Christine Lagarde’s Euro Problem

By Desmond Lachman

Anyone who doubts that European Central Bank (ECB) president Christine Lagarde has a euro problem has not been paying attention to that currency’s recent swoon. A weakening currency is the last thing that Lagarde needs at a time when the ECB is trying to tame euro zone inflation, which is now running at 7.5 percent, the fastest rate since the euro’s 1999 launch. A depreciated euro adds to inflationary pressure by raising import costs in general and the cost of dollar-denominated commodity imports in particular.

Those doubting Lagarde’s euro problem have also not been paying attention to the serious damage that the Covid-19 pandemic has wrought on Europe’s public finances in general and on Italy’s in particular. That deterioration makes it difficult for the European Central Bank to defend the euro by hiking interest rates or by curtailing large-scale ECB bond buying for fear of triggering another round of the euro zone sovereign-debt crisis.

Since the start of the year, in the space of a few months, the euro has lost around 8 percent in value against the dollar and is showing no sign of stabilizing. As a result, it is now trading at lower levels than those plumbed during the depth of the 2010 euro zone sovereign-debt crisis.

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