christine lagarde : hearing at the committee on economic and monetary affairs of the european parliament introductory statement ( by videoconference ) by ms christine lagarde, president of the european central bank, at the econ committee of the european parliament, frankfurt am main, 28 september 2020. * * * madam chair, honourable members of the economic and monetary affairs committee, ladies and gentlemen, thank you very much for giving me the opportunity to speak to you today and to have a frank and timely discussion about the ecb ’ s monetary policy, as befits the topics you have chosen for this hearing. after a few words on the euro area economic outlook, i will focus my remarks today on the ecb ’ s monetary policy and in particular on the role of asset purchases, before sharing some reflections on the ecb ’ s accountability arrangements. the euro area economic outlook the impact of the coronavirus ( covid - 19 ) pandemic is still being felt across the euro area. businesses are facing difficulties, people are losing their jobs, and prospects about the future remain uncertain. while euro area economic activity rebounded in the third quarter, the recovery remains incomplete, uncertain and uneven. consumer spending has resumed significantly, but consumers remain cautious owing to anxiety about their job and income prospects. 1 similarly, business investment has been picking up, but weaker demand and elevated uncertainty continue to weigh on firms ’ investment plans. in this context, job retention schemes and national guarantees on bank loans remain critically important factors in reducing uncertainty and softening the impact of the pandemic. the latest ecb staff projections foresee annual real gdp growth at – 8. 0 % in 2020, 5. 0 % in 2021 and 3. 2 % in 2022. euro area real gdp is only expected to recover to pre - crisis levels in late 2022. 2 the strength of the recovery remains, however, highly dependent on the evolution of the covid - 19 pandemic and the success of containment policies. the public health crisis will continue to weigh on economic activity and poses downside risks to the economic outlook. the sharp drop in economic activity earlier this year has weakened price pressures. annual headline inflation in the euro area stood at – 0. 2 % in august and is expected to remain negative over the coming months, reflecting the effects of earlier declines in energy prices, a stronger euro, and a temporary reduction in the value - added tax rate in germany. ecb staff project annual inflation to gradually increase

tfp growth was the subject of academic debate before the crisis, this was generally seen as a euro area problem, in particular vis - a - vis the united states. 7 the general mood among observers was that the catching - up economies were progressing relatively well, bourles et al ( 2010 ), “ do product market reforms in upstream sectors curb productivity growth? panel data evidence for oecd countries ”, nber working paper 16520, november 2010. see financial integration in europe, european central bank, april 2008. for a detailed exposition of this argument see rajan, r. and l. zingales ( 2002 ), “ banks and markets : the changing character of european finance ”, in v. gaspar ( ed. ), the transformation of the european financial system, october 2002. see for example havik et al ( 2008 ), “ the eu - us total factor productivity gap : an industry perspective ”, dg ecfin economic papers 339, september 2008. bis central bankers ’ speeches or at least not markedly worse than others. for example, the european commission ’ s emu @ 10 report stated that “ three of the four cohesion countries ( spain, ireland and greece ) have shown a satisfactory development overall, while only the fourth ( portugal ) has disappointed. ” 8 this leads me to my second question : if this convergence was in fact cyclical rather than structural, why was it not identified earlier? my tentative answer would be that observers ’ assessments were influenced by the financial cycle, a theme that has echoed in hyman minsky ’ s work. 9 in retrospect, it seems now that the early years of the euro were the peak of a much longer financial upswing. this led observers to overestimate the sustainability of consumption and investment, and to underestimate the risks of rising private debt levels – and this was true on both sides of the atlantic. one explanation for this is that, as the upward phase of the financial cycle can be very prolonged – according to estimates by bis scholars, the typical duration of the financial cycle is around 16 years10 – perceptions of risk and value adjusted upwards. historical relationships between asset prices, debt ratios and underlying productivity levels were deemed no longer to hold. hence, developments that merely reflected the longer financial cycle were falsely believed to be structural. another explanation is that observers overestimated future productive capacity due to the effect of the financial cycle on real - time potential growth estimates. 11 this in turn