Christine Lagarde, managing director of the International Monetary Fund, was the long-shot candidate to replace Mario Draghi as the president of the European Central Bank. She had never been a banker, let alone a central banker. She is not an economist; she is a lawyer and a rather flamboyant politician who ran various French government ministries.
And her career came with a few blemishes, including a negligence conviction in a French court in the Bernard Tapie affair – she approved a controversial €400-million ($590-million) out-of-court settlement for the business tycoon when she was finance minister – although the court did not penalize her. She showed an overly tough attitude, at least initially, toward the austerity measures that helped to plunge Greece into deep recession for almost a decade.
But she’s a lock for the ECB job after the European Council endorsed her. So how could a non-economist survive, let alone thrive, in the world’s most demanding central banker’s job?
The ECB boss does not have to deal with one economy, as the head of the U.S. Federal Reserve does; he or she has to deal with 19 economies, more than a few of which have not adapted well to the euro. The ECB has to be obsessed with price stability – inflation cannot be too hot or too cold – and has oversight of the euro-zone banks and financial stability in general. If that were not enough, he or she can’t let the conservative heavyweights at the Bundesbank, the German central bank, get pushy. What works for Germany does not necessarily work for the rest of the euro zone.
My own view is that Ms. Lagarde, 63, is more or less ideal for the job precisely because she is a politician. She’s a consensus builder and a force of nature who knows the value of wit (she said the 2008 financial crisis would not have happened if Lehman Brothers had been named “Lehman Sisters”). She is smart enough to surround herself with highly respected economists such as Philip Lane, the former governor of the Bank of Ireland who recently joined the ECB’s executive board as chief economist.
She is probably smart enough to know that the macroeconomic policies employed by Mr. Draghi, whose eight-year term is up in October, need a rethink. They worked brilliantly during the crisis years. Today, a fresh approach is needed, all the more so since the gaping north-south wealth divide could trigger another crisis. Note that the populist government in Italy, the euro zone’s third-largest economy, is toying with idea of launching a parallel currency (known as a mini-BOT, a small-denomination debt instrument) that could make it easier for the country to drop the euro. Italy has been a no-growth zone since the common currency was born 20 years ago.
There is no doubt that Mr. Draghi was the right man for his era, and that he saved the euro zone from destruction. In 2011 and 2012, after the bailouts of Greece, Ireland and Portugal, and the rescue of the Spanish banks, the debt crisis threatened to shred the euro. Greece was on the verge of reprinting the drachma and Italy, a country too big to save, was falling apart. In his now-famous speech in London just ahead of the 2012 Olympics, Mr. Draghi vowed to do “whatever it takes” to keep the whole sorry mess intact.
Interest rates came down to the point they turned negative. Banks were flooded with cheap loans to boost their liquidity and encourage lending. A program, known as outright monetary transactions, was launched that would see the ECB buy, in unlimited quantities, the sovereign bonds of any country having trouble financing itself in the public markets (it was never used, but its mere presence pushed down yields across the euro zone). When disinflation threatened to turn into outright deflation, the ECB launched a quantitative easing (QE) program – the mass buying of bonds across the region. The emergency measures worked, though QE had only partial success. Inflation, at 1.2 per cent at last count, is still well below the 2-per-cent target rate.
After every one of the ECB’s rate decisions, Mr. Draghi said his rescue measures could only go so far and pleaded for governments to pick up the slack by launching reforms to make their economies more competitive. He was largely ignored. This is where Ms. Lagarde’s diplomatic skills could work. She might be able to persuade Italy and Greece and the few other perennial laggards to get serious about reforms. In other words, her strategy could focus more on the microeconomic than the macroeconomic.
Indeed, the macroeconomic policies pushed by Mr. Draghi may soon reach their expiry date, even if they are sure to endure a bit longer as growth shows signs of faltering in Europe. The massive QE program, worth €2.5-trillion ($3.6-trillion), has covered up a lot of sins and, arguably, should not be renewed even if inflation remains low. With aging populations and falling work-force-participation and birth rates across Europe – Italy’s birth rate is the lowest in more than 150 years – it’s hard to imagine inflation ever hitting 2 per cent or more again.
The euro zone needs a new strategy. As it is, QE has made the rich richer. It has made it easier for rich families in southern Europe to transfer their wealth to northern Europe. Southern Europe is ailing and the young and talented are leaving in droves because of the lack of jobs and the feeling that their home countries are closed shops rigged to keep the wealthy in their villas and yachts. If the ECB stimulus measures remain intact, no government will be inspired to clean up its economic and competitive acts. Southern Europe is becoming a European province ruled by local aristocracies who are propped up by QE. In effect, that’s already the south’s status.
Ms. Lagarde is not an economist and that’s a good thing. If the euro zone is to succeed, she will have to come up with ideas on how to make the region work for all countries, not just Germany. Economists have their set tool boxes. Non-economists have different tool boxes. Any new ideas would be welcome.