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Lagarde is the right choice

Jul 06,2019 - Last updated at Jul 06,2019

LONDON — The choice of Christine Lagarde, the managing director of the International Monetary Fund (IMF) and a former French finance minister, to succeed Mario Draghi as president of the European Central Bank (ECB), is controversial. It should not be.

To be sure, the political horse-trading through which top European Union positions are allocated is unedifying. Lagarde was selected not in an open, merit-based appointment process, but rather as part of a backroom deal that also involved the nomination of Ursula von der Leyen, the German defence minister, to be the next president of the European Commission.

But despite the opacity of the appointment process, and although she was chosen in part because she is a woman, French and from the centre-right European People’s Party, Lagarde would bring formidable qualities to the role. She has the tenacity and political skills to have succeeded first as a lawyer, then as a politician and, most recently, as an international technocrat. Her eight years at the IMF have given her immense global experience and stature. Above all, like Draghi, in a crisis she would be willing to do “whatever it takes” to save the euro.

Some have been quick to criticise Lagarde for decisions she made during the eurozone crisis. As French finance minister, she went along with the wrong-headed eurozone consensus that Greece’s debts should not be restructured in 2010, and that fiscal austerity was the cure for the financial panic that almost destroyed the euro. But when I first met her before the IMF annual meetings in September 2011, she privately backed both unlimited ECB intervention, unlike then-ECB president Jean-Claude Trichet, and Greek debt relief (ditto).

She later sanctioned unusually candid appraisals of the IMF’s failings in Greece, over austerity, and during the wider eurozone crisis, and thus also of her own actions as finance minister. EU institutions have conspicuously failed to undertake a similar reckoning. Her willingness to admit mistakes and learn from them is rare and welcome.

Lagarde’s political background leads some to worry about the potential politicisation of the ECB, especially given that several other members of its 25-strong governing council are ex-politicians, too. But as her largely successful tenure at the IMF shows, she can be diplomatic in public while speaking her mind in private. And, because immense political skills are needed to run an incomplete and flawed monetary union of 19 countries with divergent ideas and interests, her good relations with EU leaders is actually a big plus. Draghi felt able to make his “whatever it takes” promise in July 2012, thereby quelling the panic, only because he had first won over German Chancellor Angela Merkel.

Besides, the ECB is arguably excessively independent. Given its bullying of Ireland and southern European governments during the crisis, a greater deference to politics would not necessarily be a bad thing.

Lagarde’s lack of formal economic training should not be an issue, either. The same charge was laid against her when she took over from the disgraced Dominique Strauss-Kahn at the IMF in 2011, yet she proved the doubters wrong.

Crucially, Lagarde is both bright and knowledgeable enough about economics to evaluate competing arguments, heed good advice and make sound decisions. During her tenure at the fund, she has wisely listened to a glittering array of chief economists: Olivier Blanchard, Maurice Obstfeld and Gita Gopinath. At the ECB, she will be well-advised by its chief economist, Philip Lane.

Lagarde’s flexibility and openness to different ways of thinking stand in sharp contrast to the rigidity and closed-mindedness of dogmatic policymakers such as Bundesbank President Jens Weidmann, one of her leading rivals for the ECB job. Weidmann, a monetary economist, wrongly opposed Draghi’s “whatever it takes” policy and its operationalisation as outright monetary transactions, as well as the ECB’s launch of quantitative easing (QE) in 2015. Lagarde, at the IMF, supported both.

To be sure, Lagarde’s lack of direct monetary-policy experience is a weakness. US Federal Reserve (Fed) Chair Jay Powell, another lawyer, had five years’ experience on the Fed’s board of governors when appointed. But, as she showed at the IMF, she quickly masters her brief and now has a deep understanding of international economic policy. And at a time when monetary policy desperately needs an overhaul, it can be helpful not to have preconceptions.

After all, the ECB’s next president faces big challenges. The ECB failed to meet its inflation target of below but close to 2 per cent, even when the eurozone economy was booming. And now that it is flagging and vulnerable to China’s slowdown, US President Donald Trump’s trade wars and a no-deal Brexit, there is little scope for further stimulus.

Official interest rates are near-zero or slightly negative, and, under its current rules, the ECB has little room for further QE: Its purchases of government bonds are already near its self-prescribed issue and country limits. Bolder policies, such as targeting long-term bond yields or even using so-called helicopter money, remain legally tricky and politically taboo.

In this environment, with excessively low inflation posing the main challenge for monetary policy, fresh thinking is needed about the ECB’s targets, tools and taboos. Lagarde may be more open to this than most.

More broadly, the eurozone’s internal architecture remains incomplete, and its external role is inadequate. Its half-baked banking union has not severed the links between banks and governments that almost destroyed the euro. Moreover, the eurozone lacks a common safe asset that would bolster the stability of the financial system, boost the effectiveness of monetary policy  and provide an alternative to the dollar, whose privileged global status is being weaponised by Trump.

Lagarde’s nomination is a breath of fresh air for the stale, male-dominated ECB. Draghi may seem like a hard act to follow, but Lagarde has what it takes to succeed. She needs to be bold.

 

Philippe Legrain, a former economic adviser to the president of the European Commission, is a visiting senior fellow at the London School of Economics’ European Institute and the founder of Open Political Economy Network, an international think-tank whose mission is to advance open, liberal societies. His most recent book is “European Spring: Why Our Economies and Politics are in a Mess — and How to Put Them Right”. Project Syndicate, 2019. www.project-syndicate.org

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