Christine Lagarde appointment: EU leaders have sent a powerful signal about the future of the eurozone

In choosing Christine Lagarde, the French head of the International Monetary Fund, to lead the European Central Bank, EU leaders have thrown convention to the wind. For one thing, a woman will now be Europe’s top central banker for the first time in the ECB’s 21-year history. That is welcome. For another, she will be the first person to hold that post without any experience as a central banker. That is less so.

The job is not yet in the bag, since a formal appointment cannot be made without consulting the new European Parliament. But assuming it goes ahead the highly politicised manner of the nomination makes for an unpromising start. The appointment of the ECB president was never supposed to be part of a broader political deal about who should get the European institutions’ most coveted jobs. Holders of the top central-banking post (together with the other five members of the executive board) serve for a non-renewable term of eight years. When the ECB’s first president was chosen in May 1998, the eight-year calendar for appointments was out of synch with the five-year calendar of the European parliamentary elections and the ensuing appointments.

But an unholy row at that summit in the spring of 1998 over who should be the first ECB president changed the calendar. French president Jacques Chirac lived up to his reputation as “le bulldozer” in his demand that Jean-Claude Trichet, governor of the French central bank, should immediately take the helm. The ten other European leaders of what was shortly to become the eurozone insisted that Wim Duisenberg, a former Dutch central banker, should be the first president. As a compromise Duisenberg was appointed on the understanding that he would step down mid-way through his term, resulting in Trichet’s appointment in 2003, and thus creating this year’s alignment with the changeover in jobs at the other EU institutions.

Nominating the head of the ECB, an expressly independent institution, through so overtly a political process is unfortunate to say the least. The deal looks like a Franco-German stitch-up in which the top political job as head of the European Commission goes to Ursula von der Leyen, the German defence minister, while France gets the prime monetary post. A further worry is that the two top positions at the ECB, the president and vice-president, will be in the hands of former politicians. Before joining the IMF, Lagarde was French finance minister. Luis de Guindos, who became vice-president in June 2018, had previously been Spain’s finance minister.

But what really matters is the substance rather than the manner of the nomination. The crucial question is how effective Lagarde will be in charge of the ECB and what stamp she will place on the central bank and its policies. Lagarde’s lack of direct experience as a central banker is undoubtedly a handicap. Central banking is in its way a profession, the more so since the ECB now supervises banks as well as conducting monetary policy. Unlike current President Mario Draghi, who had strong academic credentials in macroeconomics (serving as an economics professor at the University of Florence between 1981 and 1991) as well as experience as Italy’s top central banker, Lagarde is by background a lawyer.

On the other hand, Lagarde has much to boast about. Since taking over at the IMF in July 2011 she has shown herself to be an effective leader of one of the world’s most important international institutions. Both in her former capacity as French finance minister between 2007 and 2011 and in her role at the IMF, which was intimately involved in the five bailouts of vulnerable economies during the euro crisis, she got to know the inner workings of the dysfunctional monetary union inside out.

With Lagarde at the ECB, Emmanuel Macron wins an ally for his plan to strengthen the euro area through a shared budget. In a speech in March 2018 Lagarde backed “a move towards greater fiscal integration, starting with the creation of a central fiscal capacity.” But in practice that will count for little. Draghi himself has long advocated the same remedy, arguing for example in 2014 that monetary union must eventually require "a decisive step towards closer fiscal union."

What will really matter is Lagarde’s approach to monetary policy. In nominating her, European leaders are really backing a continuation of the Draghi regime, in which the ECB will do its utmost to sustain the monetary union and to combat low inflation. It was after all Lagarde who coined the term “lowflation” in April 2014, in remarks highlighting that this risk was emerging especially in the eurozone. Almost a year before the ECB started its big quantitative easing programme, she called for “more monetary easing including through unconventional measures” in the euro area. The new ECB head will also have the support of Philip Lane, the recently appointed chief economist at the central bank, who is of a dovish disposition.

As a continuity candidate, Lagarde will cement the reinvention of the ECB under Draghi. A central bank that began 21 years ago as a clone of the German Bundesbank with a restricted conception of its remit now has an expansive view of what it can and should do, including the adoption of unorthodox policies such as QE. Even though European leaders may have broken with convention in nominating Lagarde, they shied away from the really revolutionary step of backing Jens Weidmann, head of the Bundesbank, who opposed Draghi’s “whatever it takes” policy (formally “Outright Monetary Transactions”) to rescue the monetary union at its darkest hour in the summer of 2012.

There were of course other continuity candidates available, such as François Villeroy de Galhau, the governor of the French central bank, or Olli Rehn, Finland’s top central banker. But what marks Lagarde out is her prominence. She is quite simply a bigger figure on the international stage than any of the conventional candidates.

That will change things. Already there is a push for the ECB to bolster the role of the euro as an international currency to challenge the sway of the dollar. This looks more likely under Lagarde though in practice it may be hard to achieve. Even so, simply by nominating a globally renowned figure to head the ECB, European leaders are sending a message about their determination to keep the European show on the road.