Christine Lagarde: Interview with the Financial Times

28 November 2024

You said recently that the geopolitical landscape was fragmenting into rival blocs where attitudes towards free trade were being called into question. The US election accelerates this trend. Looking forward, what are your expectations, particularly in terms of tariffs?

President-elect Donald Trump has clearly announced last week the magnitude of tariffs that he has in mind: 60% for China, 10-20% for the rest of the world. But he has not been very specific about the scope and the basis on which those tariffs would apply. That’s a really interesting area for clarification and better understanding. Tariffs applied on a broad, undiscriminating basis produce certain effects. But very selective, targeted tariffs will produce a different effect. Going forward, the scope of the tariffs will be really interesting to appreciate. It’s one thing if you are raising your tariffs on certain product categories, as I think the US Administration has done for instance on electric vehicles. It’s another if they’re applied on a broad basis to anything that crosses the border. On these details we have no idea yet.

How should Europe respond?

As far as the tariffs on European imports are concerned – 10-20% – there is a 100% difference between the two. That is also interesting. I think it’s indicative of the approach allegedly often taken by President-elect Donald Trump, which consists of negotiating. The fact that you put out a range means that you are open to discussion. You’re open to a different distribution of that tariff depending on what the base is going to be. The European Commission has flagged that it is preparing, which is good. We seem to err more on what I would call a cheque book strategy. We could offer to buy certain things from the United States and signal that we are prepared to sit at the table and see how we can work together. I think this is a better scenario than a pure retaliation strategy, which can lead to a tit-for-tat process where no one is really a winner.

Because that would mean a trade war with all sorts of consequences?

If it was a trade war at large, it would be net negative for all, not just for the targets of US tariffs. When you start considering a trade war, you can soon see an escalation, which in my view is a net negative. This can be in nobody’s interest, neither for the United States nor for Europe, or anyone for that matter. This would induce a global reduction in GDP.

Some people in Europe argue that the best strategy is not to retaliate at all to potential Trump tariffs and just kind of take it on the chin. Do you agree?

What happened last time around when there was a threat of tariffs on Europe – on all categories of steel – the approach taken by the European Commission was to sit down and talk. Not to retaliate, but to negotiate.

What could Europe offer in return?

I’m not the trade person, and in trade you really have to go to a very granular level. But in general, Europe could talk about buying more liquid natural gas from the United States. And obviously there is the whole category of defence goods, some of which we are not capable of manufacturing over here in Europe and which could be bought in a cohesive EU approach by Member States.

What would a trade war mean for the ECB? How would it affect inflation?

That’s a great question, which I’m not sure that I have a complete answer to as yet because of the reasons that I have just mentioned. It would produce a variety of consequences, and the actual net impact on inflation is uncertain at this point. If you combine the decline of GDP and the potential depreciation or appreciation of the dollar, it’s extremely difficult to assess. And you also have to establish what is short term and what is not so short term before you can get to any real ultimate and conclusive answer. If anything, maybe it’s a little net inflationary in the short term. But you could argue both ways; it depends what the tariffs are, what they are applied on and over what period of time.

Is Europe potentially more affected by the United States-China trade war than direct tariffs against its imports to the United States?

That’s an interesting question. Think about the discrepancy of level in the tariffs on goods from China and other countries. I’m not suggesting that Europe is at a competitive advantage, but there is certainly a stronger weight put on Chinese exports to the United States by Trump. What we need to be mindful of and we need to monitor carefully is the “rerouting scenario”. Some of these Chinese-made products, which will obviously be less competitive on US markets, will try to find its way somewhere else – and that certainly could be the third largest economic zone in the world: Europe. It will also concern not just Europe, but all potential purchasers outside the United States.

Should Europe then protect its markets with protective tariffs against Chinese goods?

Free trade with China is more attractive if it’s reciprocal and beneficial for both. Otherwise, the risk is that tariffs will be raised by Europe, as has already happened in the case of electric vehicles. It could happen in an interim phase. But I see this as a risk because escalating tariffs is neither an ultimate nor an optimal solution.

There is a cost to fragmentation and uncertainty, isn’t there?

Of course. The level of uncertainty pre-existed the US election and has been factored into our own projections already. Maybe not all of it, but a large portion of that uncertainty was factored into the September projections. It will be factored into the December projections. That uncertainty leads to reduced confidence. If you look at the various consumer morale surveys and business confidence surveys, it’s clearly reflected in consumption and investment decisions, which are withheld as a result.

So far, both in Europe and the United States, while attempting to decouple, everyone seems to have ended up de-risking instead. Do you think that’s where we are heading?

Decoupling is probably the incoming US government’s intention. The question is: will it be an orderly or a disorderly decoupling? Clearly, the European Commission’s intention was de-risking, and the [US] Treasury under its current leadership has been focused on de-risking. But the blunt announcement of 60% tariffs on anything coming from China does not sound very much like de-risking.

In January you called Trump a threat for Europe? How do you feel about that remark today?

It was prescient. Just look at the debates that we are having in many countries in Europe.

Do you still think he’s a threat for Europe?

Actually, my thinking has changed a bit. It is up to us now – the Europeans – to transform that threat attitude of ours into a challenge that we have to respond to. I have been focusing on the areas that are the most relevant ones for us here in my capacity. I have been advocating strongly and will continue to advocate strongly that we get on with implementing and executing on the good intentions of the capital markets union. And I think that money matters, people matter, energy matters. As far as money is concerned, we have to move quickly with the capital markets union. And I see those promised US policies as an accelerator of a reset that we need in Europe.

You have been talking about the capital markets union for a very long time, but it’s not happening. What will it actually take for the capital markets union to become a reality?

I have not seen such a level of understanding and excitement as we have now: look at the Draghi report, the Letta report, the Noyer report. Some leaders are now saying: if we cannot all agree in the EU, then it should be a qualified majority, and if we cannot have a qualified majority, we should go for enhanced cooperation. EU rules allow for that. I know it’s controversial, but we should start with really transforming the European Securities and Markets Authority (ESMA) and making sure that it operates like the Securities and Exchange Commission (SEC) in the US. Instead of having 27 capital market supervisory authorities, we should have one single supervisor. How we integrate the 27 existing ones in the Member States is what needs to be defined. There can be structures where they are part and parcel of a single supervisory mechanism, but they refer not to the local finance ministry but to the central supervisory authority.

Getting the capital markets union done is a big idea in theory, but....

... it’s a massive endeavour, I agree with you. But if we don’t start with the money, it will not trigger the rest, which has to come as well, like securitisation. It’s important for the banks to have space on their balance sheet, to continue to finance innovation using different instruments. But I would start with something that is the catalyst, which is common supervision. And, frankly, we can learn from the Single Supervisory Mechanism. Ten years ago, important people said, “Never! No way will we ever see bank supervision conducted on systemic international institutions centrally.” And well, guess what? Ten years later, the supervision is conducted through the Single Supervisory Mechanism and involves the national authorities. It is laborious, but it’s working.

But given the state of European economies today, the threat of uncertainty that will emanate from the United States, your proposal can only be a starting point, right? This is one of many things that needs to happen in Europe. Did you agree with the Draghi report? Do you think it was a fair assessment?

Yes, generally I mean. We could nitpick some details and a couple of controversial sections. But generally, I agree with the diagnosis that he has.

What about common debt?

Well, that’s the only issue that Mario Draghi himself has said: Don’t even consider that as the most relevant proposal. Look at everything else. And once we’ve agreed on everything else, then we’ll come to how we finance it. And you know what’s funny: the media has focused on common debt. But nobody has picked up on the fact that he’s recommending that 80% of the total investment be privately funded and 20% be publicly funded, and that we need a blend of the two to actually make things happen.

Would you call the current situation a European crisis?

No, I don’t think it’s a crisis. I think it’s an awakening. It’s a big awakening.

But the gap with the United States has widened over time.

Yes, it has widened over the last 30 years. So you could argue that we’ve been in crisis for 30 years, which I don’t think has been the case. We have missed the transformative impact of the first IT revolution. In the 1990s, the United States rode with it and in that particular field we have lost competitiveness.

We’re now in a second phase of digital disruption, but with AI. And again, the United States and China are way, way ahead of Europe.

I wouldn‘t give up on Europe on that one. Companies in the United States and at least one, if not two, in China have invested massively in artificial intelligence. Europe is lagging behind. But I wouldn‘t say that Europe cannot catch up. There are many companies in Europe.

If they stay independent...

That‘s the challenge for the European companies. Can we actually keep financing them, helping them and giving them the freedom and space to innovate and to continue to be champions in their respective fields? Just look at the trading rooms and the financial environment in London back in the 2000s – they were staffed with French people. Where did they come from? From the best schools in France that produced [people] who could invent algorithms and financial instruments, sometimes to their own peril. This shows that the brainpower – the capacity to focus on what is needed to produce those large language models and to run them – exists in our countries. We have people in the United Kingdom and France and other places. We just need to make sure that they stay here longer, that they get their financing from here and then expand here. That’s a challenge, granted.

Finance is another sector that has been left behind. Back in 2008, a lot of European banks were on a par with US banks. Now, the average European bank is typically one-tenth the size of a JP Morgan or a Goldman Sachs. When you look at one of the rare attempts to create a European bank through the merger of UniCredit and Commerzbank – and you see pushback that’s come from politicians – does that not show that Europe is never going to make up the ground?

I prefer not to comment on a particular case which is ongoing. I have said publicly that cross-border mergers in general would be beneficial if they produce added value.

There’s a lot of weakness and fragmentation in European politics. You’ve argued that the EU needs to act more like the eurozone – as one large economy rather than a collection of economies. But that is more difficult to do today, partly because of politics, isn’t it?

Things happen in this part of the world when Member States come together. And for them to come together, it’s helpful when the two largest players [Germany and France] form common views on key issues. We don’t have a lot of that at the moment, granted. And there is political uncertainty because of upcoming elections in Germany and the current situation of the French government. But I would also observe that whenever we had to reckon with adversity – whether it was COVID, whether it was the financial crisis back in 2008 – Europe came together. In French we would say “nécessité fait loi” – necessity is the mother of invention.

Can we maybe go back to the start of the conversation: trade and fragmentation of the global economy? We’ve talked about short-term potential economic consequences. Let’s look at the longer-term picture. We know that world trade has been one of the key engines of economic growth globally over recent decades. In this potential new world of tariffs and fragmentation, we might lose out. Europe is already lagging behind in terms of growth. How gloomy do you think the medium to long-term outlook for Europe is?

In the long term, tariffs will be negative for global growth. That’s always been the case: if you raise tariffs on a global basis, it reduces global GDP across the board. I find it difficult to reconcile myself with the proposal to “make America great again”. How do you make America great again if global demand is falling? Particularly if that happens at a time when there is not that much slack in the US economy, which limits the space to respond to disappearing imported supply. That’s why we really need to understand the scope, the target and the pace [of tariffs] to measure the impact and to really appreciate what it will be.

I’d also like to address the idea that Europe, as a more open economy than the United States and China, is more vulnerable as a result. What is also the case is that Europe is the world’s third largest economy and it trades quite a lot with itself. It doesn’t suffer a particular exchange rate risk in that respect.

You also made a speech the other day about Europe’s social contract. Europe appears to have agreed on a trade-off to have better social services and less animal spirits and innovation. There is a lot of standard-setting and regulation. Does this trade-off have to be re-examined as part of Europe’s awakening?

I think the equilibrium that we have had for a long time needs to be re-examined. Does that mean that we should give up on that trade-off that you referred to, which is essentially to do with the distribution of wealth, with inequality versus equality? I’m not saying that I advocate for pure equality at all, but I do think that that trade-off is integral to the European fabric. And it has nothing to do with the other element, which we can certainly improve, in fact we should definitely do so.

If I’m to believe the CEOs and businesspeople that we see and listen to on a regular basis, then bureaucracy, overregulation and paperwork, in digital form or otherwise, is really a burden on them. That has nothing to do with the trade-off between inequality and equality. There is a degree of regulation where businesses are benefiting – certainly in businesses that benefit from implicit state guarantees like the banking sector – and which is legitimate. But going way beyond that – as European institutions have done regularly – needs to be addressed.

That’s what I mean by accelerating the resetting of Europe. Can Europe be not just a machine that produces regulation, but a landscape where innovation is encouraged by a reset of its key actors?

In the climate space companies complain a lot about regulation. It’s great that Europe is a standard-setter but, at the same time, the number of regulations is a big burden on business.

I agree with that. And I believe that the various teams working on these issues have to come together and produce a standardised set of disclosure and transition plans. Currently you have at least four different bases on which disclosure plans have to be submitted by companies, which then pass them on to banks. There are lots of other requirements in that field and they need to be harmonised. It cannot be that companies – particularly small and medium-sized enterprises (SMEs) – have to produce a plethora of different disclosures on their environmental footprint. When I say that, I have colleagues who say: "Well, but SMEs are exempt." No, they're not, because the big corporations have to check with all the SME that are their subcontractors where these business partners produce, whether there is deforestation involved, whether they do this and this and that, in order to combine everything and then report back. We have to all agree with the standards and the direction we are heading, but we have to completely harmonise this massive burden of paperwork that exists.

Do you worry that the divergence with the US on issues like the Basel III implementation is going to create a lot more difficulty for the business community? Should Europe respond to that?

I think the jury's out on Basel III. You might be right, and that would not be a good outcome because there has been so much effort and so many years put into trying to harmonise the framework in which banks operate. So it would be a pity, not so much because of the sunk work done so far, but because we would lose that harmonisation of principles and the level playing field that everybody aspired to.

How do you feel about the view that Europe has become a museum?

It’s a pretty attractive museum if you ask me. ... On a serious note, I think it’s a very self-deprecating view. We tend to see ourselves as this wonderful museum, this wonderful home for wealthy retirees. But when you go around Europe, when you try to find out what’s going on, there is also a huge amount of innovation. For instance, I was talking to Dutch members of the European Parliament recently. Did you know that the Netherlands is the second-largest farming product exporter in the world? Look at the size of the country! Everybody always marvels about other small countries that innovate massively in agriculture. The Netherlands stands head and shoulders above that.

But Dutch tomatoes taste awful.

But you eat them.

What do you think about the push for deregulation from the incoming US administration and the stock market response, which so far has been very positive? Some people say this might be a sugar rush and could eventually result in a crisis that might be even worse than the global financial crisis. Do you agree?

We have been saying for the last couple of years now that there could be a market price adjustment. There has been a little bit of it and there will be more. But to assume that we will have a financial crisis as a result of the deregulation attempt – I don’t see that. We stand ready anyway.