You are here

Christine Lagarde tapped to head European Central Bank in surprise move

BT_20190704_UVLAGARDE_3825724.jpg
Ms Lagarde says she would temporarily step aside from her IMF post while her ECB candidacy proceeds.

Washington

EUROPEAN leaders on Tuesday tapped Christine Lagarde, the head of the International Monetary Fund (IMF), to become the next head of the European Central Bank (ECB), a surprise choice that places a savvy politician and lawyer in a job typically held by an economist.

Ms Lagarde, 63, said on Twitter that she was "honoured" to be nominated and would temporarily step aside from her IMF post while her candidacy proceeds. If formally approved as the ECB's fourth president, she would on Nov 1 replace Mario Draghi, a former head of Italy's central bank who steered the eurozone economy through its recovery from the global financial crisis.

"She has enormous leadership experience, enormous institutional experience, enormous political and economic experience," said Douglas Rediker, chairman of International Capital Strategies in Washington. "What she does not have is a track record as a monetary policymaker."

Ms Lagarde would take charge of the ECB with the global economy slowing, in part because of trade tensions between the United States and China.

Investors expect Ms Lagarde to continue Mr Draghi's aggressive crisis-fighting, which took European interest rates into negative territory in 2014. European banks now pay the ECB to hold their excess deposits, a policy intended to encourage bankers to increase lending.

Yet, despite years of such unconventional policies, the ECB expects the eurozone economy to grow by just 1.2 per cent this year.

"It basically hasn't worked," said Torsten Slok, chief economist at Deutsche Bank Securities.

A decade after the financial crisis, the 19-nation eurozone economy is trapped in an environment of anaemic growth with annual inflation that is little more than half the ECB's goal of about 2 per cent.

The ECB has virtually emptied its monetary policy toolbox, having slashed interest rates and promised to keep them low for at least another year, purchased US$3 trillion in bonds, and created an innovative refinancing channel for banks.

Mr Draghi last month said the economic risks "remain tilted to the downside". If growth does not accelerate, the ECB could cut interest rates further into negative territory - at the cost of hurting bank profits - and resume the bond purchases that it halted in December, he suggested.

His reassurances left many unconvinced. "The ECB has reached the end of its rope," said Ashoka Mody, a former IMF economist. "It has really no ability in the short to medium-term to do anything like effective monetary policy."

Ms Lagarde emerged as a candidate for the ECB post in recent days after consideration had focused on Jens Weidmann, head of the German central bank; Benoit Coeure, a French member of the ECB's board; and, two Finnish central bankers.

Well-acquainted with European leaders from her eight years at the IMF helm, Ms Lagarde would be focused on persuading them to borrow and spend more to offset weak growth, according to several economists.

"The eurozone, one way or the other, is going to have to come up with a new instrument, financed by a common pot of money," said economist Jacob Kirkegaard of the Peterson Institute for International Economics.

If European leaders don't develop such a fiscal stimulus programme, he noted, the next recession could prove all but impossible to fight. Cutting interest rates would be impossible, since they are already below zero. Additional asset purchases would be politically controversial, particularly in Germany.

Meanwhile, the IMF board announced on Tuesday that American economist David Lipton will serve as interim leader of the IMF, replacing Ms Lagarde. WP