Breakingviews - Christine Lagarde is having a good crisis

European Central Bank (ECB) President Christine Lagarde gestures as she addresses a news conference on the outcome of the meeting of the Governing Council, in Frankfurt, Germany, March 12, 2020.

LONDON (Reuters Breakingviews) - Crisis is supposed to reveal character. If so, it’s showing European Central Bank President Christine Lagarde in a flattering light. The Frenchwoman on Thursday confirmed she is as capable of decisive action as her predecessor, Mario Draghi, by announcing she will buy more assets and for longer than initially planned to help the euro zone recover from a coronavirus-induced recession. But she is also luckier than the Italian.

Less than three months after the ECB unveiled its Pandemic Emergency Purchase Programme, Lagarde increased the total amount of bonds that will be bought by 600 billion euros, to 1.35 trillion euros, and said the programme would last until at least the end of June 2021, rather than winding up at the end of 2020. That was justified by the central bank’s baseline scenario that the euro zone economy might shrink by 8.7% this year.

Lagarde deserves credit for winning backing from her fellow rate-setters to ramp up purchases so quickly and by so much. She has also sent a clear signal that she won’t be put off by the German constitutional court, which in May ruled that the country’s central bank would have to stop taking part in asset purchases unless the ECB could show they were needed. Investors responded to her plans by driving down most euro zone bond yields, particularly those of Italy.

But Lagarde is also benefitting from a more favourable fiscal backdrop. During Draghi’s tenure, austerity was the watchword for euro zone governments and the central bank was left with the job of trying to stimulate economic activity on its own. Not any more.

The European Commission last month unveiled a plan to jointly borrow 750 billion euros to help the regions and sectors worst hit by the coronavirus. True, a handful of countries oppose the idea, which means it may be watered down and take time to come to fruition. But national governments are already spending vast amounts to revive their own economies. Germany, a bastion of fiscal discipline, late on Wednesday agreed a new fiscal stimulus package worth 130 billion euros. And French Finance Minister Bruno Le Maire said on Thursday that a Gallic recovery plan would be announced in the coming weeks. With finance ministers helping rather than hindering, Lagarde’s efforts to resuscitate growth will be more effective.


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