Nicolas Goetzmann is responsible for research and macroeconomic strategy at Financière de la Cité.
On 22 November, Christine Lagarde delivered her first economic speech as President of the European Central Bank at the European Banking Congress in Frankfurt. After drawing an almost perfect diagnosis of the situation and the internal problems of the euro area – which must be hailed as a real awareness on the part of the largest European economic authority – the former director of the IMF announced the a "Strategic Review of the European Monetary Policy", whose potential is a true structural transformation of the European economic approach, in a direction favorable to growth.
On July 26, 2012, Mario Draghi uttered the iconic words of his eight years at the head of the ECB: "As part of its mandate, the ECB will do everything it can to preserve the euro area. And believe me it will be enough. ". If we can rejoice that this promise has been honored – the euro area has been preserved – it is also possible to make this statement against the odds. Mario Draghi then proposed "only" to save the euro, without transforming the continent's economic strategy towards a growth policy, modeled on what has been proposed by the US Federal Reserve.
In ten years, the euro area experienced a total growth of 14.5%, against 26% for the United States.
The comparative assessment of the two institutions reveals this flaw. Over the last ten years, ie since the depth of the crisis, the euro area has experienced a total growth of 14.5%, against 26% for the United States, an average annual growth of 1.1%. Europe against 2.1% across the Atlantic. Over the same period, 21.9 million jobs were created in the United States, against 9.6 million in the euro area. In the extreme, the euro zone has been half as good as the United States over the last ten years. If Mario Draghi embodies the rescue of the euro, it is now Christine Lagarde to transform it into growth currency. An ambition that can be read through the speech delivered today.
See also – ECB: Which side should choose Christine Lagarde?
ECB: Which side should choose Christine Lagarde? – Watch on Figaro Live
A very encouraging diagnosis
While European economic discourses are almost always marked by calls for "structural reforms" in the countries of the euro zone, Christine Lagarde renews the approach by targeting her economic diagnosis on the fall of "demand". "In the last ten years, domestic demand growth has been almost 2 percentage points below the pre-crisis decade, and below that of our major trading partners". The reality of European underperformance is now taken into account by the monetary authority.
A diagnosis that is important in many ways. In the first place, it is a question of proposing a "new approach" that Christine Lagarde calls for in order to support European growth, and therefore employment. Secondly, it is a question of taking into account the reality of a world undergoing structural change: the growth of international trade, which has been the engine of European growth in recent years, is now at risk .
From an economy focused on external growth, the euro zone must now focus on domestic growth, as the United States does.
"Resilience is based on two pillars. It is based on competitive companies that export to the rest of the world when domestic growth weakens, and it is based on a strong domestic economy when the world economy weakens. " This is the second pillar that characterizes this year 2019 and the challenges ahead.
Thus, from an economy geared towards external growth, the euro zone must now focus on its domestic growth, as the United States does. A strategy that also has the merit of being able to effectively resolve the point of commercial tension between Brussels and Washington: European trade surpluses. Indeed, and in a mechanical way, the observed weakness of European growth over the last ten years has led to a weakness of European imports from the United States. In contrast, continued US support for the country's growth has largely boosted domestic demand, resulting in strong growth in imports from the euro area. The growth differential, favored by the United States, is therefore the engine of European trade surpluses. In other words, the euro area has benefited from the growth of the US, and without doing the same.
The announcement of the means of action
"So the question is what can public policies do to support our domestic demand and our growth potential". The question of tools is therefore asked, and Christine Lagarde brings a beginning of response.
In the first place, and this is the decisive point, the former director of the IMF announces the holding of a Monetary Policy Review. While the ECB pursues an objective of "price stability" which was defined in 2003 as that of "inflation close but less than 2%", the Review which will open in a "near future" will have for mission to evaluate and modify this definition in a way that is more favorable to domestic growth. While such a redefinition may seem anecdotal at first glance, it should be pointed out that its potential for efficiency is a structural change in the European economy. In the event that the ECB chooses a more ambitious monetary target, the ECB would simply have the capacity to follow the trajectory known to the United States in recent years.
This is the first stone of a potential transformation of Europe into a zone of strong growth and full employment.
In the second place, and as Christine Lagarde has already announced in the past, European states with fiscal capacity, such as Germany or the Netherlands, must support their economies through public investment, which will benefit to the whole area. Finally, by calling for the pursuit of economic and monetary integration, Christine Lagarde completes the desired device.
It is for the moment only a speech, but the steps set today by Christine Lagarde appear as the cornerstone of a potential transformation of Europe into a zone of strong growth and full employment. It will now be up to him to convince his peers in the ECB, in order to succeed in holding politically the promises that have just been made on 22 November. The work begins now.