Lagarde faces tough challenge as ECB battles to revive inflation

Nominee as head of European Central Bank an experienced and pragmatic politician

Christine Lagarde’s lack of economic training and experience in monetary policy will prompt questions about her nomination as ECB president. Photograph: Saul Loeb/AFP/Getty Images

Christine Lagarde’s lack of economic training and experience in monetary policy will prompt questions about her nomination as ECB president. Photograph: Saul Loeb/AFP/Getty Images

 

Christine Lagarde’s nomination by European Union leaders as president of the European Central Bank breaks new ground – and not only because she is a woman. As a lawyer by training, and a former politician, she cracks the mould of ECB presidents, all previously economists and central bankers.

If her appointment is confirmed she would face immediate challenges, with inflation remaining stubbornly low and the ECB with limited policy options, as interest rates are already at record lows.

Lagarde, as a former French finance minister and managing director of the International Monetary Fund, has huge experience at the top level of international finance – and financial diplomacy. Mentioned as a candidate for European Commission presidency, her late candidature for the central bank – supported by French president Emmanuel Macron – will mark a change at the head of the ECB.

Lagarde is likely to be a higher-profile figure than the typically cautious economists who preceded her. She is seen to have done a good job rebuilding the reputation of the IMF, which suffered in the Greek bail-out. Her lack of economic training and experience in monetary policy will prompt questions, particularly given the nature of the challenge facing the ECB and the possibility of having to break yet more new ground in terms of monetary policy.

Strong credentials

However, as an experienced politician and then head of a major international body she brings strong credentials in other areas, including management, leadership and communications, as well as significant financial experience. The ECB is full of technocrats and economists to outline and advise on the policy options – amongst the most senior being Ireland’s Philip Lane, recently appointed to the key position of chief economist.

“ Largarde’s lack of direct experience of working in financial markets is also notable and could be relevant if Europe heads into recession,” said Megan Greene, economist at the Harvard Kennedy School .

The division of the big jobs between the two big countries – France and Germany – is notable and Macron may well see the ECB as at least an equal prize. It will be vital for Lagarde,nonetheless, to demonstrate her independence – she will not want Europe’s politicians breathing down her neck in the way Donald Trump is trying to put pressure on US Federal Reserve chairman Jay Powell to cut interest rates.

A key point for financial markets is not only who is now likely to be the next ECB boss – but also who won’t. The possible nomination of a monetary hardliner – such as Bundesbank chairman Jens Weidmann – would have raised speculation of a change of policy approach.

Outgoing president Mario Draghi has promised to take whatever action is needed if the euro-zone economy does not show signs of life, raising the possibility of yet lower interest rates, or a revival of the ECB’s bond-buying programme.

Pragmatic stance

Weidmann headed a group of hardliners who had doubts about what the ECB had done to combat the crisis and are thought to have favoured it being unwound – though he had softened his stance a bit recently. Lagarde would be seen as more likely to take a pragmatic stance, doing whatever is necessary to revive inflation. But she will still face Weidmann and other sceptics around the table of the ECB governing council.

Draghi may start the ball rolling before his term ends on October 31st– he has promised the ECB would act quickly if the euro zone economy does not revive. Lagarde could, conceivably, take up her position just as a no-deal Brexit is hitting and as the threat of trade wars hangs in the air.

She faces a tough job. She will need to bring her governing council – comprised of ECB governors from the euro-zone countries and senior executives – with her, even if some go reluctantly.

She will also need to build a working relationship with Europe’s finance ministers, recognising that monetary policy is part of a wider economic policy picture, but also that a central bank, to be effective must be – and be seen to be – independent.

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