There's been a lot of central bank news this morning. We're not sure if you heard, but the Central Bank of Iceland cut its benchmark lending rate by 50 bps to its lowest level ever. That, and BoE Governor Mark Carney simultaneously handed over the reins to his successor and emptied the central bank's stimulus hopper with an emergency 50 bp rate cut of its own.
Now, ECB Governor Christine Lagarde, who left her perch at the IMF to take over the central bank late last year despite having little in the way of experience with monetary policy, has delivered her most dramatic warning yet about the potential risks to the European economy - and the global economy - if governments fail to act (we're looking at you, Germany).
According to Bloomberg, Lagarde said Europe risks a major economic shock on par with the global financial crisis if its leaders fail to act, and signaled that the central bank will follow the Fed and BoE with a monetary policy bombshell of its own on Thursday, when it delivers its latest decision on interest rates and policy following the conclusion of its two-day policy meeting.
During a conference call with European Union leaders late Tuesday, Lagarde reportedly said that without coordinated action Europe "will see a scenario that will remind many of us of the 2008 Great Financial Crisis," according to a source familiar with what was said on the call. But with the proper response, the shock will likely prove temporary, she added.
The message that Europe needs governments to abandon austerity and ignore the bloc's strict limitations on deficit spending to save the economy isn't a new message. Lagarde's predecessor Mario Draghi made several allusions during ECB meetings that the central bank had reached the limits of its monetary policy abilities, and that governments would need to take the baton and start ramping up spending, or watch the eurozone's deflationary malaise metastasize into a full-blown recession.
This is merely that same rhetoric, repackaged with an additional dose of urgency due to the coronavirus.
Economists who spoke with Bloomberg said the ECB still has 'a number' of options for the measures Lagarde hinted at, including ramping up purchases of corporate debt (since there's no more government debt left to buy) and more TLTROs (TLTRO IV anyone?), or possibly tweaking its response to focus on supporting small businesses who are already hurting from the outbreak.
Whatever she decides, Bloomberg noted that Lagarde's 'message' was both a "dire warning" and a "dramatic plea": monetary policy failed, negative interest rates don't kill germs, and its now governments' turn to pick up the slack.
As one Twitter wit pointed out, there's a certain irony in hearing this message from Lagarde.
Kinda ironic that when Lagarde is finally faced with a crisis where the solution Is Mostly Fiscal, she finds herself the head of a monetary institution— Lorcan Roche Kelly (@LorcanRK) March 11, 2020
Adding yet another layer to the irony onion: German Chancellor Angela Merkel said during a press conference on Wednesday that Germany would do "whatever it takes" to tackle the virus - echoing the infamous words of Lagarde's predecessor. Unfortunately, whether that includes abandoning the 'debt break' that many lawmakers still view as sacrosanct remains unclear.
Merkel has also warned that as many as 70% of Germans - more than 53 million people - could be infected with the virus, according to the worst-case scenarios provided by epidemiologists.