Philip Lane: From star pupil to ECB hopeful with Nobel potential

Trinity College Dublin economics professor John O'Hagan didn't think much of it when he hadn't heard in weeks from the third-year student he'd hired in 1990 as a research assistant to help update a chapter for a new edition of a book, The Economy of Ireland.

“He had gone AWOL. I’d accepted that some research assistants work out and some don’t,” recalls O’Hagan. “Then, some weeks later he handed me in a totally refocused and rewritten chapter. The only thing for me to do was put his name to it and delete my own from the chapter. I couldn’t change a sentence of it - it was that good.”

The student was Philip Lane, who went on to become governor of the Central Bank of Ireland in late 2015, and who is now seeking to recast the chapter on Ireland's membership of the euro zone by breaking the country's record as the only founding member of the currency not to have held an executive board seat at the European Central Bank (ECB).

"His knowledge of financial macro-economics is second to none, in particular as they relate to the euro zone," said O'Hagan. "He has also, it seems, built up a very good relationship with [ECB president] Mario Draghi. "

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However, noises from capitals throughout the euro region - including Paris, Lisbon, Bratislava and Vienna – suggest Lane (48) will be pipped by the other candidate for the ECB vice-presidency, Spain’s economy minister Luis de Guindos, when euro zone finance ministers vote next week on the matter.

A formal decision will not be made until EU leaders meet at a summit on March 22nd.

What set him apart then is curiosity in actually understanding global macroeconomics

De Guindos, a former investment banker with Nomura Securities and Lehman Brothers, has served as Spain's economy minister since 2011. While the 58-year-old lacks the economics PhD that Lane has, he has built up a lot of capital with fellow EU ministers for his handling of Spain's banking crisis.

Last year, he carried out the first test of new European bank wind-up rules, when he oversaw the rescue and sale of Banco Popular, which resulted in junior bondholders in Spain's then sixth-biggest bank being wiped out.

French banking giant Société Générale's chief Europe economist, Michel Martinez, believes de Guindos will become the ECB's next vice-president. However, he said Lane is well placed to secure one of the other executive board positions coming up for grabs, as ECB chief economist, Peter Praet, and market-operations head, Benoit Coeuré, step down next year.

“So, [there’s] a good series of opportunities for a good economist,” Martinez said.

A crucial time

The successor to the ECB’s current vice president, Portugal’s Vitor Constâncio, whose eight-year term ends in May, steps into the second most senior position at the ECB at a crucial time, as it seeks to unwind unprecedented stimulus policies introduced in the wake of the European debt crisis.

The ECB’s €2.5 trillion quantitative easing (QE) bond-buying programme, launched in early 2015, is currently being phased down. Some policy makers on the institution’s 25-member governing council are pushing to end QE, which is currently scheduled to run until at least September, in the fourth quarter.

That’s despite the fact that euro zone inflation, running at 1.3 per cent in January, remains well below the ECB’s target of close to 2 per cent.

Meanwhile, financial markets currently expect the ECB to start hiking interest rates again next year for the first time in more than a decade. The institution has kept its deposit rate in negative territory since 2014 and main interest rate at a record-low of zero for almost two years.

"The ECB will likely soon be approaching a turning point in the policy cycle and will have a big communications job in front of it to prepare the markets," says Patrick Honohan, who served as Central Bank of Ireland governor between 2009 and 2015. "But the challenge facing it is nothing like when it had to use extraordinary and innovative measures during the crisis."

Honohan, who is widely credited with restoring the reputation of the Central Bank, that seemed damaged beyond repair after Ireland’s banks nearly collapsed in 2008, has no doubt that his successor deserves to be the country’s first representative on the ECB executive board.

“When you look at the international lists of top economists – whether it’s based on published works or how many of them are cited elsewhere – Philip comes out on top of the group of Irish economists unquestionably,” Honohan says.

Top economics student

Lane, an alumnus of Blackrock College in south Dublin, went on to become a top-ranked economics student when he graduated from Trinity in 1991 before attending Harvard in Cambridge, Massachusetts, where he received a PhD in economics.

He followed up immediately with a two-year stint as an assistant professor of economics and international affairs at fellow Ivy League school, Columbia University.

Richard Clarida, a Columba University professor and a managing director at investment firm Pimco, initially hired Lane at the Manhattan college and remains in contact with him more than two decades later.

“What set him apart then and distinguishes him still today is curiosity in actually understanding global macroeconomis, as opposed to shoehorning the real world into a three-equation model,” said Clarida, who dined with Lane in Dublin last month. “His research and database on international financial adjustment has been very influential to policymakers around the world.”

Lane returned to Ireland in 1997, where he started off as an economics lecturer at Trinity, and ultimately became head of the department, before joining the Central Bank as governor in November 2015 - automatically gaining a seat on the ECB’s governing council.

The appointment of a second academic to the role in succession surprised many, as Robert Watt, the top civil servant at the Department of Public Expenditure and Reform, was widely tipped in political circles for the plum position.

While de Guindos has been openly canvassing for the ECB gig - saying publicly last week that he was confident of winning - Lane has adopted a more low-key approach.

Still, members of the European Parliament’s economic and monetary affairs committee said that Lane’s technical expertise on monetary policy shone through as both candidates were grilled by them on Wednesday evening.

“The majority of the political groups considered Governor Lane’s performance more convincing,” according to Roberto Gualtieri, the chairman of the committee. “Some groups expressed reservations for Minister Guindos’s appointment.”

Tracker-mortgage scandal

Draghi has also leaned on Lane outside the governing council. The ECB president, as chair of the European Systemic Risk Board set up in 2010 to promote financial stability in the EU, asked Lane in 2016 to develop a plan to keep euro area states’ borrowing costs low in future - without triggering a widely-feared full fiscal union.

Philip's never going to have people laughing in the aisles when he's speaking - but everything he says in public is well thought through

Lane, who lives in Dublin with his wife, Orla, and two children, reported back last month with his group’s proposal for the creation of a new asset class of sovereign bond-backed securities (SBBS). Still, it’s not clear how much support this plan will ultimately have from European capitals.

Lane, who runs in his spare time and is a die-hard supporter of Liverpool and the Irish soccer team, has been as interested as Honohan in domestic economics - having founded the irisheconomy.ie blog, beloved by academics, back in 2008.

However, his speeches have been much more focused on ECB monetary policy than his predecessor.

Also, while Honohan, hired as governor for his banking expertise, appeared to enjoy being throw into the political theatre of the Oireachtas finance committee meetings over the years, Lane has been largely on the backfoot in his appearances as governor, where questioning focused on the regulator's handling of Ireland's tracker-mortgage scandal.

“Philip’s never going to have people laughing in the aisles when he’s speaking - but everything he says in public is well thought through,” says a former colleague of Lane.

Lane, whose father served as a one-time head of a strategic technology unit at AIB and is said to have been a visionary in terms of how the bank could harness the internet. He displayed his own inner technology geek on his first day at the Central Bank in 2015, when he took to YouTube to deliver a message to staff.

Meanwhile, O’Hagan, a TCD professor emeritus since October 2016, who got Lane to update his chapter in the latest edition of The Economy of Ireland last year, continues to hold onto exam papers his former student wrote.

He dreams of even greater things for his former protégé than a seat on the ECB executive board.

“I think there’s a distinct possibility that Philip will be given a Nobel Prize for economics in time,” he said. “I really believe that.”