Lagarde: ECB strengthens euro liquidity amid geoeconomic shifts
ECB President Christine Lagarde emphasized the need for Europe to prepare for geoeconomic fragmentation, outlining strategies for strategic autonomy. Speaking at the Munich Security Conference, she announced the expansion of the ECB's EUREP facility to ensure euro liquidity.
Navigating Europe's path to strategic autonomy
A decade ago, economic interdependence was a source of stability; now it presents vulnerabilities to global disruptions and deliberate weaponisation of dependencies.
Eurosystem staff analysis suggests a sudden 50% drop in supply from geopolitically distant suppliers could reduce manufacturing value added by 2-3%, concentrated in electrical equipment, chemicals, and electronics.
As the most open major economy, Europe must transition to strategic autonomy.
This involves three strategies: independence (rebuilding domestic supply chains in critical technologies), indispensability (building strengths in crucial supply chain areas), and diversification (spreading supply across partners).
Lagarde warned that pursuing independence in lagging sectors risks creating 'hollow champions' and eroding competitiveness.
A targeted approach, understanding granular strengths and weaknesses, is essential to avoid unnecessary costs or missing critical chokepoints.
ECB bolsters euro liquidity with expanded EUREP
The ECB must prepare for a more volatile environment, as rising geopolitical tensions and supply chain disruptions are likely to increase financial market stress.
The goal is to prevent such stress from triggering fire sales of euro-denominated securities, which could hamper monetary policy transmission.
To ensure confidence in euro liquidity, the Governing Council recently expanded its EUREP facility.
This standing facility now offers non-euro area central banks continuous access to euro liquidity (permanence), extends its reach globally to any central bank meeting basic criteria (scope), and ensures swift provision of liquidity by granting access by default (agility).
This expansion reinforces the euro's international role, boosting confidence for investment and trade.