A Letter To Santa From Christine Lagarde and The ECB…

There’s a new boss in town. Christine Lagarde chairs her first ECB monetary policy meeting this week and will then face the press. One can only hope that there are no nearby fridges to stand in the way of hearing the new ECB President’s vision of monetary life after Super Mario (Draghi). Her predecessor is credited with saving the euro but President Lagarde might have to save the world.

There are early hopes among environmental activists that the ECB will bring its considerable financial weight to bear on fighting the global climate emergency. However, the reality is that the nascent “green bond” market is too small to really make a significant impact on climate change. The environment is one of many items likely to appear on the Lagarde wish list. As a former head of the IMF, she will be well aware of the challenges facing Europe and the planet. Many of those challenges are long-standing, almost hopeless causes, but it is the season of hope ahead of a brand new decade so we thought a little letter to Santa might be in order. Here’s a guide to what we think the ECB would like Santa to deliver.

  • Inflation: The world’s largest trading bloc has been crippled with very low inflation. Ultra-low, even negative interest rates have utterly failed to deliver higher inflation to stimulate consumer spending of cash which remains hoarded in banks across the region. The phrase “Japanification” is being increasingly employed to describe Europe’s predicament of using a failed monetary tactic but unable to change course for fear of strangling economic growth in the region. A gift of higher inflation from Santa would hugely help the ECB and allow it to address its other intractable problem.
  • Healthy Banking System: It is no secret Europe’s banking system is in a parlous state. Burdened with massive bad debts like the Japanese banks of the late ‘80s, there has been a lack of political will to mandate the ECB to cease the can-kicking and call time on some serious banking franchises. The standout banking patient in Europe is Deutsche Bank but it is arguable that the entire Italian banking system is equally in need of tough structural medicine. Santa’s gift of a banking “solution” will need to be very innovative as any concerted ECB policy effort to shrink the banking system could push the region’s economy into recession. So…
  • Structural Growth: Europe is often described as being in structural decline and destined to be a low growth economy for decades to come. Demographics are certainly not helpful as the workforce ages and dictates a smaller pool of labour is required to support the pension draw downs of a rapidly increasing retired population. Poor industrial policies of many European governments have also been guilty of protecting older industries at the expense of faster growing sectors, primarily technology. European industrial policy is a classic case study in misallocation of capital. Bloated public(government) sectors and the protection of older industries like utilities, coal, steel and autos have consumed huge amounts of capital and starved structural growth sectors of capital. We are thinking information technology, health, education and materials technology(energy storage) as areas with very strong structural growth stories. Santa needs to deliver a new European growth story soon.
  • Brexit: Get it done, says Boris. Good luck, says Santa. Europe really needs to move on. Brexit uncertainty is killing investment and confidence. Sadly, a letter to Santa is really the only hope for Boris as current thinking on trade negotiations and timings are the stuff of Lapland fantasy.
  • Climate: Of course, Santa has not enough room in his sack to deliver an entire planet but maybe just maybe Santa could help? We were thinking he could give inspirational guidance to Europe which could address not just the climate challenge but deliver on most of the gift requests listed above. What if the ECB rather than trying to cajole the European consumer to spend, declared that many goods and services would over time be only available in a finite amount. Think water, food, forestry, plastic, buildings, travel and broadband spectrum and then think about a race to consume and acquire before scarcity. This would instantly not only generate inflation but also dramatically change humanity’s rate of consumption of the planet’s precious resources. This writer had often thought the best way to change consumer inflation expectations was to “tell” people there was significant increasing inflation ie fake inflation news. It doesn’t seem so much a sin of spin these days given the daily dose of delusion being visited on the UK and US electorates. One way, or the other, inflation is really what Europe needs to free itself from its stagnancy straitjacket. Ironically, the planet’s climate could be, over time, the disciplinary Santa which delivers resource scarcity plus inflation rather than a sack of “beautiful clean coal”. A very Trumpian irony indeed.

Anyway, in a few hours we shall see what Christine Lagarde thinks is possible. And, where Santa really is needed…

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