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ECB President Christine Lagarde: Subdued and stateswoman-like
Photo: DANIEL ROLAND / AFP
Black suit, yellow and blue Ukraine solidarity sticker, bitterly serious facial expressions: Christine Lagarde, the always stylish President of the European Central Bank (ECB), has never been more subdued in her almost two-and-a-half-year tenure than on Thursday before the continent's financial press.
The horror of war was written all over the face of the Frenchwoman, who likes to flirt so often with the audience and the camera.
But nothing has been normal since the Russian army invaded the neighboring country on February 24.
Lagarde's runner-up Luis de Guindos, on the other hand, seemed unperturbed as usual, a compact, cozy Spaniard with the aura of a brandy baron, who can probably only be shaken by a lousy grape harvest.
The appearance of the two ECB grandees was preceded by the first meeting of the ECB's Monetary Policy Council since the beginning of the war in Eastern Europe, which is driving up the already enormous inflation in the euro zone.
Prices in the euro zone rose by a whopping 5.8 percent in February;
In view of the massive economic upheaval caused by the fighting in Ukraine, the inflation rate is likely to be significantly higher at the moment.
At the same time, there is a growing risk that the pandemic-plagued currency area will fall back into recession.
Everything could have been so beautiful: the virus is losing its horror, unemployment is falling, the economy is growing moderately, spring is attracting people to the streets, squares and department stores.
Were it not for Vladimir Putin's tanks rolling through Ukraine and the Russian President's implied threats to deploy his nuclear arsenal and bring humanity into World War III.
A kind of interim solution
So there is a real danger that Europe will slip into a phase of stagflation for the first time since the oil crises of the 1970s – the economy is stagnating and inflation is galloping.
Which makes the task enormously tricky for Lagarde, her stalwart Vice de Guindos and the other central bankers.
With an interest rate hike, they would not change the energy supply bottlenecks and possibly stifle the upswing.
If they pump even more money into the capital market, they will also fuel inflation.
So what to do?
The ECB decided on a kind of interim solution on Thursday.
But what sounds like cultivated boredom surprised most observers and also the markets.
Because the central bank will reduce its monthly purchases of government and corporate bonds earlier than previously planned - as a signal that it is taking the risk of inflation even more seriously than before.
What she's been doing with her purchases for years is this: by buying the bonds from the market, she increases demand for them and drives up their prices.
In return, the interest rates on the bonds with which states and companies have to attract buyers are falling – after all, the ECB is always a solvent buyer.
In this way, the central bank facilitates borrowing and supports the economy.
However, it also funnels money into the capital market, which mainly flows into the stock and real estate markets.
In order to slowly get out of crisis mode, the ECB actually wanted to reduce the scope of its bond purchases on a quarterly basis from April to April from EUR 40 billion to EUR 30 billion and finally EUR 20 billion.
At the end of the year, she might want to suspend them completely and then finally raise key interest rates again.
Now the ECB wants to take the steps in quick succession: buy bonds in April for 40 billion euros, in May for 30 billion and in June – and not only in the fourth quarter – for only 20 billion euros.
Despite all the risks emanating from the war, the ECB is withdrawing the support from Europe's economy faster than planned, with which it has so far made it easier to take on debt, but at the same time is driving inflation.
Because it is becoming increasingly clear that inflation will not go away any time soon.
The ECB raised its forecast for average inflation this year from 3.2 to 5.1 percent, a figure that is miles above the 2.0 percent that Lagarde is aiming for in the medium term, i.e. over three years.
And the fact that inflation, as the ECB believes, will fall to an average of 2.1 percent in 2023 and even to 1.9 percent in 2024 can turn out to be a pipe dream the next time the forecasts are checked.
"The war is having a tremendous impact on the economy and inflation," Lagarde conceded.
She lowered her growth forecasts for the eurozone economy to 3.7 percent this year, 2.8 percent next and just 1.6 percent in 2024.
On the stock market, the news that the ECB was cutting back on its money supply despite the risk of war caused minor shock waves before the situation calmed down somewhat towards the end of trading.
Possibly because it was realized that the central bank can do comparatively little to counteract the effects of the war on the real economy, but can do more to counter further increases in prices.
The analysts at Deutsche Bank subsidiary DWS also rated the ECB’s decision as “good news”: “It takes a clear step towards normalizing monetary policy.”
Admittedly, the ECB would not be a central bank if it did not keep a back door open and reconsider the duration and volume of bond purchases should the situation worsen.
It is primarily the man in Moscow who decides whether this will happen.
The next meeting of interest rate decision-makers in Frankfurt am Main will take place on April 14th.
And absolutely no one can predict what the general conditions will be like.
What is certain is that Luis de Guindos will look as affable as ever.