‘A tribal clique’: Lagarde denounces economists at Davos

European Central Bank President Christine Lagarde launched a stinging attack on the economics profession on Wednesday (17 January), accusing analysts of having “blind faith” in their models, which often bear little connection to reality.

Speaking at an event entitled “How to Trust Economics” at the World Economic Forum in Davos, the ECB chief also suggested that economists constitute a “tribal clique” whose models largely discount the possibility of “exogenous shocks” such as pandemics, climate change-induced weather events, and sudden supply shortages – all of which have severely impacted Europe’s economy over the last few years.

Lagarde, a lawyer by training who previously served as the head of the International Monetary Fund, also noted that upon assuming her current position as ECB president in 2019 she explicitly warned its Governing Council and analysts to “beware of models”.

“Many economists are actually a tribal clique,” she said. “[They] are among the most tribal scientists that you can think of. They quote each other. They don’t go beyond that world. They feel comfortable in that world. And maybe models have something to do with it.”

“If we had more consultations with epidemiologists, if we had climate change scientists to help us with what’s coming up, if we were consulting a bit better with geologists, for instance, to properly appreciate what rare earths and resources are out there, I think we would be in a better position to actually understand these developments, project better, and be better economists.” 

‘Not helping the fight’

Lagarde’s fiery comments echo remarks she made in an interview with Bloomberg TV earlier on Wednesday, where she criticised money markets for “not helping the fight against inflation” by being too optimistic about rate cuts being introduced earlier than expected this year.

Money markets are currently pricing in six rate cuts of 25 basis points (0.25 percentage points) each over the course of 2024, with the first cut coming as early as March.

However, Lagarde warned that, although rate cuts will “likely” be introduced by the summer, crucial wage bargaining data used by the ECB to determine monetary policy will only be available in “late spring”.

“We will know a lot more probably in April, May, because the bargaining agreements are being negotiated in the first quarter of every year and the results come in after the agreements have been closed,” she explained.

Eric Dor, the director of economic studies at the IESEG School of Management, told Euractiv that markets were indeed “a bit overoptimistic in December [by] implicitly forecasting a cut of policy rates early in the year”.

However, he noted that more recent ECB data on bond yield curves shows that “since then, markets have become more realistic”.

Maria Demertzis, a Senior Fellow at Bruegel think tank, stressed that the fact that the head of the ECB told markets their predictions were amiss is “brave” but refused to be drawn on the issue of forecasting.

“Who knows who’s right?” Demertzis told Euractiv. “If the whole market is thinking that way, are they all wrong? I don’t know… Given the uncertainties that we see, I wouldn’t put my money on anybody.”

The ECB hiked interest rates on ten consecutive occasions to curb soaring prices between July 2022 and September 2023, bringing its benchmark deposit facility from -0.5% to a record high of 4.0%. It paused rate hikes at its two previous rate-setting meetings in October and December.

‘The track record of forecasting is abysmal’ 

Lagarde’s comments also came on the same day that Eurostat, the EU’s official statistics office, confirmed a previous flash estimate that year-on-year eurozone inflation increased from 2.4% in November to 2.9% in December – down from a peak of 10.6% in October 2022 but still well above the ECB’s 2% target rate.

The ECB’s own forecasts see inflation dropping to 2.7% this year before falling below 2% in 2026.

IESEG’s Dor stressed that one current “major source of uncertainty” surrounding contemporary inflation predictions is the attacks on shipping vessels by Houthi forces off the coast of Yemen, causing a spike in shipping costs that could eventually be passed onto consumers.

“If this situation lasts for a long time, the surge in shipping rates could imply a rebound of inflation in the euro area,” he said.

Asked about the ECB’s own inflation forecasts, Demertzis was scathing. 

“If you look at the track record of forecasting, it’s abysmal,” she said. “The fact that inflation returns to [below 2%] in two years’ time is by construction. The models that they use force it to return to equilibrium and inflation to 2% in two years’ time.”

“I think forecasting right now is much more an art than a science,” she added. “Forecasting at this point is just not reliable.”

[Edited by Zoran Radosavljevic]

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