Lagarde: It’s even worse than we thought

ECB president supports more public spending as milder economic predictions are ‘out of date.’

European Central Bank President Christine Lagarde warned Wednesday the eurozone economy will “very likely” contract more than forecast after governments shut down business to contain the pandemic.

The ECB now expects the euro club's economy to shrink between 8 percent and 12 percent, depending on how fast lockdown measures are lifted and economic activity picks up. Earlier forecasts from the European Commission were below 8 percent.

“It’s very likely that we’ll be somewhere in between the medium and the severe scenario,” Lagarde said in an online youth dialogue. Predictions of a mild contraction are “out of date.”

New forecasts are due early next month, the Frenchwoman said, around the time eurozone governors convene for their next ECB monetary policy meeting.

“You’re really talking about an economy in the euro area that is, in one given year, going to shrink more so than it has for instance during the great financial crisis,” she said.

The president’s comments come as the Commission prepares to unveil a recovery fund.

Governments have already spent or committed trillions of euros, increasing their public debt piles, to keep their industries alive during the lockdowns.

Lagarde said she’s relaxed about that increased debt, as inflation and interest rates remain at record lows. What governments spend their money on, is more important.

“If debt is spent in order to transform our economies ... then it’s a particularly good use of debt and should be encouraged,” she said.

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