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ECB: the changing of Lagarde

The decision to appoint Christine Lagarde as president of the European Central Bank (ECB) was essentially political. What does that mean for monetary policy in Europe?

The European Union’s (EU) latest game of musical chairs has finally ended. After much negotiation, wrangling, and now typical EU-style ‘emergency’ summits, the prime ministers, presidents, and chancellors have agreed to nominate Christine Lagarde to the role of ECB president and Ursula von der Leyen as head of the European Commission. 

In the end, the European Parliament’s own process for electing the new head of the Commission – referred to as the ‘Spitzenkandidat’, or lead candidate – was bypassed, and EU leaders took control in an attempt to balance national representation with capability.

So what do we know about this pair of new presidents and what do their appointments mean for the direction of the EU?

Of the two, von der Leyen has by far the lower profile; she is little known outside Germany, let alone beyond the EU. But as someone who was once tipped to take over from the mighty Angela Merkel as chancellor, her unflappability will be seen as a key attribute. That said, as a compromise candidate, she will be pulled in many different directions and will need to balance the competing interests of the various parliamentary blocks in the EU. Indeed, for her appointment hearings she was sent a list of demands by social-democrat and liberal groups.

Among the next Commission’s priorities will be to complete the banking union – including a European Deposit Insurance Scheme and more cross-border bank mergers – furthering the so-far tepid progress on a Eurozone budget with true counter-cyclical capability, and maintaining the cohesion of the bloc in the face of ever-present populism.

Von der Leyen’s comments on flexibility in applying the fiscal rules will consolidate the Commission’s direction of travel, and have extra weight coming from a ‘conservative’ German.

Supranational issues

But, as I said in my blog back in March, it’s not the nationality that really matters, particularly for the ECB job.

For markets, the relief that Jens Weidmann – a more hawkish character – did not get the job was evident in the rally in peripheral European debt. But Lagarde is more than the ‘not Weidmann’ appointment.

In her time as the International Monetary Fund’s managing director, Lagarde made many dovish comments – sometimes even appearing to out-dove Draghi himself. While she might not have direct central-banking experience, she was the French finance minister for four years under Nicolas Sarkozy through the time of the financial crisis. Incidentally, her vice president at the ECB, Luis de Guindos, is also a former finance minister from Spain. This aspect of her experience may work to her advantage: by not being tied to any orthodox school of thought, she may be more open to unconventional policies, though she and de Guindos will rely heavily on the new chief economist, Philip Lane, to steer the debate.

So what sort of ECB will Lagarde inherit? One that is again in the throes of easing policy. But investors haven’t been convinced that the ECB can do ‘whatever it takes’ if the drop in market-based inflation expectations is anything to go by, as the chart illustrates. Her key priority will therefore be to shore up the central bank’s credibility through both words and actions. 

While it is clear that Lagarde is a political appointment, being well connected and a trained lawyer may prove useful in having to stretch the EU treaties in order to deliver a credible response in the next crisis.