HELSINKI — Central banking is rocket science. If you don’t get it right, the consequences can be tragic.
That’s why EU leaders are taking a huge gamble in their decision to entrust the leadership of the European Central Bank to Christine Lagarde, a political rock star with no economic training and no practical experience of monetary policy.
Lagarde, currently the managing director of the International Monetary Fund, has many skills. A former international lawyer, she’s also a skilled political player, a fluent communicator popular with the media and a pragmatic chairperson unencumbered by economic dogma. She is trusted by global leaders from Berlin to Beijing to Buenos Aires.
At a time when the ECB is running low on options for jolting the economy, Lagarde may have the acumen and authority needed to persuade reluctant, conservative Germany and the Netherlands of the urgent need to provide more fiscal stimulus, according to Jacob Kirkegaard, a senior fellow at the Petersen Institute for International Economics in Washington.
But by nominating the former French minister to succeed Italy’s Mario Draghi — the bold president of the bank who rescued the European economy in 2012 with a promise to do “whatever it takes to preserve the euro” — the EU’s leaders have effectively decided that they don’t need a central banker to run their central bank.
The main reason why Lagarde got the nod, instead of the experienced French central bank chief François Villeroy de Galhau, appeared to be gender.
The tightly knit central banking fraternity, which was expecting the candidate to come from within the ranks of eurozone national central bank chiefs, is aghast. As one insider put it: “It’s as if we’re going from ‘whatever it takes’ to ‘whatever.’”
That poses a serious risk in an era in which growth is slowing, inflation sits stubbornly below the ECB’s target of just under 2 percent, interest rates are stuck at zero and the ECB is rapidly exhausting the supply of eligible government bonds it can buy to stimulate the economy.
The next ECB president may be plunged into fire-fighting within days of taking office on November 1 if a global trade war unleashed by U.S. President Donald Trump worsens, Britain crashes out of the EU without a withdrawal deal or Italy’s confrontation with Brussels over its budget deficit and excessive debt takes a turn for the worse.
The markets are already expecting Draghi to fire his final cartridges before then, by cutting the deposit rate for banks parking funds at the ECB deeper into negative territory and resuming a limited round of securities purchases to try to get inflation up closer to the bank’s objective.
Horse trade
The surprise choice of Lagarde, 64, was part of a Franco-German trade-off under which conservative German Defense Minister Ursula von der Leyen, 60, was nominated to head the European Commission, breaking a political deadlock in which all the original candidates fell by the wayside.
Managing Director of the International Monetary Fund Christine Lagarde (R) is pictured during the Open Ceremony of Women’s Forum Americas in Mexico, on May 30, 2019 | Rodrigo Arangua/AFP via Getty Images
Under the package deal, outgoing liberal Belgian Prime Minister Charles Michel will be president of the European Council, chairing EU summits, and socialist Spanish Foreign Minister Josep Borrell will become the EU’s foreign-policy honcho. All the appointments except Michel’s require approval by the European Parliament, which is not yet certain.
The main reason why Lagarde got the nod, instead of the experienced French central bank chief François Villeroy de Galhau, appeared to be gender.
For the first time, the sensitive choice of ECB chief was the adjustment variable in political horse-trading over other top EU jobs — even though the bank is meant to be strictly independent of politics. Moreover, Lagarde’s is the second appointment of a politician to replace a macroeconomic expert, after former Spanish Economy Minister Luis de Guindos replaced ECB Vice-President Vítor Constâncio last year.
With Frenchman Benoit Coeuré’s term on the executive board expiring at the end of the year, it piles enormous responsibility on the shoulders of newly appointed chief economist Philip Lane, who spelled out the ECB’s utter determination to keep monetary stimulus going as long as necessary to meet the inflation target in a speech in Helsinki on Monday.
Coeuré is likely to be replaced by an Italian, raising the specter that Rome’s anti-establishment government may put forward a maverick rather than an orthodox central banker.
Questionable record
To be sure, the appointment is not without what some might regard as its advantages. A Lagarde-led bank is likely to be more collegiate, with the president acting as the mouthpiece for policy devised by Lane and the ECB staff and endorsed by the 25-member Governing Council, whereas Draghi took a decisive lead on his own at key moments such as his 2012 “whatever it takes” intervention, which was the turning point of the crisis.
And Lagarde does have crisis management experience. She served as France’s finance minister during the early stages of the eurozone sovereign debt crisis before taking the helm of the IMF in 2011 when Frenchman Dominique Strauss-Kahn — a path-breaking economist — resigned in disgrace after being charged with sexual assault.
“Because of her own rock-star qualities, she may be best placed to deliver the message in Berlin and the Hague that they must plow more of their surpluses into fiscal stimulus.” — Jacob Kirkegaard, senior fellow at the Petersen Institute for International Economics
But people who worked with Lagarde in Paris and Washington say she is a skilled spokeswoman for others’ policy rather than an original economic thinker like Strauss-Kahn.
Despite being feted by the Financial Times as “finance minister of the year” in 2009 and starring on the covers of glossy business magazines, her record is open to question.
She was convicted by a special court of negligence for approving a €403 million arbitration payout — the ruling has been rescinded — in favor of bankrupt businessman Bernard Tapie, a former center-left minister who had swung his support behind conservative President Nicolas Sarkozy. Supporters said Lagarde, who was not given any punishment, had acted on orders from Sarkozy’s office.
In the euro crisis, she was an accessory to the now infamous Deauville agreement between Sarkozy and German Chancellor Angela Merkel in 2010 which helped tip Ireland and Portugal into bailout programs by raising the prospect of mandatory debt restructuring for countries that lost access to financial markets.
The agreement aggravated markets’ loss of trust in the eurozone, sending bond yields of stressed sovereigns sky-rocketing. The proposal was watered down and has never been generally implemented.
Christine Lagarde (C), and the Women’s Forum for the Economy and Society CEO, Chiara Corazza (R), arrive for the opening ceremony of the Women’s Forum Americas in Mexico City, on May 30, 2019 | Rodrigo Arangua/AFP via Getty Images
As IMF chief in 2013, Lagarde demanded that all bank deposits in Cyprus larger than €100,000 be seized to pay towards a €10 billion international bailout for the debt-stricken eurozone country. After a public outcry, the IMF backed off from demands to hit smaller depositors too, and the bail-in of larger savings was reduced to a one-off levy of 9.9 percent.
She also tried but failed to force eurozone governments to write down their holdings of Greek debt to make Athens’ interest payments sustainable. Instead they agreed only to defer interest payments, stretch out repayment and allow Greece to redeem high-interest IMF loans.
Her main achievements were to pursue a significant shift, begun under Strauss-Kahn, away from the IMF’s traditional conservative austerity bias, and to modernize its communications.
“Because of her own rock-star qualities, she may be best placed to deliver the message in Berlin and the Hague that they must plow more of their surpluses into fiscal stimulus,” Kierkegaard said. “In a way, the EU may be moving towards a more Japanese-style ‘Abenomics,’ with monetary and fiscal policy working together to deliver a massive stimulus.”
Alternatively, it may merely be on the way to politicizing the central bank. It doesn’t take a rocket scientist to see why that’s worrying.
Paul Taylor, contributing editor at POLITICO, writes the Europe At Large column.