Debate: European Central Bank – annual report
Date: MONDAY, 8 FEBRUARY 2021
Speaker: Christine Lagarde
Language: EN

Turning to the circumstances, clearly the pandemic has confronted us with a serious health and economic crisis, and yes, the start of vaccinations provides hope. But citizens across Europe are still facing the dire social and economic consequences of the virus, and prospects about the future remain uncertain. In these circumstances, a close dialogue between the EU institutions is essential for charting a clear way forward and reaching a common European response to common challenges. This Parliament has ensured that the views of European citizens are heard and acted upon as the EU is tackling the crisis. Parliamentary resolutions like the one we are debating today represent an important occasion for us at the ECB to reflect on how we can best deliver on our mandate for the benefit of all Europeans, and this is also the objective of our ongoing strategy review. I have repeatedly emphasised my ambition to listen more attentively to people from across the euro area, so I am very pleased to announce today to you that we will publish the key findings from our ‘ECB Listens’ portal. This will be published today, and on this occasion I would like to thank the 4 000 Europeans who responded to our consultation and shared their concerns about inflation developments, about the current economic crisis and about the impact of climate change, as those were the key topics that they commented on. Together – all together, including you, Mr Vice-President Valdis Dombrovskis – I would like to start by just looking back at the unprecedented economic crisis that Europe experienced last year and how the ECB responded. I will then look at the prospects for this year, before discussing a few of the policy challenges that we face in ensuring a strong recovery from the pandemic and how to manage the transition to a greener and more digital economy. So let me start with the year behind us and how I believe we responded forcefully to an unprecedented crisis. I don’t know how 2020 will be remembered by each and every one of you, but I think collectively we will remember 2020 as the year of the pandemic that led to an unprecedented economic contraction. The European institutions and the EU Member States reacted swiftly, creatively and resolutely, and the ECB, in my view, played a vital role. Our monetary policy was centred on two pillars. First pillar: in March 2020 we launched the pandemic emergency purchase programme, also known as PEPP, with an initial envelope of EUR 750 billion. But over the course of 2020, incoming data pointed to a more pronounced impact of the pandemic on the euro area economy and a more protracted weakness in inflation than previously envisaged. So the European Central Bank’s Governing Council expanded the PEPP envelope twice, first by EUR 600 billion in June, and then by a further EUR 500 billion in December, for a total of EUR 1 850 billion. The PEPP was tailored to the specific nature of the coronavirus crisis, and it serves a dual purpose. First, it can be operated as a powerful market backstop to prevent destabilising financial dynamics and breakdowns in monetary transmission. And second, it can act as an instrument that supports our monetary policy stance by smoothing out the impact of the pandemic on our price stability objective. These two engines have been activated with varying intensity over the two phases of the pandemic emergency. The backstop engine was the first one to be ignited, amidst the financial panic in the early stages of the pandemic. It helped preserve the transmission of our monetary policy to all sectors and countries in the euro area, thereby averting an even deeper economic contraction. That was the first engine. The second engine took over when markets eventually calmed, and it has been instrumental in nudging inflation closer to the path that we were projecting before the pandemic hit. That was pillar number one. Pillar number two was the targeted longer-term refinancing operations, also called TLTROs. We have eased and adapted the terms and conditions of our TLTRO III programme in order to reinforce its inbuilt incentive for banks to lend to firms and to households. This makes the TLTROs a powerful complement to the PEPP, as they concentrate on the downstream phases of monetary policy transmission – those that work through banks and, more directly, reach the small and medium-sized enterprises, which are most reliant on bank financing. So those are the two pillars that were really active in the course of 2020 – and to good effect. Let us now look at the year ahead and let’s look at what the outlook will be for our economy. As I mentioned earlier, the start of vaccination campaigns across the euro area provides the eagerly-awaited light at the end of the tunnel. At the same time, the renewed surge in COVID-19 cases, the mutations of the virus and the strict containment measures are a significant downside risk to the euro area economic activity. Output remains well below pre-pandemic levels and uncertainty about how the pandemic will evolve remains high. However, when containment measures are lifted and uncertainty recedes, we expect the recovery to be supported by favourable financing conditions, by expansionary fiscal policies and by a recovery in demand. Despite the steep increase in January due to a confluence of factors, inflation remains low. This can be attributed to weak demand and significant slack in labour and product markets. While we expect headline inflation to increase further over the coming months, underlying price pressures are likely to remain subdued owing to weak demand, to low wage pressures and the appreciation of the euro exchange rate. In this environment that I have just described, an accommodative monetary policy stance remains essential. It ensures that financing conditions remain favourable to put the economic recovery on a self-sustaining trajectory. Our pledge to preserve favourable financing conditions is crucial in the current environment, as it reduces uncertainty about the terms at which the economy can access external finance. This bolsters confidence and will encourage consumer spending and business investment. A more solid recovery is a precondition for re-anchoring inflation around its pre-pandemic path. At the same time, and as I have stressed many times, including in this House, it remains crucial that monetary and fiscal policy continue to work hand in hand. Fiscal policy, both at the national and at the European level, remains crucial to bolster the recovery in the euro area and address the impact of the pandemic. It can channel economic support to where it is most needed. By protecting workers and households and providing lifelines to viable firms that have been hit hard by the pandemic, fiscal support is particularly powerful in boosting aggregate demand. However, we need to remain vigilant. While fiscal support is crucial at this stage, it should be targeted and focused on the measures that are most conducive to economic growth. Against this backdrop, the ground-breaking Next Generation EU package should be implemented in such a way that the EU and all its Member States emerge from the crisis with stronger economic structures and a higher degree of cohesion. If implemented as planned, Next Generation EU could even boost growth as early as this year. So let’s look at a few policies. It is essential, in our view, that the Next Generation EU funds are disbursed quickly and used to support structural reforms and growth-enhancing investment projects. This would boost growth potential and contribute to reaching the EU’s objectives in the areas of climate change and digitalisation. We also need ambitious EU policies to make sure that bond and equity markets complement bank lending and public resources in financing a sustainable recovery. Progress in the area of sustainable finance, for instance, is pivotal to accelerate the transition towards a low-carbon economy. Efforts to deepen the Single Market, notably its digital dimension and in the services sector, would provide additional support for the recovery. As co-legislator, the European Parliament has a crucial role to play in advancing Europe’s green and digital agendas. The ECB is ready to play its part on these two fronts, as you request in your resolution. As I was quoted (and as I am happy to repeat), central banks are not responsible for climate policy, and the most important tools that are needed lie outside its mandate. But the fact that we are not in the driving seat does not mean that we can simply ignore climate change. Climate change has macroeconomic and financial implications and consequences for our primary objective of price stability and other areas of competence. We will contribute to fighting climate change in line with our mandate. We have already started this process and we will continue to do more. For example – and this includes most recent developments – we hold green bonds amounting to 3.5% of our own funds portfolio, and we plan to increase this share over the coming years. Since the start of this 2021, bonds with coupon structures linked to certain sustainability performance targets have been eligible as collateral for Eurosystem credit operations and for outright purchases for monetary policy purposes. This used not to be the case. Within the Eurosystem, we have also agreed on common principles for sustainable and responsible investment that we will apply when managing our euro-denominated non-monetary policy portfolios. This used not to be the case in all the euro system. We aim to start making annual climate-related disclosures for these types of portfolios within the next two years. And in the context of our strategy review, we will discuss whether sustainability considerations could be reflected in our monetary policy operations. On the digital front, the increased use of digital technologies is changing all aspects of our lives, including how we pay. This is where our preparatory work on a digital euro comes in. I am pleased that your resolution welcomes our work in this area – public support for this project is crucial. As representatives of European citizens, you have a fundamental role to play here. Our public consultation launched since October, which is now completed, drew over 8 000 responses from individuals, firms and, of course, industry associations. We will present you with a comprehensive analysis of these responses in the spring. This analysis will provide important input for the Governing Council of the ECB when it decides whether or not to launch a digital euro project. Let me conclude. If we want to pave the way for a sustainable recovery, we need to maintain and strengthen the common European approach that proved so effective last year. The ECB is committed to doing its part, within its mandate. We are equally committed to continuing and building on the close dialogue with this Parliament. You are essential in our efforts to improve our communication with European citizens. This is another clear finding from the ‘ECB Listens’ portal – many respondents have asked us to explain our decisions more clearly, in simple language and with more relatable, concrete examples. But communication is a two-way street, so we will continue our efforts to listen to your requests and remarks more attentively, as summarised in this resolution. As usual, we will provide our detailed feedback on the resolution together with the ECB Annual Report 2020. I now very much look forward to listening to your remarks and to participating in the discussion that we will have on the occasion of the final resolution on the report.