expected you to be the leader of France.
LAGARDE: So I’m the leader of the European Central Bank. And, although without Central Bank background, I have tried to understand, be surrounded by competent people use judgment. And the learning curve has been tough, as you know. And people will probably comment for many years about this or that. But I think, you know, when I look back and I see how much changes we have, we have we have conducted and I say “we” because we are a team. There is an executive board that leads a governing council, and we have unbelievably talented staff that that constantly rethink, reprocess, question to come up with the good advice. But we’ve gone through a strategy review. We’ve gone through a war. We’ve gone through energy crisis. We’ve gone through inflation spiking. And we are we have gone through those two phases of hiking rates, holding. And we are hopefully looking at dialing back. All that in a matter of four and a half years? I think it’s okay. We could’ve done better. We could always do better. And people will comment about this view or this slight delay here, or the under assessment of the impact of energy crisis. And was it 100% supply-driven, or was it also in we will talk about that. But I think what matters to me is that we get to the end of that road, which is price stability, sustainably so, 2% as we defined. And then we will continue the work. We have also, you know, completed the operational framework review, which is not very sexy either, which is highly technical, but which indicates how present we will continue to be in providing liquidity.
EISEN: What about the future of the euro? Where would you like to see it in the next 25 years?
LAGARDE: You know, there are two important reports that are coming up. I don’t know if you’ll have time to cover them in the next few weeks, but there is one that is coming out tomorrow that’s the Letta Report. Former Italian prime minister who is going to focus on what are the hurdles? What are the hiccups? What is not working? What should work? How much bureaucracy and red tape can we remove so that we can have a smooth functioning of the market? That’s number one. Number two, later on I think in September my predecessor will report also on the productivity of Europe and how productivity can be improved. I’m almost certain that both of them will mention capital markets union, banking union. I’m looking at the financial side of their likely prescriptions. And I think that, you know, in maybe not 25 years time. Earlier, I would hope, we will have reached a stage where we have a capital markets union which–
EISEN: Common bond market?
LAGARDE: A common bond market. Well, no, no. I’m not saying that. I’m saying a capital markets union where there is deep liquidity, where issuers from the corporate sector can feel confident that they are going to file the same prospectus everywhere, that the regulatory environment is the same, that the supervision authority is the same. We don’t have something like the SEC. Some people do not always like the SEC’s decision, but it is a unifying factor when it comes to what can be done, what should be done, what should be sanctioned. We have 27 different authorities in that respect. We need a single rule book. I mean, there’re lots of things that need to be significantly changed. And I hope that it is the case because and it circles back to what we were talking about, the Europeans are good savers. They’re not very good consumers, but they’re very good savers. Those savings have to be used on the European market. There’s no reason to travel somewhere else if the conditions are such that you know what you’re investing, you know what the regulatory environment is, you know what you can expect, and you know that money will be, will be secured and–
EISEN: I mean, you’re–
LAGARDE: Well-invested.
EISEN: I’m just thinking as Silicon Valley, for example. Europe doesn’t have a Silicon Valley. Why not?
LAGARDE: And I bet you it has 27 Silicon Valleys because each and every member state is probably very anxious to nurture some startups that will become unicorn and the large the Magnificent Seven of tomorrow. But we have some pretty good corporates. I think there’s often a reference to Granolas, which are not all in the European Union, by the way. There are some in the U.K. as well, which is part of Europe, if not the European Union. And they are different sectors. But a Silicon Valley, per se, no. And that’s probably the direction that we should be heading towards, consolidating through capital market, notably the development of very productive sectors with significant innovation, working on new technologies.
EISEN: What about you? You’re–
LAGARDE: What me?
EISEN: This is an eight-year term. Goes till 2027. What’s been the most challenging part of it so far?
LAGARDE: You know, in this job challenges come, you know, one at a time, and sometimes two or three at a time. And whether, you know, we talk about having war at our doorstep, or whether we talk about locking down half of the economy, getting out of it, suffering inflation as a result of energy prices and a few other things, it’s, it’s a constant rollercoaster of new challenges that are thrown at us. And our job is to keep that equilibrium and that and to stick to our objective of price stability. So that is hard because you need to sort of, number one, keep calm. Keep your nerves. Try to have a little bit of distance when lots of things are thrown at you because you are riveted to what you need to achieve and what your duty is, which is to provide stability in a world which is vastly unstable. So that has been tough. Sometimes bringing everybody to the table, and making sure that we can reach a consensus, which doesn’t necessarily mean unanimity, but enough of a consensus that we all feel confident heading in the direction of this decision or the other. That is sometimes difficult because I deal with very, very smart people who are not short of egos sometimes, not all of them. And, and I have to allow enough space for that to, to be expressed and to be leveraged without compromising the collective drive that we should have.
EISEN: You’ve also been, as long as I’ve covered you, a champion for women in business, in leadership positions. I do wonder what you would what you would go back and tell yourself as you were starting out, the advice you would’ve given yourself.
LAGARDE: You know, I think I have observed the principle that you heard me mention occasionally, which is what I heard from my, you know, national synchronized swimming coach. You know, “When it’s tough, grit your teeth and smile and get on with it.” That has, that is still true to this day. And I think don’t hesitate to take risk. And don’t always stand on the side, measuring the pros and cons. Doesn’t mean to say that you should not, you know, think through and analyze what’s coming up. But there’s a point in time when you have to just say, “Okay, you know what? I can do it.” And have the confidence to do so.
EISEN: So you’re leading the ECB. You led the IMF. You’ve led a major American law firm. What’s what’s next? What do you wanna do next?
LAGARDE: Time will tell. I have no, I have no plan and, as I told you, when I moved from one universe to another, I had never made the plan to do so. So future will tell. What I know for sure is that I’m going to decide what I really like doing, and what I don’t want to do anymore. But that is not the conversation we should have, certainly not online. Maybe offline.
EISEN: Okay. Offline and in the future. Christine Lagarde, thank you so much for the time today. Very much appreciate it.
