Christine Lagarde Has Bigger Problems Than the Euro

The European Central Bank has a problem, and, no, it is not the exchange rate. The recent appreciation of the euro may have caught all the headlines, but it pales in comparison with the broader challenge the pandemic poses for monetary policy. Rather than simply talking down the currency, the ECB must take more substantive steps to support economic growth and lift inflation back to target.

Since the start of the summer, the euro has soared to nearly $1.20, its highest level in more than two years. A stronger currency can damage growth, since it makes euro zone exports more expensive relative to other foreign goods. It also lowers import prices, pushing down the inflation rate. Last Thursday, ECB President Christine Lagarde presented the bank’s new set of forecasts and explained that the stronger euro was one reason why inflation was expected to stay underneath the central bank’s target of “below but close to 2%” in the coming years.