Christine Lagarde: key issues she must address at the ECB

If confirmed as president, rebooting eurozone growth should be among top priorities

Christine Lagarde’s nomination as the next president of the European Central Bank was not widely expected.

If confirmed as Mario Draghi’s replacement, the head of the International Monetary Fund would be the first ECB president without any direct experience of setting central bank policy. Although a lawyer by professional background, Lagarde could be helped by the political experience she has gained through stints at the IMF and as France’s finance minister. Presiding over the ECB, whose responsibilities include setting the eurozone interest rate and ensuring the stability of the banking system, is viewed as a tough task given the requirement to oversee 19 eurozone economies.

Lagarde arrives with several challenges facing the ECB. Here are the key issues she must address:

Reboot growth in the eurozone

Financial markets across Europe have rallied on the news of her nomination, with investors viewing her as a continuity candidate who is not likely to ditch Draghi’s policies supporting economic growth.

Eurozone growth was a healthy 0.4% in the first quarter of the the year. But the US-China trade war has dragged down international trade volumes, which has had a knock-on affect in export-intensive industries of Europe such as the German carmakers.

While Lagarde has no central bank experience for investors to pore over for clues on her monetary policy stance, her speeches at the IMF have typically favoured dovish policies, meaning an inclination to keep interest rates low. Hawks, in contrast, favour higher borrowing costs to combat inflationary pressures.

Lagarde will have little firepower at her disposal to reboot the eurozone economy. Interest rates are already at record lows of zero and -0.4% for bank deposits. However, she could take the main interest rate into negative territory or deploy more unconventional policies, such as expanding quantitative easing – the buying of government bonds from banks.

Keep the eurozone together

The eurozone remains an unfinished monetary and political union, suffering from deep divisions between member states over the appropriate level of centralisation.

Her political connections could help prod EU governments towards using more tax and spending measures to stimulate the eurozone economy, which the central bank has been arguing for without much success.

Lagarde will need to keep an eye on Italy, where economic growth is weak and government debt high. Rome has had repeated rows with Brussels over its budget. The prospect of eurosceptic movements pushing to leave the single currency could send markets into a tailspin, requiring swift reaction from the central bank.

She has comprehensive experience of the eurozone debt crisis from her time at the IMF, overseeing the bailouts of Greece and other nations struggling at the time. She also backed Draghi after he pledged to do “whatever it takes” to keep the euro from breaking apart in 2012.

Display independence

The ECB’s political independence is enshrined in an EU treaty. However, Lagarde’s previous role in French politics brings this sharply into question and also comes as the principle of central bank independence is challenged elsewhere around the world.

With Spain’s former finance minister Luis de Guindos as vice-president of the ECB, two former politicians will hold the top jobs, an institution more traditionally dominated by technocrats.

Financial markets could be rattled if investors believe nation states could apply pressure over monetary policy decisions, similar to the concerns over Donald Trump applying pressure at the US Federal Reserve. Jerome Powell, who leads the American central bank, has had to reassure markets of his independence.

That Lagarde is not a trained economist means she may need to rely more on ECB staff and technical members of its governing council. The appointment of Philip Lane, the former Irish central bank governor, as chief economist will help her in this regard.


Richard Partington

The GuardianTramp

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