ECB Top Job: Will Lagarde Continue the Bank's Dovish Approach?
ECB Talking Points:
- Christine Lagarde lacks experience in monetary policy but her experience as head of the IMF can bring some fiscal insight during a time where monetary decisions seem to be insufficient
- She believes that low inflation can hinder economic growth and that public spending can improve output without increasing debt
- It is expected that she’ll continue Draghi’s QE programme in the near-future and could remain dovish if economic conditions remain tilted to the downside
Christine Lagarde’s nomination to lead the European Central Bank came as a surprise as she was not in the top candidates expected to obtain the job, at least not within the general public’s top candidates, but she is not a new face within the top job selection process. Her political background made her more likely to replace Jean-Claude Juncker to become the new leader of the European Commission and her lack of experience in financial markets has led to some scepticism about her appointment as the top economic official in the Eurozone.
But her role as head of the International Monetary Fund and how she came to occupy that role speak to her ability leading large organisations. She took the job as head of the IMF in a sudden turn of events where her predecessor Dominique Strauss-Khan was arrested on suspicion of sexual assault. She had no previous experience within the finance sector, but she managed to rebuild the confidence in the IMF after its reputation was greatly damaged in the aftermath of the Greek financial crisis. It didn’t matter back then that her background was that of a politician and lawyer, nor will it matter now given her reputation within the economic institution.
Some will question her abilities and track record
Despite her successful career leading the fund she has faced criticism over certain actions undertaken in her career, like the controversial bailout of Argentina and her involvement in the “Tapie” scandal. The IMF’s $57bn bailout of the Latin country threatened her reputation as the country’s currency crisis continued and its yields shot up shortly after the cash injection, with many still fearing that the Argentinian economy could break if the general elections in October sees a victory for the populist opposition. A bigger black mark in her career is her involvement in the 2008 Tapie scandal, of which she was accused of diverting public funds to French businessman Bernard Tapie when she was France’sminister of Economics under Nicolas Sarkozy’s presidency.
Nonetheless she was never convicted, and she continued her role as the head of the monetary fund, a post she will now vacate to possibly replace Mario Draghi as the new top economic official in the Eurozone.
Is she fit to fill the job?
She has no formal economics training, and although that is also true for other central bankers like Jerome Powell, she has no previous experience working in a central bank, which means she lacks experience with monetary policy, the backbone of the ECB’s job. But as Mario Draghi has already pledge to continue monetary stimulus in the foreseeable future it is likely that when Ms Lagarde steps in at the beginning of November she will continue with the set policies until at least mid-2020, as Mr Draghi is likely to take advantage of her inexperience to push for another round of quantitative easing, knowing that she is unlikely to reverse his decision in the early stages of her new role. She may have the experience to handle the recovery and bailout process once a country has fallen deep into recession, but it is expected that she will need to rely on the Central Bank’s economists to set the monetary policies to avoid summoning the Eurozone into a recession, as her job is no longer to rescue after the fact but to avoid it happening. But as the Eurozone faces increasing economic challenges her lack of central bank experience may play in the bloc’s favour as it is likely to bring stability to monetary policy in the short-term and will likely allow the ECB’s internal experts, who are the ones to have developed the current policies, to boost their roles within the bank.
And despite her lack of monetary setting experience she is considered to have certain attributes that other candidates lack, and the ability to stand her ground is one of them. In a time when central bankers have been implementing loose monetary policy and are thought to be influenced by leading politicians, Ms Lagarde’s experience as a lawyer and politician is expected to have equipped her with the tools to be able to face and stand up to the world’s leaders to ensure the central bank remains independent. She is also highly experienced in fiscal policy, which has become increasingly important in the ECB rate setting alongside monetary policy.
When looking for guidance as to what her stance may be once she has gotten comfortable with her new role we can note a remark she made in 2014 where she said that public investment has the potential to efficiently boost growth, and the increase in output from such investment could possibly offset the increase in debt, hinting to a more dovish monetary stimulus stance, which is in line with views from most southern European countries. Regarding inflation, she has previously mentioned that subdued inflation can undermine growth and increases the risks of deflation occurring, so we can expect her to focus on stimulating the economy (i.e. low rates and asset purchases) to bring inflation to its 2% target, leaving aside the “close to or below” approach.
There is no doubt then that Ms Lagarde will face pressure from Germany, considered to be the Eurozone’s largest and strongest economy, which has condemned the continued use of low-to-negative interest rates which are seen to damage the savings of German consumers.
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--- Written by Daniela Sabin Hathorn, Junior Analyst
To contact Daniela, email her at Daniela.Sabin@ig.com
Follow Daniela on Twitter @HathornSabin
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