Just a few days before last Thursday’s appointment, the European Central Bank decided that the twenty-five members of the Governing Council would not meet in person. Not even this time. Since the outbreak of the pandemic in March, the meetings of the body that decides interest rates, the offer of liquidity to banks and the purchases of public or private debt have always and only been held with each one connected by videoconference. It seemed inconceivable for security reasons, until a few months ago. Now the ECB has already made historic decisions in this way. But that the executive committee from Frankfurt first called a physical meeting, and then moved it online, gives the measure of how central bankers share the situation of all the other Europeans: they live in radical uncertainty. In the case of the ECB a difference that the uncertainty made greater by the signs of a conflict over the bank’s choices e on the role of Christine Lagarde.
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Just Thursday there were clear signs that someone is working to reduce the power of the new president – not open to view – against the background of the new problem in Frankfurt: an increase in the value of the euro which, since the eve of this crisis on February 20 to today, has been 9.7% against the dollar and 9.2% against the set of currencies of the main trading partners of the area. For a system in recession, an appreciation of the currency is the opposite of what is needed: it slows production activity by making export products more expensive, while driving the economy towards deflation due to the fall in the costs of imported goods. The same recent revision of the Federal Reserve’s targets only increases the risk that the euro will revalue too much for the state of the economy, as it suggests many years without US central bank rate hikes and therefore capital outflows from the dollar. In an increasingly mercantilist world, Europe risks falling into the grip of the competitive devaluations of the other large commercial areas.
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Not the first time. On January 25, 2018, with the euro climbing 18% to $ 1.23 in just over a year, then ECB president Mario Draghi declared that the volatility of the exchange rate was a source of uncertainty. Investors understood: the ECB would not tolerate any longer. From then until the eve of the pandemic, the single currency plans a long 14% drop against the dollar. Now Lagarde and the Governing Council are trying to do something similar to what Draghi did, albeit with less of a hand. For the first time on Thursday, the ECB statement read by the president cites exchange rate developments as one of the factors to be followed because they can have implications for inflation. And Lagarde herself, in a press conference, hinted that her high guard: To the extent that the euro puts negative pressure on prices – she said – we must carefully monitor the issue. And this has been discussed at length (in the Governing Council, ed). The news is that at that moment, shortly after half past two on Thursday, Lagarde was not the only one speaking on behalf of the ECB top management.
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In the middle of his press conference, someone else was speaking against it. At 2:34 pm, just after Lagarde had started speaking and as market participants awaited her comments on the euro, an agency launch from Bloomberg teased the chairman: The Governing Council discussed the currency’s recent appreciation – yes law – but the general opinion has been that there is no reason to overreact. In other words, an opposite message issued from Frankfurt when Lagarde tried to stop the revaluation of the currency with her statements. And on Thursday afternoon, the euro rose from 1.18 to 1.19 dollars. Bloomberg could not have left without someone on the Governing Council, under guarantee of anonymity, speaking to the agency. And it had never happened before that the president’s press conference was opposed simultaneously by central bankers on different positions. The clear signal: the most intransigent wing in the ECB will not allow the French to act as a leader, indeed ready to undermine its credibility if the wing of the governors most opposed to the expansionary choices will be placed in the minority as Draghi did. The cards are on the table, just now that the shadow of deflation in Europe means that real interest rates for indebted companies and states are increasingly heavy in the midst of the crisis.
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