Interview with Christine Lagarde, President of the ECB, conducted by Alexis Papahelas on 30 October
4 November 2023
When you were in Athens last week, you talked about Greece’s resilience and its phenomenal recovery capacity. Could you tell me how this happened? How did Greece become a success story?
When I look at the key performance indicators for assessing Greece’s economic and financial situation, I see improvements across the board: in employment, growth, the fiscal situation and the debt-to-GDP ratio. Greece has completed many of the reforms on its to-do list. Not all of them, of course. There is still more work to be done. I understand that there are more reforms in the pipeline but, overall, the results of the country’s efforts are impressive. And this did not go unnoticed by those whose job it is to rate an economy and assess its credit rating – as shown by the two recent decisions that raised Greece’s rating to investment grade. I think it’s a tremendous testament to the country’s efforts. The turnaround was thanks to the fiscal adjustments and the reforms that were implemented, but also to the resolute efforts of the Greek people and the Greek authorities.
Is the high debt-to-GDP ratio of any concern to you?
The debt-to-GDP ratio is around 160% at the moment. It has fallen significantly in the last couple of years. And obviously this downward trend needs to continue in the future. I know there is more to come, but Greece has evidently responded to this challenge with determination, and the results are already clear to see.
Did you ever get really worried about Grexit? Did you think that it was possible?
There were two particular moments where the threat could have materialised. The first was during the French G20 presidency in November 2011, when there was talk of a possible referendum, which didn’t happen in the end. The second, when the threat was much more tangible and much more worrying, was in July 2015. So, we had two Grexit threats, but the one in 2015 was the most concrete, and if it hadn’t been for the determination of a few European leaders, it would have happened.
You had a front-row seat to the Greek financial crisis from a very early stage. When you look back, do you think that any mistakes were made?
The original mistake was for the country to have found itself in that situation. If there had been greater fiscal discipline and if the prudent principle of establishing a rainy-day fund for bad times when the economy was doing well had been applied, the crisis might not have happened. The fiscal policies in place before and after the crisis hit in 2009 were the original mistakes. As I have said before, it would have been helpful for the IMF to have had longer programmes than those available in its arsenal. The programmes it had were intended for rapid and deep changes, reforms and fiscal consolidation. At the time they weren’t necessarily the best tools for a country that was in a monetary union without a fiscal union or for Greece’s specific fiscal situation.
Did you learn any lessons or draw any conclusions of your own from the crisis?
One very pertinent lesson is to make sure that we have the collective discipline to address the lack of a fiscal union. I think this should be a very pressing concern for all of us. When you have a monetary union without a fiscal union, as we do, you need clear fiscal guardrails and a fiscal framework within which countries can design and implement their fiscal policies and be accountable to the other members of the monetary union.
Something else that stands out from the Greek situation is that decisions were made but then sometimes reversed by the subsequent political team. And, even when decisions were taken, the implementation and monitoring needed to move forward didn’t always happen. Another lesson is that, even when banks are not the cause of a crisis, a solid and robust financial sector with well-capitalised banks is crucial.
Are you satisfied with the current state of the Greek banking system?
I think a lot of work has been done to consolidate and strengthen the Greek banking sector. Take non-performing loans, for example. In 2016 almost 50% of loans were non-performing. Now it is just over 8%. That is a significant sign of improvement, which has involved parking those non-performing loans outside the banks. So, in a way, the banking system has been sanitised. Capital ratios are much stronger, non-performing loans have gone down and liquidity ratios are also quite solid. So yes, a lot has been done to make Greek banks more robust and more attractive. I think the fact that a large foreign bank is taking an interest in a Greek bank is a clear indication that the sector has become more attractive.
Do you think 10 or 12 years ago it would have been possible for you and the Governor of the Bank of Greece Yannis Stournaras to take a walk around Syntagma Square where all the demonstrations were happening? What was going through your mind when you actually did it this time?
I was totally bemused by the transformation, I have to tell you. As you know, I did not come to Greece at the height of the crisis, but I was obviously in frequent contact with the team. I was following the IMF mission’s visits very closely – special security measures were taken and it was a source of anxiety and concern. Now, to walk down the street, say hello to people and feel their energy, vitality and optimism was quite striking. It is a testament to the effort and the determination of the Greeks to turn things around and to take hold of their destiny with the discipline and seriousness required in a union like the EU. I think it’s fantastic that Greece can set standards and be an example of what to do, of what reforms to implement.
Do you have the sense that economic events are driven by geopolitics these days? How hard is it to carry out fiscal and, more importantly, monetary policy?
You and I have been around for a little while. And I think that geopolitics taking precedence over many other developments is nothing new. What I think is slightly different now is that there is a compounded effect of multiple geopolitical developments taking place in various corners of the world. Sometimes they are a reflection of a major schism happening in front of us. When the world had a bipolar power structure, when it was fairly organised and settled, you could anticipate things. You could have more certainty about future developments. Now it’s far more fragmented. Crises are taking place in various parts of the globe at the same time, and it’s not clear who is on whose side and what the next development will be, let alone the final outcome of the current crisis in the Middle East. And if you add to that the crisis that we have just gone through with the pandemic, plus the terribly serious challenge of climate change, which is a tragedy that is already unfolding, that’s a lot of geopolitical and climate-related developments taking place together. That’s what’s making it even harder at the moment, which is why I think that we are confronted with shifts and breaks that, although not unimaginable, certainly fly in the face of the traditional way of thinking or the certainties that we used to have.
Do you think that inflation will recede next year?
This is certainly our forecast and this is certainly our goal. We are determined to bring inflation down to 2%. According to our projections we will get there in 2025.
It seems as though increases in food prices and housing are almost becoming structural now. Are you worried about the political implications of all this, about the political pressures stemming from the rise in the cost of living?
When we measure inflation, we pay attention to the headline rate, which is what our compatriots in Europe are experiencing – how much more they have to pay to put petrol in their car, food on the table, or to have clothes, shelter and everything else. But we also try to understand what is underneath the most variable components. One of those components is food. Is the price of food going to be higher in the future? That’s a possibility if you look at the impact of climate change, for example. Droughts, floods, higher temperatures and rising sea levels will most likely have an impact on food prices going forward. As for the political implications that you asked me about, let me say that our mandate is to ensure price stability, and this is the best contribution we can make to social peace and to society, to the most vulnerable of its members in particular.
The last question I’d like to ask you is what really keeps you up at night?
I try to sleep as much as I can, and at the moment it’s not a lot, I have to say. When I go to bed, I’m really tired and I fall asleep. But what preoccupies me before I go to bed is the level of violence, hatred and hubris around, which is first and foremost terrible for people – terrible for children and terrible for civilians. And of course, in addition to the human suffering, all this will have an impact on our economies, on the level of people’s confidence, and it will probably make our job a little bit harder going forward.
