Changing of Lagarde – new European chief out to make leaders spend
POLITICAL nous of former French finance minister Christine Lagarde, as much as her economic expertise, have proven key to transitioning from record quantitative easing (QE) stimulus packages to persuading politicians to initiate major public sector and capital investment programmes across the eurozone.
With the UK general election less than a fortnight away, attention will focus on the outcome of that plebiscite and whether it will lead to certainty or further instability.
In the meantime, the accession of Ms Lagarde to the head of the European Central Bank (ECB) should be closely watched by Irish exporters and importers, given the influence she will have over the value of the euro and interest rates in the coming years.
In delivering her inaugural monetary policy announcement this Thursday, she does so against the backdrop of anaemic inflation prints, depressing sentiment surveys and woeful growth data in the eurozone and a weak euro.
With Germany, the “powerhouse” of Europe twice narrowly missing a recessionary dip in the last six months, it is glaringly apparent that the ECB’s current monetary policy stance is not fit for purpose. Her predecessor, Mario Draghi, faced a similarly daunting challenge when he took the reins, which eventually saw him initiating the ECB’s largest stimulatory splurge in its history to breathe new life into what was becoming a moribund currency and economy at the time.
As a parting gift to Ms Lagarde, Mr Draghi delivered a veritable masterclass in “how to gain consensus” when he persuaded the Governing Council to add a raft of new stimulus at what was his penultimate monetary policy announcement in September.
He delivered a deposit rate cut of 10bps to -0.5pc, along with restarting quantitative easing.
In short, given the relentless onslaught of weak economic European data, the ECB agreed “unanimously” that there needed to be a stimulus package, but that is where the accord ended. There were huge divisions on what to do – some Governing Council members opposed quantitative easing, some objected to a cut in rates, while reservations were expressed over measures that will have the effect of limiting the charges for banks parking their spare liquidity at the ECB.
One of the more hawkish Governing Council members, Sabine Lautenschläger, even resigned in protest.
Mr Draghi was astute enough to know that monetary stimulus would have to be grudgingly adopted at some point in the near future and successfully pushed it across the line before his less experienced successor was forced to attempt the same thing.
This September’s monetary policy meeting was also notable for a major shift in ECB rhetoric.
Mr Draghi gave a strong nudge to European governments to pick up some of the stimulus. He stressed that there was unanimity among the Governing Council that fiscal policy, particularly in Germany, should start to evolve as the main policy tool. Having shouldered the responsibility of delivering the next round of stimulus before his departure, Mr Draghi has left his successor with perhaps the more difficult and more consequential task of persuading European leaders to start spending.
Within the past fortnight, Ms Lagarde, while giving her debut public speech as president, reinforced the view that the ECB is at or very close to the end of its stimulus capabilities.
She was at pains to stress that some of that burden must now lay at the feet of European governments, particularly those with large budget surpluses, namely Germany and Netherlands.
It therefore seems rather timely that someone with Ms Lagarde’s political nous takes the helm at the ECB at a crucial juncture when Europe, dusting itself off from a cataclysmic debt crisis, faces into an uncertain Brexit outcome, US trade threats and an ECB price stability mandate that now seems out of date and out of tune.
Ms Lagarde has already announced a review of the ECB’s inflation target, and will likely spend her first few months attempting to heal the rift within a divided ECB Governing Council by avoiding any contentious stimulus packages while simultaneously trying to educate a reluctant, European political elite to the benefits of untying their purse strings.
If she manages to pull even some of that off and starts to get a positive move in European economic data, she can add “successful central banker” to her already impressive CV.
A move from monetary towards fiscal stimulus would likely allow the ECB to “normalise monetary policy” and move on from negative interest rates sooner than forecast. This should lead to a stronger euro, which would be welcomed by Irish importers, who have seen EUR/USD trading in the 1.1000 range for or lower for most of the past five years.
Mario Draghi left his successor with a more difficult task
She must educate a reluctant elite to untie their purse strings
She says some of burden must lay at the feet of governments