Christine Lagarde is set to swap the helm of the International Monetary Fund for that of the European Central Bank, becoming the first woman to run euro-area monetary policy just as the bloc’s economy looks in need of fresh stimulus.
Lagarde was nominated to succeed Mario Draghi as president of the ECB when his eight-year term ends on Oct. 31. European governments turned to the 63-year old onetime lawyer and former French finance minister on Tuesday after hours of negotiations over a package of top EU jobs.
In moving from Washington to Frankfurt, Lagarde will be tasked with driving monetary policy in a 19-nation economy which Draghi has already signalled will need more help, likely in the form of lower interest rates and possibly with the resumption of quantitative easing. Inflation is running at barely half the ECB’s goal of just under 2 per cent despite years of negative rates and 2.6 trillion euros (US$3 trillion) of bond purchases.
Investors will likely bet that as a seasoned crisis-fighter, Lagarde will share Draghi’s taste for aggressive and innovative monetary policy, especially as her appointment means the more hawkish Bundesbank President Jens Weidmann misses out. Financial markets are already pricing an ECB rate cut by September, in line with predictions by ECB watchers at Bloomberg Economics and Goldman Sachs Group Inc.
Financial markets are already pricing an ECB rate cut by September, in line with predictions by ECB watchers at Bloomberg Economics and Goldman Sachs Group Inc. Morgan Stanley said the choice of Lagarde increases their “conviction” that the ECB will eventually resume buying bonds.
Lagarde last week described the world economy as hitting a “rough patch” and advised central banks to continue to adjust their policies in response. In June 2014, she said she would “certainly hope” the ECB would conduct QE if inflation stayed sluggish — months before it announced it would do so.
Moliere’s Trees
She also praised Draghi’s 2012 commitment to do “whatever it takes” to save the euro and recently echoed his call for governments to do more to battle future downturns. In March, she linked the need to fortify the euro area to the words of playwright Moliere: “The trees that are slow to grow bear the best fruit.”
Just last September, Lagarde dismissed speculation she could take over the ECB, telling the Financial Times she was a ” bit annoyed and fed up” with the suggestion and that she was “not interested” in the role. Only one economist surveyed last month predicted she would get the job, with Weidmann seen as the most likely winner in a tight race dominated by men.
France has now twice secured the presidency of the two-decade-old ECB. Draghi, an Italian, was preceded by Frenchman Jean-Claude Trichet, who replaced Dutchman Wim Duisenberg.
In common with Trichet, whose appointment was held up by a trial involving the bailout of Credit Lyonnais, Lagarde brings a history of legal wrangles. They culminated in a conviction of negligence in 2016 over her handling of a multi-million euro dispute linked to the same bank.
Lagarde’s appointment also means the ECB and the U.S. Federal Reserve will be headed by former lawyers, a shift from the era when central banks were run by academic economists such as Ben Bernanke. That risks opening her up to criticism that she lacks the knowledge to set monetary policy.
“She’s very political, she’s very wise, and I would assume she has the best economists that can help her with this,” said Alicia Levine, chief strategist at BNY Mellon Investment. “It is a little puzzling because she’s not known as one of the leading economic minds out there.”
She does boast political nous though, which will be needed to unite fellow ECB officials when setting policy — especially if they run low on monetary ammunition and need to nudge governments to step up support of the economy.
“She has the political skills needed to build consensus on the Governing Council, is a good communicator and has the standing and backbone to defend the ECB’s decisions on the larger European stage — though she may still face skepticism in Germany,” said Krishna Guha, head of central bank strategy at Evercore ISI. “She would be forceful in calling on member states to make use of the fiscal space.”
EU Council President Donald Tusk dismissed concerns about Lagarde’s lack of formal economic training. She will make a “perfect” ECB president, he said in Brussels.
Alongside Sabine Lautenschlaeger, Lagarde will be one of two women on the six-member Executive Board. They are likely to be the only two female participants in the 25-member Governing Council, which includes the governors of euro-region national central banks and has long been dominated by men.
Broader View
Lagarde was also the first woman to serve as managing director of the IMF, being first appointed in 2011 and then handed another five year term in 2016. She will now leave more than 1 1/2 years before that is due to end, likely sparking a fight between capitals over whether a European should always run the lender or if it’s time for an emerging-market candidate to do so.
At the IMF, Lagarde helped negotiate the fund’s biggest ever bailout when it handed fresh aid last year to Argentina. She also sought to give emerging economies such as China more of a voice in its management, while putting greater emphasis on issues including climate change and income and gender inequality. That helped broaden the fund’s image beyond its reputation as an advocate of budget cuts.
She sometimes clashed with countries whose monetary policy she will now help set. As the leader of one of Greece’s major creditors, she found herself both pressuring the country to accept austerity to keep it in the euro-zone while at the same time persuading its European partners to allow debt relief. In 2018, she and Weidmann disagreed publicly after she called upon Germany’s government to spend more and close its current account surplus.
Lagarde was educated in France and the U.S., working as an intern in the U.S. Congress for a time. On graduating from the University of Paris, Nanterre, she joined the Paris office of Chicago-based law firm Baker & McKenzie LLP. She focused on employment law and mergers and acquisitions, rising through its ranks to become a partner in 1987 and then its chairman in 1999.
Then-French President Jacques Chirac launched her political career in 2005 by appointing her minister for trade. She went on to serve as minister for agriculture before becoming the first woman to become finance minister in a Group of Seven economy in June 2007.
She held that role as the collapse of Lehman Brothers Holdings Inc. set off a global recession and paved the way for the euro-area debt crisis. During the all-night talks of policy makers that followed she often sought to boost morale by passing M&M’s chocolates around fellow finance chiefs.
“If it had been Lehman Sisters rather than Lehman Brothers, the world might well look a lot different today,” she once said.
A past member of France’s synchronized swimming team, Lagarde said her experience in the pool had taught her how to “grit your teeth and smile.”
Bloomberg.com
