Lagarde: Geoeconomic fragmentation demands strategic autonomy
ECB President Christine Lagarde emphasized Europe's need for strategic autonomy amid rising geoeconomic fragmentation at the Munich Security Conference. She highlighted the expansion of the ECB's EUREP facility to ensure euro liquidity and financial stability.
Three paths to strategic autonomy
The global landscape has shifted, transforming economic interdependence from a source of stability into a vulnerability, exposed by global disruptions and the weaponisation of dependencies.
Eurosystem staff analysis reveals that a sudden 50% reduction in supply from geopolitically distant partners could decrease manufacturing value added by 2-3%, with significant impacts on electrical equipment, chemicals, and electronics.
As the most open major economy, Europe must now pursue strategic autonomy.
President Lagarde outlined three distinct strategies: independence, involving rebuilding domestic supply chains in critical technologies; indispensability, focusing on strengthening key areas within those chains; and diversification, spreading supply across multiple partners to prevent single disruptions.
She warned against broad-brush approaches, emphasizing the need for granular understanding to avoid eroding competitiveness or missing critical chokepoints, such as the risk of creating 'hollow champions' in sectors like chip making.
EUREP facility expands global reach
The ECB must prepare for a more volatile environment, where assertive industrial policies and geopolitical tensions increase financial market stress.
To prevent this stress from triggering fire sales of euro-denominated securities and hampering monetary policy transmission, the Governing Council expanded its EUREP facility.
This standing mechanism now offers continuous euro liquidity against high-quality collateral to central banks globally, moving from a regional to a worldwide perimeter.
Access is granted by default, ensuring agility in provision.
This expansion reinforces the euro's international role, boosting confidence for partners to transact in euros, knowing liquidity will be available during market disruptions.
The ECB thus contributes to European security by being a source of stability.