Christine Lagarde will raise the profile of the European Central Bank, making it a more politically-savvy institution that takes its message directly to the people. However policy innovation, the trademark of her predecessor, may be relegated.
In return, Lagarde may be able to use her considerable diplomatic skills to persuade Germany to help temper a euro zone slow-down by raising its spending levels - a feat outgoing ECB chief Mario Draghi failed to achieve.
Facing a protracted crisis, Draghi and his team of highly-trained monetary policy-makers have essentially devised the world’s biggest experiment in unconventional policy over the last five years. Weak growth suggests the stimulus path must be pursued, even as the limits of its existing tools are nearing.
With little training or experience in monetary policy, Lagarde, who takes over from Mario Draghi on November 1, will be the arbiter and not the driver of the policy innovation that is now needed, putting a greater burden on Philip Lane, the ECB’s new chief economist, and the bank’s staff.
“The question is whether the monetary policy brain drain with the departures of (former chief economist) Peter Praet, (former vice president), Vitor Constancio, and Mario Draghi will be equally replaced or whether Philip Lane might soon be the last pragmatic monetary economist standing in the ECB’s Executive Board,” ING economist Carsten Brzeski said.
Draghi, himself a PhD economist who wrote a dissertation at the Massachusetts Institute of Technology (MIT) on economic theory and its application, has in contrast been the head of the ECB’s brain trust, surrounding himself with some of the euro zone’s best minds while ultimately making the big calls himself.
In his 2012 speech promising to do “whatever it takes” to save the euro - widely credited with holding the bloc together during the darkest days of its debt crisis - Draghi took the initiative himself, forcing an unaware Governing Council to follow and line up behind him.
Indeed, his colleagues say that many of the ECB’s big decisions, including increases and extensions of bond purchases, were driven by Draghi, with policy meetings only ironing out details but not setting the direction of travel.
Even last month, when Draghi put policy easing firmly on the table, he caught many of his colleagues unaware and likely tied Lagarde’s hands for much of her first year.
But Lagarde, the IMF’s Managing Director, may be more of a listener, which could give a greater role to the Governing Council in shaping policy and improve the diversity of views.
“Mario Draghi was very close to the markets and listened to them perhaps too much,” one policymaker, who asked not to be named, said. “That is not to be expected with Lagarde. She listens to experts more.”
Listening and engaging in politics may be Lagarde’s strength.
That is significant since the ECB’s policy arsenal is largely exhausted and the biggest lever is now fiscal policy, controlled by the 19 euro zone capitals and not the ECB.
“The hope is that she can contribute, in her own way, to a shift towards a more proactive fiscal policy in Berlin,” Frederik Ducrozet, a strategist at Pictet Wealth Management said.
Obsessed with budget surpluses and paying down debt, Germany has been reluctant to spend more and Draghi’s biggest failure may prove to have been not convincing German Chancellor Angela Merkel to use record low borrowing costs to invest more.
A keen Twitter user and advocate of simplifying policy messages so ordinary people can tune in, Lagarde is also likely to revamp how the ECB speaks.
This may be a double-edged sword, as Draghi himself pointed out recently.
“The limit, the border-line between central banks and politics is also drawn by language,” Draghi said last month.
“Once you stop talking to your natural constituency and venture into a different audience, using a different language, you naturally enter into the political sphere.”
Some argue that the bank, run by unelected bureaucrats, is already a political beast whether it likes it or not. Its massive bond purchases, a key tool to cut borrowing costs, have already resulted in some redistribution of wealth, benefiting the rich disproportionately by pushing up asset prices.
Becoming yet more political could even jeopardize the bank’s independence, its biggest asset.
This was already an issue several years ago when the bank came under fire from Wolfgang Schaeuble, then Germany’s finance minister, who only toned down his criticism of ultra-easy monetary policy after the Bundesbank itself stood up for the independence of the ECB.