09 January 2020

LSE: Taking stock of Christine Lagarde’s challenges at the ECB

Lorenzo Codogno and Mara Monti argue that Christine Lagarde’s challenges at the helm of the ECB remain daunting, despite smooth sailing during her first press conference and a notably different communication style.

Christine Lagarde’s reign at the European Central Bank (ECB) has heralded a shift not in the monetary policy field, but mainly in terms of communication, at least judging from her first press conference in December. She is not Mario Draghi or Jean-Claude Trichet, her predecessors, and she wants to affirm her own different style as President.

Lagarde will favour a more collegial decision-making process to address the divisions that came to the surface in September after the decision to confirm the Asset Purchase Programme. She will possibly even allow public voting by Governing Council members. Currently, there is an informal voting system, which tends to achieve unanimity, but is not public. Still, Draghi supposedly resisted such a change. Those who sit on the Governing Council de facto represent their central bank and country, although in principle they should not. Country weights and rotation logics strictly drive even the appointments at the Executive Board. Thus, allowing Governing Council members to vote formally and making their vote public may be unduly risky, as it may exacerbate country divisions.

Lagarde’s bold start was also a way to deflect criticism for not having a central banking background, although she was previously Managing Director of the International Monetary Fund and Finance Minister in the French government. Actually, her background should prove a great asset given today’s need to table a dialogue with euro area policymakers while maintaining the ECB’s independence and monetary dominance.

Indeed, the role of the ECB, its policies, its independence and relationship with political actors may be challenged, as has already happened in many other countries/areas. Tensions inside Europe have not gone away. Brexit has bolstered support for populist parties and potential splits within and in the immediate surroundings of the monetary union.

The key question is how much influence anti-establishment parties will have in the European Parliament and EU countries, and in which way this could affect the appointments, and thus policies, at the ECB. It is a crucial question because the head of each National Central Bank, appointed nationally, sits on the ECB’s Governing Council.

Within the Executive Board, there are also many changes due to a number of mandates expiring, thereby potentially making for discontinuity in policies.

The core of the new presidency will be a strategic review. Lagarde has said that implementing a strategic review some 16 years after the previous one is “nothing unusual or extraordinary”. The Governing Council goal is to complete it before the end of 2020. She has made it clear that it will be comprehensive, as “it will turn each and every stone”. It will reach out not just to the usual quarters but also to the European Parliament, academics and civil society, with “no preconceived landing zone”. It will also cover technological and climate change, inequality, and how businesses are affected by monetary policy. It will re-examine the appropriateness of each monetary policy instrument, although the framework for doing this “is not yet fully agreed”.

Probably the most critical part of the discussion will be about the inflation target. The definition of price stability is entirely in the remit of the Governing Council, i.e. there is no formal need for a policy review.

Full article on LSE

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