03 July 2019

OMFIF: Lagarde's shattering ECB move

The selection of the International Monetary Fund managing director and former French finance minister to take over from Mario Draghi on 1 November confirms a new activist era in central bank policy-making – with an intriguing mix of positive and negative consequences.

The good news is that Europe may be set for a new burst of monetary policy-fuelled growth, assuaging years of bitterness by indebted southern Europe against the northern creditor countries. The bad news is that many voters in Germany, the biggest economy and largest creditor, may feel increasingly disadvantaged by policies supporting the debtor countries – fuelling fresh political resentment that could undermine EMU's chances of longer-term survival.

Lagarde's prospective eight years in the job, assuming she is confirmed by the European Parliament, will be a race against time. The outcome will show whether a pro-growth agenda favoured above all by southern EMU members will win against the forces of monetary orthodoxy favouring a return to safety-first Bundesbank-style policies.

The unexpected choice of Lagarde marks an extraordinary further step to politicise a central bank that was supposed to be above politics. Already in the last few months of unashamed national bargaining over the European Union's top positions, politicking intruded directly into decisions over the ECB post. [...]

Lagarde's eight years as IMF managing director have been marked by considerable criticism of German polices. In January 2018 she used a Bundesbank conference in Frankfurt to mount a strong attack on Germany's current account surplus of 8% of GDP. Lagarde said it was a sign of excess savings and inefficient investment and posed a problem for world economic balance. The rise of protectionism across the world was 'not unconnected to accumulation of current account surpluses in key countries,' she said.

When she moves to Frankfurt in October, German officials can expect more strictures like this. Lagarde will be given a warm initial welcome to Germany's financial capital – but it may not last.

Full article on OMFIF

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