Christine Lagarde, President of the European Central Bank (ECB), gave a speech at the Council on Foreign Relations’ C. Peter McColough Series on International Economics in New York on April 17, 2023. Lagarde discussed how the global economy is undergoing transformative changes due to various factors such as the COVID-19 pandemic, Russia’s war against Ukraine, weaponization of energy, inflation, and geopolitical tensions between the United States and China. She highlighted two potential effects on the policy environment for central banks: increased instability due to waning global supply elasticity, and more multipolarity as geopolitical tensions mount.
Lagarde pointed out that the previous period of stability in the global economy, characterized by elastic global supply chains and low inflation, may be giving way to lasting instability with lower growth, higher costs, and uncertain trade partnerships. Recent events, such as the European energy crisis and supply disruptions in critical sectors like automobile production, have exposed the vulnerabilities of global supply chains. Governments are taking steps to increase supply security, but this could also accelerate fragmentation as firms adjust in anticipation. Fragmentation of global value chains along geopolitical lines could result in increased consumer prices, ranging from around 5% in the short run to roughly 1% in the long run, according to ECB analysis.
Lagarde also highlighted the potential shift towards a more multipolar world, with implications for central banks. In the past, the US dollar and the euro have been dominant global reserve and transaction currencies, with Western payments infrastructures playing a crucial role. However, new trade patterns, particularly with China, may lead to new alliances and increased use of alternative currencies for international trade invoicing and reserves. Some countries are seeking to reduce their dependency on Western payment systems and currency frameworks, which could create opportunities for alternative currencies such as the Chinese renminbi or the Indian rupee.
Overall, Lagarde’s speech emphasized the changing global economic landscape and the potential implications for central banks, including increased instability in supply chains and more multipolarity in currency frameworks.
https://www.ecb.europa.eu/press/key/date/2023/html/ecb.sp230417~9f8d34fbd6.en.html