Davos 2023, the interventions of Lagarde and Le Maire

The French Economy Minister, Bruno Le Maire, ranks Paris among the strong supporters of a decisive intervention by the European Union in response to the incentive plan for the green transition launched by the US of Joe Biden. The discussion is open between the chancelleries, between those who believe it is sufficient to reformulate the rules of state aid, those who hold back by saying that there are already funds from the Recovery Fund to be used, and those (including Italy) who ask for a sovereign fund that allows a unitary response, overcoming the different spending capacities that derive from the different spaces available in the national budgets.

It is one of the strong themes that emerged on the last day of the Davos Economic Forumduring which the president of the ECB, Christine Lagardehas returned to warn how inflation will remain high also due to the full return on the market of China, which has ended the zero-Covid policy, while the director of the IMF, Kristalina Georgievapoints out that the economic prospects are less negative than a few weeks ago but caution is still needed

Le Maire to Italy: “Excellent reports”

“For the green reindustrialization of Europe, a massive, simple and immediate response to the Inflation Reduction Act (IRA). In this regard, I congratulate the President of the European Commission Ursula von der Leyen for her words, perfectly in line with what President Macron has always defended, namely more independence and investment in the green sector,” said Le Maire during a panel of the World Economic Forum. Europe has a “two-track approach” in its response to the US administration’s legislation: “We expect some concessions from our American friends – said Le Maire on television from Bloomberg – but there is also another way which is to implement a sort of European inflation reduction act” adding that Europe must invest more in strategic sectors including electric car batteries, hydrogen and solar panels. “The time factor is essential – he said – we must become independent”.

Le Maire also spoke about Italy’s relations, made tense by the migration issue. Between the French and Italian governments “there was no misunderstanding” on the subject of migrants, and Italy and France have “an excellent relationship”, he stressed. “Italy is a large European country and a key player in industry and as you know President Macron has made key proposals to strengthen European industrial policy. We are counting on Italy’s support”.

Lagarde (ECB): “Chinese recovery brings inflation”

The president of the ECB is back on the subject of inflation and rate hikes, Christine Lagarde, who yesterday released “hawkish” statements that made themselves heard on the financial markets, sending government bonds under tension. Against inflation “we will do what is necessary” and the ECB will “maintain the course” of monetary policy, he reiterated adding an element of assessment: “The world economy will benefit from China’s growth, but the additional demand for energy will bring pressure inflationary for all”. In essence, this is your reasoning, if last year “China grew by 3%, now the forecast is + 4.4%”. More China in the world economy, given the end of the zero-Covid policy that has plastered Beijing in recent months, will have a positive impact for everyone “but it will bring inflationary pressures for all of us because China’s energy consumption in 2022 was less, there will be more demand in 2023. We try to incorporate that into our models.”

A warning to governments also came from Lagarde. If Frankfurt’s monetary policy is committed to reducing inflation by raising the cost of money. the fiscal one must not go in the opposite direction. “The ECB will do what it takes and I hope fiscal policy doesn’t force us to do even more,” he said. So stop indiscriminate subsidies: “I hope that in 2023 it will not happen that fiscal policies work in an anti-cyclical manner with respect to monetary policy”.

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Georgieva (IMF): “Prospects improve but not excessive optimism”

An acknowledgment that the economic prospects are less gloomy than some time ago also came from the director of the IMF, Kristalina Georgieva: The outlook for the world economy “has improved” but “we have to be cautious”. In particular, “we don’t know exactly how inflation will evolve” and “if budgetary policy works against monetary policy, you, Christine Lagarde, will have to raise rates even more”, she said, in a certain sense repeating Lagarde’s warning . “We must be careful not to drift from too much pessimism to too much optimism. We must stay in the middle of this spectrum anchored in a healthy realism that is in the best interests of the world.”

An appeal, in a phase of rethinking international relations, has finally come to avoid fragmentation because reducing trade risks losing 7% of global GDP, equal to 7 trillion dollars. “Be pragmatic – he said – collaborate”.