After three long days of horse trading in Brussels, member state leaders on Tuesday plumped for Christine Lagarde to take the helm at the hugely powerful European Central Bank (ECB).
The decision took many pundits by surprise. Of the names touted to take over from Mario Draghi, Lagarde’s was far down the list – below ECB board member Benoit Coeure and Bundesbank president Jens Weidmann, among others.
Lagarde’s CV is impressive: A lawyer by training, she has led the International Monetary Fund (IMF) since 2011, and before that was finance minister of France. As a supporter of Draghi’s unconventional monetary policy, she is set to bring continuity to the ECB.
Yet her lack of central banking experience has raised eyebrows in the City as it prepares to wave goodbye to the much-loved Draghi. Furthermore, her past as a politician and controversial role in the Eurozone crisis could undermine credibility in the independent ECB, economists warn.
“The big danger here is that people perceive this as risking an even bigger politicisation of the ECB,” says Marc Ostwald of ADM Investor Services. “Lagarde has no real experience in economics, she doesn’t really have any experience in the formation of monetary policy.”
Andrea Iannelli, investment director at Fidelity International concurs, saying: “She brings no experience in central banking, having played more political than policy-related roles in her career.”
Mike Hewson, CMC Markets chief market analyst, highlights Lagarde’s role in the bailout of Greece as head of the IMF. She admitted the Fund made mistakes after it was accused of manipulating Greece’s debt sustainability projections to allow it to contribute rescue money.
“It suggests to me that there was some political pressure brought to bear,” says Hewson.
He adds that the ECB is “already fairly politicised as it is,” saying it threatened to cut off the banking systems of Greece, Ireland and Italy during the Eurozone crisis of the early 2010s. “But this, putting a politician in charge, pretty much removes the veil,” he says.
Andrew Kenningham, chief Europe economist at Capital Economics says Lagarde “is likely to support [French President Emmanuel] Macron’s push for “more Europe”” in the form of closer banking and fiscal integration.
Yet many argue these sorts of policies have been, and will continue to be, required to preserve the euro and keep markets on their feet. The markets have certainly reacted well to the news of the dovish Lagarde’s nomination, with bond yields falling and stocks rising.
“A more hawkish president would have posed a significant risk to the market but Lagarde is probably more dovish than the departing president himself,” says Ben Lord, fixed interest manager at M&G Investments.
He says: “She may even have a go at persuading Germany to change tack on its current account surplus” which has long been a source of disharmony among Eurozone members.
Seema Shah, chief strategist at Principal Global Investors, says Lagarde’s nomination came “as a positive surprise to markets, dissipating fears that hawkish Bundesbank president Jens Weidmann would be taking the helm”.
David Zahn, head of European fixed income at Franklin Templeton, adds Lagarde’s background means she would be “unconstrained” when considering “innovative approaches to monetary policy”.
Jim Reid, research strategist at Deutsche Bank, says: “Markets will like the fact that she is a skilled and well-connected political operator.”
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And with questions over the limits of the ECB’s asset purchasing programme and the risk of debt restructurings, Reid says, “a lawyer could prove to be useful”.