Blog

ECONOMY
July 03, 2019

New ECB Leadership: What to Expect From Madame Lagarde?

By Andreas Billmeier, PhD

In a “package deal” to fill a number of top positions in Europe, European leaders have recommended International Monetary Fund (IMF) Managing Director Christine Lagarde to succeed Mario Draghi as President of the European Central Bank (ECB) in November. How will she change the ECB and monetary policy?

Background

Christine Lagarde is an accomplished lawyer and politician, having built a track record as French Finance Minister before taking the helm at the IMF in Washington DC. She does not have any formal training in economics, however, and, contrary to previous ECB presidents, she does not have practical experience in central banking, which makes it harder to gauge her views.

Western Asset’s View

Judging from IMF output under her guidance, we think Lagarde’s views are likely to be similar to Mario Draghi’s: on the dovish side of the spectrum, at least for now. For example, a very recent IMF staff statement notes that “if the inflation outlook is downgraded further, even greater accommodation will be needed.” While this is, strictly speaking, the country team’s view and not Lagarde’s, her take is unlikely to be substantially different in the sense that the Managing Director is the head of IMF staff and all staff positions are reviewed by the management team. Moreover, we take note of a recent report by the IMF’s Independent Evaluation Office that studied the IMF’s advice on unconventional monetary policies and found that the “response to the developments has been wide-ranging and in many respects impressive.” The report also highlights, however, “the absence of deep expertise on monetary policy issues.”

That said, Lagarde’s legal background might come in handy for some of the decisions she may have to consider sooner rather than later, in particular with regard to relaxing some of the self-imposed limits on securities purchases if the ECB were to decide to restart the Asset Purchase Programme (APP). Moreover, she is clearly a respected consensus builder and has been playing an important role in global policy circles for more than a decade, including during the European sovereign crisis in 2011/2012.

Her appointment raises questions about the composition of the Executive Board and the insulation from political interference. Genuine central banking experience has become increasingly scarce after the recent appointment of Luis de Guindos, another former finance minister. This will automatically raise the profile of ECB Chief Economist Phillip Lane, a respected economist and former governor of the Central Bank of Ireland. By the same token, the replacements for Benoit Cœuré and Yves Mersch will require significant economic experience to protect the ECB as an institution. The question is ultimately whether Lagarde will be an opinion leader at the ECB in the same way Draghi has been.

Last, while we don’t think this will be the case, Lagarde’s transition to the ECB could still be derailed: the European Council needs to consult the European Parliament and the ECB’s 25-strong Governing Council before her appointment. The Governing Council might take issue with her lack of experience in “monetary or banking matters,” as required by the European Treaties. Parliament, on the other hand, might balk at some of the other elements of the “package deal,” which could, in turn, also put her candidacy in jeopardy.

© Western Asset Management Company, LLC 2019. This publication is the property of Western Asset and is intended for the sole use of its clients, consultants, and other intended recipients. It should not be forwarded to any other person. Contents herein should be treated as confidential and proprietary information. This material may not be reproduced or used in any form or medium without express written permission.
Past results are not indicative of future investment results. This publication is for informational purposes only and reflects the current opinions of Western Asset. Information contained herein is believed to be accurate, but cannot be guaranteed. Opinions represented are not intended as an offer or solicitation with respect to the purchase or sale of any security and are subject to change without notice. Statements in this material should not be considered investment advice. Employees and/or clients of Western Asset may have a position in the securities mentioned. This publication has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider its appropriateness having regard to your objectives, financial situation or needs. It is your responsibility to be aware of and observe the applicable laws and regulations of your country of residence.
Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários Limitada is authorised and regulated by Comissão de Valores Mobiliários and Banco Central do Brasil. Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial Services Licence 303160. Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services Licence for fund management and regulated by the Monetary Authority of Singapore. Western Asset Management Company Ltd is a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan. Western Asset Management Company Limited is authorised and regulated by the Financial Conduct Authority (“FCA”). This communication is intended for distribution to Professional Clients only if deemed to be a financial promotion in the UK and EEA countries as defined by the FCA or MiFID II rules.