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What’s needed now at the bank isn’t a mastery of monetary policy — the ECB has plenty of that in house. It’s the political skill that will be required to rebuild trust and consensus at a time of heightened contention.
The outgoing president of the ECB, Mario Draghi, has unwittingly set Lagarde up for a difficult start. As one of the last big decisions of his term, he convinced the bank’s governing council to take bold steps and revive quantitative easing, an unconventional policy that allows the central bank to purchase securities in order to encourage lending and investment.
Draghi made this last push to ensure Lagarde won’t need to start her mandate with new monetary policy actions. But it leaves her in charge of managing blowback from some of the bank’s more hawkish policymakers, most notably the Germans. Their pushback will likely undermine the policy’s effectiveness — and require some intensive fence-mending efforts from Lagarde. [...]
The Italian’s travails illustrate why Lagarde’s political experience is so important. Running one of the world’s top two central banks is no longer a matter of ivory-tower debates over the technical subtleties of inflation-targeting. The ECB chief must manage an ever-growing portfolio of monetary policy and banking responsibilities, while also negotiating crisis management duties with global peers and EU governments.
Even more importantly, Lagarde will have to manage the difficult politics of monetary policy at a time when interest rates are at close to zero or even negative. As chief of the ECB, she will need to work closely with eurozone governments — not just to mend fences but to ensure fiscal policy can play its role in reviving the economy.
In the end, what will determine her success is whether she can forge consensus among the eurozone’s governments and hammer out fiscal policies that will ready the continent for the next downturn. It will be her skills as a politician, more than anything, that define her tenure at the ECB and the future of the eurozone.