Christine Lagarde must learn to run an economy that is slowing to a crawl

Lagarde’s most perilous moments will come when she cannot rely on a prepared text, like news conferences after ECB policy meetings

Christine Lagarde and Mario Draghi. They both agree central banks should step in if inflation is weak. Photograph: Getty Images

Christine Lagarde and Mario Draghi. They both agree central banks should step in if inflation is weak. Photograph: Getty Images

 

Christine Lagarde is the surprise nominee to be the next president of the European Central Bank, the body that sets monetary policy for one-fifth of the global economy.

Investors clearly expect she will follow her predecessor, Mario Draghi, and do “whatever it takes” to defend the euro. They bid market interest rates to record lows in the days after she was named, a clear sign they expect easy money to keep flowing.

But Lagarde, who is the respected managing director of the International Monetary Fund (IMF) , is not an economist, and that has raised some questions beyond the usual political intrigue about her candidacy. A compromise candidate who emerged from a roster of male central bankers, she, unlike Draghi, does not have a doctorate in economics, and has not been the head of a central bank.

Lagarde, a lawyer, will take over at a time that the best economic brains describe as difficult. Growth in the euro zone has slowed to a crawl, and central banks in the US, Japan and Europe have largely exhausted their arsenals of stimulus measures.

The organisation overseen by Lagarde warned as much on Thursday. “Even in the absence of a major shock,” the IMF said in a report prepared before her nomination, “there is a danger that the area could enter a prolonged period of anaemic growth and inflation.”

European finance ministers easily endorsed Lagarde last week. The European Parliament and the European Central Bank’s governing council will now weigh in, though neither has the power to block her from taking charge on November 1st. Here is what they will be talking about.

– lots of central bank chiefs are not economists

There is plenty of precedent for people without advanced economics degrees to run central banks. Jerome H Powell, chair of the Federal Reserve, trained as a lawyer. So did Lagarde before entering politics as a minister in the French government. Jean-Claude Trichet, president of the ECB before Draghi, studied economics, but did not have a doctorate. He spent most of his career as a civil servant.

Both Powell and Trichet had central banking experience.

Lagarde’s most perilous moments, analysts say, will come when she cannot rely on a prepared text, like the news conferences that follow monetary policy meetings of the ECB’s governing council. The sessions are broadcast live on the web, and financial markets react instantly to nuances in the bank president’s language. The president must display great finesse to avoid sending false signals. That has sometimes been a problem for Powell, despite his experience.

Lagarde may well commit a few gaffes as she finds her footing, said Edwin Truman, a fellow at the Peterson Institute for International Economics in Washington.

“That’s probably true of every person who rises to the level of central bank governor – there is a possibility to make a misstep,” Truman said. “She probably will need to learn a little bit of central bank speak.”

– she will depend on others for economic advice

Lagarde will become the European Central Bank’s president just as it is losing some of its finest economic minds.

Peter Praet, the chief economist, left in May after an eight-year term. Benoît Cœuré, a widely respected member of the bank’s executive board, will leave in December. And, of course, the bank will lose Draghi, who earned a doctorate in economics from the Massachusetts Institute of Technology. All have been pivotal in the central bank’s efforts since 2011.

Philip Lane remains as the only hard-core economist among the six members of the executive board, which sets policy with the other 19 members of the governing council.

Lane, who was governor of the Central Bank of Ireland, has an enviable depth of practical and academic experience. He was previously a professor at Trinity College Dublin, where he did groundbreaking research on how the movement of money across borders contributed to the 2008 financial crisis.

“It’s a reasonable assumption that she would rely a lot on the judgment of the chief economist and more experienced members of the ECB,” said Ángel Talavera, an economist who follows the ECB at Oxford Economics.

The challenge, said two other economists who have observed Lagarde closely and asked not to be identified for fear of offending someone so powerful, is whether Lagarde has the economic know-how to recognise and challenge bad advice.

Trichet blundered in 2011, late in his term, when he raised interest rates, braking the economy even as the euro zone hurtled toward crisis. Jürgen Stark, the chief economist then and an inflation hard-liner, certainly influenced the decision. Draghi, who took office that year, quickly reversed the cuts.

Lagarde’s supporters point out that she has spent eight years at the IMF and certainly learned a lot. One of the IMF’s main functions is to monitor the economic performance of member countries, and the fund played a crucial role in preventing the collapse of Greece during the euro zone debt crisis.

Yet the IMF does not have nearly as much power as the ECB to determine the course of the global economy.

“The core monetary policy part of it is really hard, and that’s where she’ll have to come up a very steep learning curve,” said Krishna Guha, head of the global policy and central bank strategy team at Evercore ISI, a firm that advises investment banks.

– she will bring fresh skills to the job

Lagarde has a record as a strong manager. She took over the IMF when it was in crisis. Dominique Strauss-Kahn, her predecessor, was forced out in 2011 after being accused of sexually assaulting a housekeeper in a New York hotel. The charges were later dropped.

The IMF “was in disarray”, said Douglas Rediker, who then represented the US on the fund’s executive board. “One of the first things she did was restore the reputation, integrity and confidence of the IMF,” said Rediker, now chairman of International Capital Strategies, a consulting firm.

Lagarde is known as a boss who scolds employees when they check their mobile phones during meetings. But she is also more informal than Draghi. During a visit to the ECB offices in June, probably before she realised she could become president, she bantered easily with lower-level employees, according to a person who was present.

Lagarde once said she tried to do something for women every day, and can be expected to address gender imbalance at the central bank. Just two of the 25 members of the governing council are women.

Lagarde, who was the French finance minister before leading the IMF, may rely on her political skills to get euro zone governments to do more of the heavy lifting if there is another crisis, Rediker and others said.

That is important because there is probably not that much more that the ECB can do if the euro zone sinks into recession. Benchmark interest rates are at record lows. Countries like Germany that are in good financial shape could stimulate the euro zone economy by spending more on infrastructure. Euro zone leaders could agree on a common deposit insurance fund to strengthen the banking system.

“Everything in Europe, whether tacitly or overtly, has a political element to it,” Rediker said. “Christine Lagarde’s skills might be ideal for the ECB at the current moment.”

DO LAGARDE AND DRAGHI THINK ALIKE?

Here’s a quick read on what they say:

On weak inflation

Draghi, June 18th, 2019: “In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required.”

Lagarde, April 2nd, 2019: “Monetary policy should remain accommodative where inflation is below target, and should anchor expectations. Exchange rate flexibility should be used, as needed, to help absorb shocks.”

Quick take: Central banks should step in if inflation is weak.

On government and monetary policy

Draghi, June 18th, 2019: “Monetary policy can always achieve its objective alone, but especially in Europe, where public sectors are large, it can do so faster and with fewer side effects if fiscal policies are aligned with it.”

Lagarde, October. 5th, 2017: “Of course, monetary policy is most effective when complemented with sound fiscal policies that promote long-term sustainable growth.”

Quick take: Moves by the central bank are most effective when they work in tandem with government spending policies.

On banking union

Draghi, April 12th, 2019: “The Economic and Monetary Union needs to be strengthened, first and foremost by implementing what has already been agreed and finishing the common projects we have started: completing the banking union, strengthening the operational capacity of the European Stability Mechanism in full compliance with union law, and making ambitious progress on the capital markets union.”

Lagarde, March 28th, 2019: “Going on 20 years the time is ripe for the euro area to show new resolve and complete the banking and capital markets unions so it can harvest the benefits now and in the future.”

Quick take: Deeper integration of the euro zone’s financial sector will make it stronger.

– New York Times News Service

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