Christine Lagarde will officially take over from Mario Draghi as the new President of the European Central Bank today. Sebastian Diessner explains that while Lagarde is widely expected to pursue similar policies to her predecessor, the politics surrounding her presidency may play out very differently.
The Eurozone’s monetary policy has become more contested and politically salient than almost ever before. In the wake of Mario Draghi’s departure from the presidency of the European Central Bank (ECB), barely a day goes by without media reports of internal disagreements among current ECB decision-makers, fierce critiques from businesses, interest groups and former central bankers, and strong rebuttals from the same. In this fraught context, Christine Lagarde, former chairwoman and managing director of the IMF, is now taking over from Draghi, whose decisive policy actions are widely credited with having rescued the single currency from the brink of collapse at the height of the Eurozone crisis.
Lagarde’s nomination in early-July – brokered skilfully by French president Emmanuel Macron – caught most experts off-guard, who had already placed their bets on an all-male group of national central bank governors including Jens Weidmann (from Germany), François Villeroy de Galhau (France), Erkki Liikanen and Olli Rehn (both Finland). In the end, Lagarde, a non-central banker, made the cut, and so the search was on instantaneously to identify her potential monetary policy preferences. A consensus quickly emerged that she would likely favour the expansive monetary policies of her predecessor and be willing to act as decisively and pragmatically in case of another shock, brokering the necessary support coalitions within and beyond the central bank. Lagarde herself appeared to confirm this view during a well-prepared and convincing performance at her nomination hearing in front of the European Parliament.
The question, however, will not so much be about the incoming president’s willingness to act, but about whether the technical and political circumstances will allow her to. On the technical side, observers are increasingly wondering whether the ECB’s policies are running out of steam and whether the scope for future innovation is exhausted, in the face of stubbornly subdued inflation far from the central banks’ self-defined target of ‘below, but close to, 2%’. During the last weeks of his presidency, Draghi’s most poignant farewell message has been that the activation of other policies, most notably fiscal policy, is needed to help the ECB reach its aims as well as revive growth ‘faster and with fewer side effects’ (thereby relieving the central bank from being ‘the only game in town’).
Credit: European Central Bank (CC BY-NC-ND 2.0)
Recent research that we have conducted suggests that such nudging of Eurozone governments played an important part in the ECB’s signalling at the height of the crisis – despite the central bank’s widely assumed preference for fiscal austerity. But these calls have further intensified now that the problem is not anymore one of near-imminent financial collapse, but of low growth and inflation, with a potential recession on the horizon. The crux for the technocratic ECB, however, is that fiscal and other government policies are firmly in the realm of national electoral and executive politics – churning out advice on these could thus easily be perceived as undue meddling by the central bank in political affairs (which, in turn, may invite political interference). On top of this, it remains uncertain whether governments will actually feel compelled to listen to the central bank’s pleas.
Perhaps the biggest issue for the future ECB, then, is neither the central banks’ preference for monetary nor for fiscal policy alone, but its views on the extent to which monetary-fiscal coordination – predicted to be necessary for future policy innovation – can be achieved in light of the ECB’s far-reaching independence.
The central bank is likely to contemplate these challenges in an upcoming strategic review of its policy framework to take place during Lagarde’s term, which was first confirmed at Draghi’s penultimate press conference. With ever more stakeholders coming to the fore and voicing preferences for the conduct of monetary policy, the review will likely have to entail a careful balancing act between being as inclusive as possible while maintaining the central bank’s formal independence.
Moreover, the other side of the coin will be to not merely engage monetary policy experts, but also the wider (and in certain parts of the Eurozone increasingly sceptical) general public. To this end, Lagarde can be expected to rely upon the recently nominated German economist Isabel Schnabel on the ECB’s Executive Board, who has not shied away from public debate in the past and has put forward both a measured defence and critique of the central bank’s actions. However, whether the national central banks and their governors on the ECB Governing Council will act as translators and defenders of the ECB’s policy stance or as amplifiers of national disagreements will need to be watched closely.
One significant supranational political counterpart of the ECB (or perhaps even ally, not least since the crisis), has been the European Parliament and its Economic and Monetary Affairs (ECON) Committee. While exchanges between successive ECB presidents and MEPs in the ECON Committee during the so-called ‘Monetary Dialogues’ have been seen as a cornerstone of the ECB’s accountability, these arrangements leave ample room for improvement and should come to be reviewed and overhauled during Lagarde’s tenure as well.
A key challenge here will be to balance two seemingly opposing needs. On the one hand, the ECB has broadened its policies and is actively nurturing discussions about non-monetary policy issues. On the other hand, a further specialisation of the Committee’s work has repeatedly been identified as important for holding the central bank to account more succinctly. Striking this balance between generalisation and specialisation – for example by means of forming a sub-committee on monetary policy – will be a task for the newly elected ECON committee and its chair, Italian economist Irene Tinagli from the Socialists & Democrats group.
Despite the relatively large size of the ECON committee, past research indicates that the success of the Monetary Dialogue for the ECB’s political accountability has tended to hinge on the engagement of only a few committed MEPs. Who, then, are the parliamentarians whom Christine Lagarde will be facing throughout the first half of her presidency (i.e., the roughly 4.5 years until the next EP elections)? In addition to some of the veterans of the Monetary Dialogue (such as the Green MEPs Philippe Lamberts and Sven Giegold or Conservative MEP Markus Ferber) the recent EP elections swept in a number of MEPs that are worth watching, which may well give the ECB staff preparing Christine Lagarde an interesting time ahead of the hearings.
While a number of former ECON members went on to become central bankers themselves (such as Sylvie Goulard at the Banque de France, Burkhard Balz at the Bundesbank, and Elisa Ferreira at the Banco de Portugal), the reverse seems true these days, with former president of the Bank of Poland (and former prime minister) Marek Belka as well as former Czech National Bank deputy governor Luděk Niedermayer among the MEPs facing Lagarde (the latter now being vice-chair of ECON).
Another expert member to be reckoned with is economics professor Luis Garicano, who also coordinates the committee’s liberal Renew group. On the far-right end of the spectrum, law professor Gunnar Beck is taking over from ex-MEP and AfD-founder Bernd Lucke as chief europhobe of the committee. While they and their colleagues are formally in charge of scrutinising the ECB, citizens and civil society will need to do likewise with MEPs. There remains hope that in addition to a review of the ECB’s policy framework, the ways in which the central bank is held to account will evolve in the process as well, in light of the mounting political challenges ahead.
Note: This article gives the views of the author, not the position of EUROPP – European Politics and Policy or the London School of Economics.
Sebastian Diessner – European University Institute / LSE
Sebastian Diessner is a Max Weber Fellow at the European University Institute (EUI) in Florence, Italy. He holds a research stipend from the Fritz Thyssen Foundation and completed his doctoral studies at the LSE with a thesis examining the comparative political economy of central banking. His research interests include macroeconomic governance and policy coordination, transparency and accountability, and quantitative and qualitative methods in the social sciences.