The Choice of Christine Lagarde for the ECB

And so it happened. The managing director of the IMF — and the third most powerful woman in the public policy world — Christine Lagarde, was just nominated to the presidency of the European Central Bank (ECB). It’s a bold move from the heart of Europe’s power, and at least somewhat unexpected. Other candidates, such as Germany’s Jens Weidmann or Finland’s Erkki Liikanen, were more frequently discussed during the last few months’ inevitable speculation.

The move is not without its merits, however. Lagarde, who has been running the IMF since 2011, does not come from the central banking world. Indeed, she’s not even an economist. 

Somebody at the helm of the ECB from outside the career of central banking means she might be willing to try new things. This, central banking sorely needs. Its decades-old commitment to a policy regime — inflation targeting — that scarcely works and is increasingly questioned is long overdue for a change. As a determined and thick-skinned policy maker unafraid of controversy, a Lagarde-run ECB could be the trailblazer for the 2020s that the Reserve Bank of New Zealand was for the 1990s.

On the other hand, as a lawyer and politician rather than an economist by profession, her nomination signals a more politically involved central bank. The ECB is currently ranked as the world’s most independent central bank, not being tied or responsible to any one country’s political regime and its independence from politics enshrined in the Maastricht Treaty. 

With a former finance minister at its helm, deep into the policy world, it is a fair guess that Lagarde will make the ECB at least somewhat more inclined to follow the current whims of European politicians. That would be disastrous. 

It is safe to say that without experience as a central banker and without an economics background, Lagarde will rely heavily for economics expertise on the ECB’s chief economist, Philip Lane, a Harvard-schooled economist and until recently the governor of the Central Bank of Ireland. And subsequently, Lagarde’s focus may lie elsewhere than the core task of monetary policy. 

What does Lagarde bring to the table?

Many economists and commentators seem to think that Lagarde’s nomination is a communications play (here or here); the ECB needs to be clearer about their activities and stand up more coherently to public scrutiny. As central banking is a game of confidence and credibility with transparency playing an increasingly vital role, Lagarde’s experience as a policy maker and clear communicator may prove very successful. 

Her views on monetary policy — as far as we can discern them as of now — are a mixed bag. Mitigating the fear of a more politically inclined ECB, as recently as last year Lagarde strongly defended independence in monetary policy and singled it out as an important topic for the future. In the very same publication she optimistically explored the many opportunities offered by FinTech — and Lagarde seems to have a much more positive attitude and healthy wait-and-see approach than most of the colleagues in her new position. 

Most central bankers’ position towards virtual currencies and disruptive technologies in finance has been — to say the least — somewhat hostile and here, perhaps, Lagarde’s ascension to the top of the ECB may contribute to a more composed and serious conversation. 

On the other hand, she’s known to praise negative interest rates as a boost for the global economy and advocated a more aggressive monetary policy — especially for the Eurozone — which is far from reassuring. She favors the bond-buying programs of the ECB, which already seem to have worsened Europe’s zombie-firm trouble. Shoring up and supporting Europe’s already-fragile banks is a task ensuring that the next ECB president has her task cut out for her. 

“Good monetary policy,” Lagarde said last year, “is about story-telling. Policy is effective if only it can be explained clearly so the public can form expectations about future policy.” That might be overstating the case for transparency, but she’s definitely onto the right track. 

Evaluating the needs of a currency area as diverse as the Eurozone and reconciling the governors of 19 different countries on the ECB Governing Council while clearly communicating a coherent strategy to financial markets is a challenge indeed. If anybody is well-equipped for it, it’s Christine Lagarde. 

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