On November 1, Christine Lagarde will assume the presidency of the European Central Bank. The former French minister, outgoing managing director of the IMF, needs no introduction. He speaks languages, has an insurmountable contact agenda and extensive experience in both the private and public sectors. But neither a doctorate in Economics nor a specialization in monetary policy. He reaches a very important position, succeeding a giant like Mario Draghi and at a delicate moment for the continent. In the coming months and years you will have to face at least 10 weight challenges.
Politicization
Until very recently, the central bank was a private preserve of technocrats. A dark, complicated place and politicians only paid attention from across the street. They had a lot of interest in the decisions, but not so much in the armchairs. Lagarde, former minister, will have Luis de Guidos, former minister as vice president. The crisis turned Draghi into a cult figure in the Eurozone. For many, the only institutional leader with an overall vision and courage to do everything necessary and sufficient to achieve stability. Super Mario. A side effect is that a chair on the Governing Council of the ECB has become an appetizing trophy for a different audience in search of glory. Central banks have always had to fight fiercely in defense of their independence. The next president will be judged with special hardness and will have to demonstrate that neither Berlin nor Paris nor Washington can impose a decision or a criterion on her .
Without consensus
"The measures implemented by the ECB have become less and less conventional and difficult for Member States to accept," writes the think tank Bruegel. And as a consequence, Draghi has brought forward more decisions by majority (and not unanimity) than its predecessors . According to a recent paper by Alan S. Blinder, 10% of central banks recognize political pressures in one direction or another in the previous year, and 30% if the temporary range is extended. "The pressure is almost always for a more lax monetary policy," says the document. Something that Americans who follow their president on Twitter (just yesterday once again) know well. The north-south gap remains notable and the inequalities and differences in the eurozone are notable.
Stagnation
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There is unease in the market and among analysts and politicians. Nobody dares to anticipate a big shock , but there are enough disturbing indicators. Yesterday, Draghi lowered growth expectations for the euro zone to 1.1% for this year , one tenth less than in its previous estimates, and 1.2% for 2020 compared to the expected 1.4%. The same data as for 2021. The area has been positive for more than 20 quarters, but there are so many exogenous elements on the prowl that a geopolitical or financial spark could unleash a storm. "The probability of a recession is small, but it has increased," said the Italian after his penultimate appearance in Frankfurt.
Hostile environment
With a Trump trade war against the world in stages, and with a possible outcome for the braves of Brexit on the same day that Lagarde assumes the mandate, the pressure can increase significantly. Without even counting Japan or Australia, BNP Paribas estimated this summer that at least 10 central banks will lower rates before the end of the year . It is hoped, in addition, that the new European Commission will take some additional step with respect to China or that Beijing will be more active than in the past, with unpredictable consequences.
Negative types
Central banking is no longer as before. A decade of crisis, especially in Europe, has altered the fundamentals. The usual expression is that we navigate unknown waters and Lagarde and his team will have to deal with an environment of unprecedented negative types. She has defended them and firmly argues that the Eurozone would be much worse without them, but the next five years should be to symbolize a change of era. The preceding theory on inflation has proved vague . The ECB took out the bazuka as never before but the objective is still well below the mandate and what was sought with unconventional measures. For the new team, a more precise, comprehensive and coherent definition of what is known as "new normality" remains.
New team
Lagarde is not the only new one in Frankfurt. The trident formed by Peter Praet (chief economist), Draghi and the formidable Benoit Courè is going to be history. The reins of the institution will remain in the hands of the French, De Guindos (with a year of seniority) and the newly appointed Philip Lane , the only tough economist in the Council. Lagarde, just landed, will have to rely heavily on him. In the city, and in Brussels, they remember how in 2011 a clueless Trichet followed the guidelines of his chief economist, Jürgen Stark, chose to raise rates at the gates of the Great Recession.
Arsenal sold out?
One of the major concerns present is what room for maneuver the ECB has left. Before the crisis, monetary policy was basically defined by inflation targets and the interest rate, the main and sometimes unique instrument. At the same time, financial stability was sought and achieved through microprudential regulation and supervision. That framework has been so comfortable for a long time, it is neither sufficient nor valid. The ECB has been pulling unconventional measures for years . With the so-called forward guidance , the TLTROs so advantageous to the entities, the Quantitative Expansion, massive bond purchases, negative rates at the ease of deposit, nominal rates perpetually at 0%. The risk premiums calmed down, but neither the growth has the expected vigor nor the inflation targets are achieved. What else can you do? Or, how long can the economy continue to be doped? Before the crisis, the ECB balance accounted for 12% of the GDP of the euro zone. Now, around 40%, more than 4.4 billion euros.
Passive Eurozone
The great complaint of Mario Draghi, which Lagarde has endorsed, is the lack of collaboration of national authorities. Both insist that countries that may have to be spending more, starting with Germany. He repeated it yesterday in one of his last appearances: " It is time for fiscal policy to take the monetary witness ." Similarly, the former FMi insists that those who do not have their healthy economies should make pending structural reforms, because when the next crisis comes it will be worse. And he believes that the reform of the governance of the Eurozone has to be completed at once. End once the Banking Union with the Deposit Guarantee Fund, capital markets, intervention mechanisms for asymmetric shocks . The EU has not done its homework. It can be dangerous and end up unforgivable. From Frankfurt, he will have the challenge of convincing governments, maintaining the perpetual pulse with his great vigilant. From the office, in the distance, you can see the silhouette of the Bundes Bank. With James Weidmann, the eternal candidate for his position, he should deal. And with Chancellor Merkel, the person whom Draghi had to visit most regularly.
The problem of silence
Although it may seem absurd, one of the great challenges of the next president of the ECB will be to learn to remain silent. Central bankers are subject to scrutiny with few equivalents. The institution is a fort. Access to the Governing Council is very scarce. Every public intervention, every interview, is monitored, every word reviewed by a dozen people and several departments. Any slip, however small, can cost billions of euros. For politicians accustomed to public life like Lagarde, learning to control their impulses is essential . Your way of communicating, expressing, influencing, dealing with media, analysts and colleagues is going to have to be completely different from what you are used to. And it is not easy. Therefore, monetary responsibilities have almost always been in the hands of technocrats with a very low public profile.
Agility and flexibility
In 2019, the Central Bank is asked for things that a decade ago could not be imagined. Dealing with cryptocurrencies. And specifically, with bets like the Facebook Pound. With the transformation of fintecs and the emergence of new different actors that assume part of the traditional banking business. Or, for example, the ECB's role regarding Climate Change. She has promised to strive for transparency, access and a more ambitious communication policy. But above all, you should focus on the next crisis, which will be. We don't know if big or small, or when it will explode. Nor what type will it be and what answers will it require. Lagarde, as leader, must show much more agility than the one shown a decade ago in Frankfurt . And it is something that in his interventions so far seems not to have accepted.
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