The candidate appointed by the European Council to head the European Central Bank (ECB), Christine Lagarde of France, will promote a monetary policy in line with that currently pursued by the monetary institute, judging by the answers sent by the outgoing President of the International Monetary Fund (IMF) to MEPs before her hearing on Wednesday 4 September in Brussels (see EUROPE 12315/15).
According to Ms Lagarde, the ECB's monetary policy over the past 8 years has been "effective and successful". That being said, since inflation remains low and economic growth is slowing down, partly due to geopolitical tensions, "it is therefore clear that monetary policy must remain highly accommodative for the foreseeable future", she says.
Thus, according to the outgoing IMF President, the ECB's main key rates, which will remain very low - or even negative - until mid-2020 (see EUROPE 2270/17), have not yet reached their lower bound, even if this monetary policy has consequences for the profitability of the banking sector.
On Thursday, 12 September, Ms Lagarde's likely start date in Frankfurt, the Governing Council will consider further measures to raise the inflation path to a level in line with the ECB's mission, namely close to, but below, 2% (see EUROPE 12304/1).
According to the monetary institute, inflation is expected to reach 1.3% in 2019, 1.4% in 2020 and 1.6% in 2021.
Asked about the evolution of the ECB's mission, Ms Lagarde did not rule out the possibility that, in the long term, a reflection might begin on how the European institution could support the global policies pursued within the European Union, "such as sustainable and inclusive growth", but without ignoring its primary mission in terms of price increases.
Stability Pact. Ms Lagarde also stressed that compliance with the rules of the Stability and Growth Pact was necessary to ensure sound public finances and, a fortiori, to ensure the proper functioning of the Economic and Monetary Union (EMU).
Referring to the reform of the EMU, the outgoing IMF President spoke out in favour of more counter-cyclical fiscal rules to build up buffers in good times, which could be used to support the economy during a downturn.
In addition, she considers that the development of fiscal capacity for the euro area "is an important element" on the EMU agenda. However, she does not go so far as to make proposals on the governance of this future instrument, while the euro area finance ministers are still working on the issue (see EUROPE 12275/1).
The ECB is the direct supervisor of the main banking groups within the banking union in the euro area. In this regard, Ms Lagarde would like to see this union completed. This requires a rapid agreement to make the common backstop of the Single Resolution Fund (see EUROPE 12280/1) operational. Similarly, she advocates for the establishment of a European Deposit Insurance Scheme (EDIS) which would "put depositary confidence at the same level within the monetary union, increase financial stability and facilitate financial integration".
The monetary institute is also a key player in the event of a financial rescue of a euro area country. Ms Lagarde is therefore in favour of the June agreement on the reform of the statutes of the European Stability Mechanism (ESM), the permanent rescue fund for the euro area.
It would also be "important" to integrate the ESM into the EU legal order, as recommended by the European Parliament (see EUROPE 12214/8), says Ms Lagarde. But the ESM should not be renamed the European Monetary Fund, as its powers are not those of a monetary institute.
Financial supervision. On the supervision of financial actors, the candidate for President of the ECB welcomes the alignment of the ECB's prudential requirements for hedging against bank loans that would in future become ineffective in relation to recently adopted European legislation (see EUROPE 12311/8).
On the issue of risks from the shadow banking sector, Ms Lagarde called for vigilance. "We need to strengthen our efforts to understand and monitor the evolution of risks from the rapidly growing asset management industry", she said, even if the industry is regulated in the EU. This industry can amplify a financial crisis by its potentially pro-cyclical nature and the liquidity shortages it can cause in the event of a financial crisis.
"We do not have a macroprudential toolbox for the non-bank financial sector. This is a gap that needs to be addressed", she also points out. And to add: "If an entity resembles a bank and presents a risk equivalent to a bank, it should be supervised like a bank. This applies to investment firms and fintech companies."
Sustainable Finance. Another top priority for the candidate for President of the ECB is sustainable finance.
"I hope that the 'Green New Deal for Europe', announced by the President-elect of the Commission to the European Parliament, can change the situation", she writes.
On the application of the EU taxonomy on sustainable finance, currently under negotiation (see EUROPE 12281/9) to the ECB's asset purchase programmes, Christine Lagarde is nevertheless cautious, pointing out that 'green' assets are still a relatively limited asset class and that the taxonomy is still in its infancy.
"As soon as such a taxonomy is agreed, the ECB will have to assess whether and how it can be applied to its asset purchase programme", she replied.
Money laundering. One of the areas expected to be a turning point for the candidate is undoubtedly the fight against money laundering in the banking system.
On the role of the institution, she recalled that the ECB's Single Supervisory Committee was not responsible for fighting money laundering and that this responsibility fell to the national supervisory authorities, but stressed that the ECB must take risks very seriously in the context of its supervisory role.
In view of the recent scandals, Ms Lagarde believes that perhaps a "more pan-European approach" should be considered, but does not go so far as to recommend the creation of a European body dedicated to the fight against money laundering (see EUROPE 12312/8). She merely recalls the options contained in the Commission's July Communication for a better implementation of European rules in this area (see EUROPE 12303/2).
Virtual currencies. The former French Finance Minister believes that, so far, virtual currencies have had no tangible impact on monetary policy and financial stability. However, this may change in the future and therefore justifies, for her, close monitoring by the ECB.
On Facebook's highly criticised Libra stablecoin project (see EUROPE 12316/9), Ms Lagarde acknowledged the advantages that this type of initiative can bring in terms of the efficiency of cross-border payments. But she points out that its widespread use could pose risks to monetary policy and financial stability.
As for a possible regulatory framework (see EUROPE 12229/33), the candidate advocates a "balance" between the need to ensure that these activities do not entail risks to financial stability and the need to allow financial innovation.
But "if the activity is inherently the same and the risk is the same, then so should be the regulation", she says.
See the written answers of Ms Lagarde: http://bit.ly/2ZoE0Xi (Original version in French by Marion Fontana, Lucas Tripoteau and Mathieu Bion)