Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: As Global Finance Chief's Way the fallout from the Iran
Speaker 2: War Bloomberg's Francine Lacrosse. It's down exclusively with the President
Speaker 2: of the ECB, Christine Lagarde.
Speaker 3: Let's listen in.
Speaker 4: How's the euro Area economy holding up in the face
Speaker 4: of the Iran War.
Speaker 1: Well, let me take you back to February twenty seventh.
Speaker 1: Europe was really on a great path and was well positioned.
Speaker 1: So we had recovery underway. We were going to increase
Speaker 1: our projection most likely. Inflation had been under control, oscillating
Speaker 1: around our two percent target for almost a year, and
Speaker 1: unemployment was at rock bottom. An employment participation was still
Speaker 1: significantly high. And then the war started and that created
Speaker 1: a situation of I think increased fragmentation. Everybody talks about
Speaker 1: the asymmetry of the shock, which is one of the
Speaker 1: largest energy shock that we have ever seen on a
Speaker 1: global basis, and with that going on, I think that
Speaker 1: there was a movement of.
Speaker 3: More integration.
Speaker 1: So you have a fragmented world which becomes I think
Speaker 1: more fragmented, more fragmentation and determination to better integrate. So
Speaker 1: we are at this interesting moment where there is damage caused,
Speaker 1: there is value lost, there is destruction of that. I
Speaker 1: don't think that Europe is that the epicenter of that.
Speaker 1: It's clearly Asia which is the first victim of the
Speaker 1: situation in terms of economic losses. And I don't think
Speaker 1: that we should be forgetting the direct losses of people
Speaker 1: having being injured, being displaced, and the destruction that has
Speaker 1: taken place that will require reconstruction efforts, and that I
Speaker 1: think is and should be at the front of our
Speaker 1: mind as we look at the economic consequences.
Speaker 4: On the world economy. How much of a drag does
Speaker 4: it have on GDP forecasts? Again, oil prices fluctuate.
Speaker 1: So much, you know, the direct impact on GDP is
Speaker 1: going to be measured by the you know, the IMED,
Speaker 1: the World Bank, the OECD to a lesser extent because
Speaker 1: it doesn't have the whole constituency, but all of them
Speaker 1: are revisiting downward their projection. I think it's you know,
Speaker 1: minus zero point three compared with what they had expected.
Speaker 1: We are revisiting as well our growth forecast and our
Speaker 1: inflation forecast. We have published that as you know, and
Speaker 1: we have revised inflation to two point six percent growth
Speaker 1: to zero point nine and then and then the evolution
Speaker 1: is going to be a factor of how long, how deep,
Speaker 1: how propagated the crisis is, and we central bankers are
Speaker 1: left with defining the baseline, which is based on the
Speaker 1: most accurate information we have, what we think will happen.
Speaker 1: And because this information that we have is constantly changing
Speaker 1: and we have a high degree and predictability and uncertainty,
Speaker 1: we have to work on scenarios, factoring in how high
Speaker 1: oil and gas and all six A, NA and derivatives
Speaker 1: of those products will be, how long it will last,
Speaker 1: and how fast the situation will be recovered, And we
Speaker 1: keep looking at current data as they come in, and
Speaker 1: thanks to Bloomberg, for instance, this comes in on a
Speaker 1: very regular basis, and we try to figure out where
Speaker 1: we are relative to the baseline and where we are
Speaker 1: relative to the various scenarios that we have laid out.
Speaker 4: And I think you laid it out as three scenarios, baseline, adverse,
Speaker 4: and severe.
Speaker 1: I would call the baseline the baseline and the other
Speaker 1: two the scenarios the scenarios.
Speaker 4: So where are we now?
Speaker 1: We are in between the baseline and the adverse, So
Speaker 1: we have baseline adverse severe. So currently, but you know,
Speaker 1: when I say currently, you have to look at you know,
Speaker 1: the price of the burial, the price of the various
Speaker 1: categories of fuel, the price of futures, and all of
Speaker 1: that applied to gas as well to determine where we
Speaker 1: are exactly relative to these two. But we are somewhere,
Speaker 1: I think, in between the baseline and the adverse scenario.
Speaker 4: So how quickly can that change from baseline to scenarios?
Speaker 3: It changes every day.
Speaker 1: So the difficulty of US central bankers is that we
Speaker 1: need to take a medium term view. This is how
Speaker 1: we define our target. You know, this price stability that
Speaker 1: defines our mandate is done by reference to the medium
Speaker 1: term results and at the same time facts data. A
Speaker 1: number of ships blocked here, volume of oil extracted varies
Speaker 1: almost on a daily basis. So we need to do
Speaker 1: this somehow schizophrenic exercise of keeping our eyes on the
Speaker 1: medium term and making sure that we deliver our mandate,
Speaker 1: but at the same time checking the data almost daily.
Speaker 4: So what does it mean for monetary policy? Does the
Speaker 4: baseline already warrant a hike?
Speaker 1: What it means for monetary policy is that we have
Speaker 1: to be It means two things. We have to be
Speaker 1: completely agile and ready to move in the direction that
Speaker 1: is required. And second we have to be data dependent,
Speaker 1: as we have repeatedly said. But it does not predicate,
Speaker 1: as we speak today from sin that we will go
Speaker 1: in one direction or the other. And it's certainly doesn't
Speaker 1: you know, determine a rate path that I can confirm today,
Speaker 1: and any of the colleagues who are confident that is
Speaker 1: going to be one way or the other or don't know.
Speaker 3: Honestly, does the ECB have a title?
Speaker 1: But don't forget one thing. The baseline and all our
Speaker 1: scenarios are designed and formulated with the incorporation of what
Speaker 1: the market assumes and no other monetary policy or fiscal
Speaker 1: policy decision affecting baseline or either of the two scenarios.
Speaker 4: Do you think there's a tightening bias the YOUCB?
Speaker 3: No, I think there is.
Speaker 1: We have a we have a compass which indicates price
Speaker 1: stability predicated on financial stability. Those are the two I
Speaker 1: wouldn't call them bias.
Speaker 4: How different is it from the shark in twenty twenty
Speaker 4: two and how different will your response be?
Speaker 1: Well, it's different from twenty twenty two in many ways.
Speaker 1: If you look back, inflation was completely different, interest rates
Speaker 1: were completely different. The shock was a combination of supply
Speaker 1: and demand. It was a vastly different situation, and I
Speaker 1: think Europe was affected in a much more significant way
Speaker 1: than it is at the moment because we had this
Speaker 1: sudden stop that came out of the war, the unjustifiable
Speaker 1: war of Russia against Ukraine, which brought to halt the
Speaker 1: delivery of gas that was very sudden.
Speaker 4: I mean, at the time, central banks were blamed for
Speaker 4: acting too slow. Is there a danger? I mean, how
Speaker 4: does that impact Again you're thinking is time?
Speaker 1: Look, I think we've said very clearly that we would
Speaker 1: need data to act, but that we would not hesitate
Speaker 1: to act. I think it really captures well the position
Speaker 1: that we have. We need the data in order to
Speaker 1: analyze whether it's you know, see through, it's going to
Speaker 1: be short lived, we will get back to you know,
Speaker 1: you know, back to the past if you will, although
Speaker 1: I don't think that's actually possible, and we need all that.
Speaker 1: So it's either the see through, which doesn't require that
Speaker 1: we take any particular decision, or it's going to be
Speaker 1: long lasting, it will peak higher and it will require
Speaker 1: action on our part. Or it will be somewhere in between,
Speaker 1: which will then require judgment on the part of the
Speaker 1: Governing Council to decide whether or not the indirect effect
Speaker 1: and the risk of secondary effect might deanco expectations, which
Speaker 1: then you know, would require action as well.
Speaker 4: So I was at a dinner yesterday with the Treasury
Speaker 4: Secretary who was saying that actually he thinks this will
Speaker 4: be short lived.
Speaker 1: But he's a political leader as well as being a
Speaker 1: terribly competent person, But he's a political leader. I'm not
Speaker 1: a political leader anymore. And our job as a central
Speaker 1: banker is to stay in our line, to observe our
Speaker 1: framework we have one, thank you very much, and to
Speaker 1: identify whether or not we are in a situation of
Speaker 1: short lived look through or long lasting act and possibly
Speaker 1: decisively or in between, which requires a very subtle identification
Speaker 1: of how much when in order to make sure that
Speaker 1: infection expectations are anchored and we do not get the
Speaker 1: secondary effect.
Speaker 3: So that's that's the job.
Speaker 1: It's the difficulty of what we have to do at
Speaker 1: the moment while at the same time very seriously looking
Speaker 1: at the medium term and being attentive to the short term.
Speaker 4: And so your gut feeling for what we're living through.
Speaker 4: Now you'll act quicker than in twenty twenty two.
Speaker 1: I don't have a gut feeling, you know when i'm
Speaker 1: you know, I hear the music of this is short lived.
Speaker 1: We will go through that you can see through. First
Speaker 1: of all, we decide what we have to do point
Speaker 1: number one, point number two, you know, to explain to
Speaker 1: the fisherman who cannot go at sea because he cannot
Speaker 1: pay for is petrol, or when I think of, you know,
Speaker 1: the household that doesn't know whether they'll be able to
Speaker 1: pay for the refilling of the fuel tank, or whether
Speaker 1: I think of the guys who have to drive to
Speaker 1: work and who see the price of all at the
Speaker 1: pump going up and up and up. Take I take
Speaker 1: the see through story into account, but this is not
Speaker 1: something that you can actually explain, which requires from our perspective,
Speaker 1: in order to align in the most effective way monetary
Speaker 1: and fiscal policies, It requires that we have a dialogue
Speaker 1: with the fiscal policy leaders and ask them to be
Speaker 1: targeted and temporary, transparent and tailored and all those TTTT
Speaker 1: when they design support packages or help for the people
Speaker 1: who are the fisherman the housekeeper, the house hold or
Speaker 1: the guy who is driving his car.
Speaker 4: Given where we are, now, what does worst case scenario
Speaker 4: for growth and inflation look like?
Speaker 3: The worst case scenario is war in any event.
Speaker 1: You know, as former head of the IMF, I have
Speaker 1: seen successful program being completely wiped out by war. So
Speaker 1: war is in any circumstances the worst outcome. If you
Speaker 1: talk in strict economic terms and the movement of goods
Speaker 1: and all that, it's the you know, it's the Strait
Speaker 1: or fore or Moose not being open for shipping and
Speaker 1: transportation because you have to twenty percent of gazanol going
Speaker 1: through that as well as you know, the like of
Speaker 1: ingredients necessary for fertilizers, ingredients necessary for microchips and what
Speaker 1: have you not going through the Strait.
Speaker 4: So what's the pain threshold for the Euro Area economy
Speaker 4: that the ACV would have to act on? Is it
Speaker 4: inflation at three four percent?
Speaker 1: Or is it look we have forecast for inflation that
Speaker 1: vary between two point six which is the baseline that
Speaker 1: we have, and a little north of four percent based
Speaker 1: on what I told you earlier, you know, which is
Speaker 1: see through strong decisive reaction or somewhere in between, depending
Speaker 1: on the factors that we see. We will adjust because
Speaker 1: we will be agile, but one thing for sure is
Speaker 1: that we will keep out two percent.
Speaker 4: Madame again, how worried are you about the discrepancy between
Speaker 4: spots and future oil prices and so potentially tighter markets
Speaker 4: that we're pricing in.
Speaker 1: I think it's the whole dilemna that we have about
Speaker 1: short and medium term. And you know, the more anxious
Speaker 1: and worried economic actors are about the resolution of this crisis,
Speaker 1: the more pressure there will be on the spot market.
Speaker 4: How much do you blame the US administration for what's
Speaker 4: happening to the European economy?
Speaker 1: You know, it's not my job to do, you know,
Speaker 1: blame two point finger or to associate this or that
Speaker 1: with blame. I'm more in the hope section myself, and
Speaker 1: I very much hope that people can sit at the table,
Speaker 1: can come to their sense and understand that it will
Speaker 1: be in the best interest of the global economy of
Speaker 1: the people that a war settlement is reached and that
Speaker 1: not just a cease fire, and that we can navigate
Speaker 1: through the straits.
Speaker 3: Of the world.
Speaker 1: How long that's a ramification with international law, But let's
Speaker 1: not go there.
Speaker 3: I'm a reformed lawyer. As you know.
Speaker 4: We can go there if you want. I mean, is
Speaker 4: it something when you look at the economic fallout? Actually
Speaker 4: in general, even if there's a truce, if there's lasting peace,
Speaker 4: how long does that play out for?
Speaker 1: I think there are two dimensions to that. One is
Speaker 1: for shipping to resume under regular, normal conditions, it will
Speaker 1: take I don't know whether it's two or three months.
Speaker 1: I listen to the experts and I try to understand
Speaker 1: how long it takes to fill in the ships again,
Speaker 1: to move the tankers around, and to deliver. I think
Speaker 1: most of them are saying that it's a two or
Speaker 1: three months job for the shipping and the distribution production.
Speaker 1: Refinery that seems to be another matter. And when you
Speaker 1: look at the rafaelasan refinery facility in Qatar, they say
Speaker 1: that it's not months, it's years.
Speaker 3: That we're talking about some of.
Speaker 1: The facilities in Saudi where its pipeline probably shorter, but
Speaker 1: some of the other facilities will require long term fixing
Speaker 1: and adjusting and repairing and setting it up again.
Speaker 4: I mean, given all of this, is there too much
Speaker 4: financial exuberance in markets?
Speaker 3: You know, what is a little strange is that.
Speaker 1: There is a tendency Bison to assume that it's business
Speaker 1: as usual. And I think there is a bit of
Speaker 1: a dichotomy between what between those who regard business as
Speaker 1: usual and those on the other hand, who are saying,
Speaker 1: watch out. It's a very significant shock and we are
Speaker 1: not about to see the end of that process because
Speaker 1: there will be ramifications. They will be impact on the
Speaker 1: price of you know, processed and unprocessed food. There will
Speaker 1: be an impact on the supply chain if it lasts longer.
Speaker 1: And we are not going to see exactly the same
Speaker 1: disruption as during COVID, but something that will be in
Speaker 1: between normal and COVID disruption.
Speaker 4: But do you worry about financial stability? I mean there's
Speaker 4: also private marked.
Speaker 3: You always do.
Speaker 1: Yeah, I always worry about financial stability and price stability
Speaker 1: because they are intrinsically.
Speaker 3: Interdependent. So, you know, we.
Speaker 1: In the supervision function of the ECB and all supervisors
Speaker 1: around the world have to be very attentive to financial risks,
Speaker 1: whether sort of declared and disclosed risks which hopefully have
Speaker 1: mitigating factors associated with it. At least that's what the
Speaker 1: regulation is doing. And the rampant risks the various you
Speaker 1: know black swans that are there.
Speaker 4: What worries you the most in all of this, you.
Speaker 1: Know, it's what worries me, both in good and in
Speaker 1: good and bad, and I hope we'll never have. The
Speaker 1: ugly is the impact of artificial intelligence on our economies
Speaker 1: and the outcome and the governance of artificial intelligence. And
Speaker 1: what I mean by that is what impact will it
Speaker 1: have on just not just on productivity where our star
Speaker 1: will go, which obviously matters to US central bankers, but
Speaker 1: what impact will it have on our societies? How many
Speaker 1: people will be unemployed, how many people will require retraining,
Speaker 1: risk killing?
Speaker 3: Who will pay for that?
Speaker 1: The whole you know, fiscal equilibrium that will result from
Speaker 1: the massive transformation that is expected in many corners. That
Speaker 1: that keeps me not awake at night.
Speaker 3: Because I try to get some sleep.
Speaker 1: But it's it's it's.
Speaker 3: A big issue. It's a really big issue.
Speaker 4: Are governments thinking about that? Given given there they're also
Speaker 4: dealing with this massive energy crisis.
Speaker 3: Now I've been in government few years of my life.
Speaker 1: What is really difficult is is to focus on the
Speaker 1: day to day, to mind the next election, to respect
Speaker 1: your program or or the expectations that your voters have,
Speaker 1: and yet at the same time to anticipate what will
Speaker 1: be the effect of major breakthrough innovations, significant developments. And
Speaker 1: I think that in that category, AI is something that
Speaker 1: we need to have at the front of our mind
Speaker 1: because it is moving so fast and because the impact
Speaker 1: of it can be so.
Speaker 3: Disruptive for good or for bad.
Speaker 1: I think the development we've seen with Anthropic and Metals
Speaker 1: is a good example of a responsible company that is
Speaker 1: suddenly thinking, Ah, that could be really good, but if
Speaker 1: it falls in the wrong hand, it could be really bad.
Speaker 1: We need to do something about it. I don't think
Speaker 1: there is a framework. You know, everybody is keen to
Speaker 1: have a framework within which to operate. I don't think
Speaker 1: there is a governance framework that is there to actually
Speaker 1: mind those things we need to work on that.
Speaker 4: Do you think financial institutions are prepared for I think
Speaker 4: there's been called to meetings in various corners of the world,
Speaker 4: and I know that we at the ECB will be
Speaker 4: talking are talking to financial institutions to alert them to
Speaker 4: those risks. Yes, and then Maritell we also had elections
Speaker 4: in Hungary over the weekend. What does Orban's defeat mean
Speaker 4: for Europe and the world.
Speaker 1: I think I'm looking at Magyar Peter magiar victory, which
Speaker 1: was significant, you know, landslide result.
Speaker 3: He has two thirds majority.
Speaker 1: He can change this new prime minister, can change the constitution,
Speaker 1: remove you know, a number of obstacles to both growth
Speaker 1: and integrity in the governance of that country, and I
Speaker 1: think that that is really to be welcomed. The second
Speaker 1: thing that you know, it tells me is that Hungary
Speaker 1: is in the European family, and what I heard recently
Speaker 1: is that this new Prime Minister, Peter Magyar, is indicating
Speaker 1: that he would like to see Hungary join the euro
Speaker 1: Area and the florent of Hungary be replaced by the
Speaker 1: euro which I think is the natural path of all
Speaker 1: twenty seven, well twenty six actually it excludes Denmark, but
Speaker 1: six member states are expected to be part of the family,
Speaker 1: and we have twenty one. If Hungary goes through the
Speaker 1: process of integration, the convergence and all of that, it
Speaker 1: would be a great achievement and it would coincide with
Speaker 1: what was expected by the founders.
Speaker 4: Do you think that the talks on adoption of the
Speaker 4: Europe by Hungary will happen in your mandate.
Speaker 1: Wow, you'd have to extend my mondate a little bit,
Speaker 1: which I think is not in the cards.
Speaker 3: I'm happy to stay, but.
Speaker 1: No, because you know, convergence requires a number of reforms,
Speaker 1: some of which I think Hungry is going to consider
Speaker 1: and hopefully implement. The judicial one is appointed case, and
Speaker 1: then it requires an adjustment period, which is usually you know,
Speaker 1: anywhere between two and a few more years, depending on
Speaker 1: which country you look at in terms of other practices.
Speaker 1: But the convergence process takes a bit of time. You know,
Speaker 1: you need to align a lot of parameters, you need
Speaker 1: to have the same legal basis.
Speaker 3: On many many aspects.
Speaker 1: But I'm delighted that you know, he's he's looking at
Speaker 1: it with with with a very positive approach, and he's
Speaker 1: picking up on that basis which has not been the
Speaker 1: case for a long time.
Speaker 4: Talking about your mandate. Will you see it out? Will
Speaker 4: you fully finish your mandate?
Speaker 3: Look, when you know, when there is.
Speaker 1: Big clouds on the horizon, the captain does not leave
Speaker 1: the ship. And this captain is not going to leave
Speaker 1: the ship because I see clouds, the biggest cloud.
Speaker 3: Well, you know, then what do you see?
Speaker 1: Well, we all, we're all facing the same situation with asymmetry,
Speaker 1: as I indicated. But when you see you know, major disruption,
Speaker 1: the energy supply being being reduced, when you see threats
Speaker 1: to growth, upside risk to inflation, this is, this is,
Speaker 1: These are a serious matters that we have to to
Speaker 1: be attentive to and and to keep under control so
Speaker 1: that our price stability, our two percent target is not
Speaker 1: going to be varied from