Lorenzo Codogno and Mara Monti argue that Christine Lagarde's challenges at the helm of the ECB remain daunting, despite smooth sailing during her first press conference and a notably different communication style. Issues will emerge from different sources, not least the ECB's problematic relationship with political actors, but she appears well equipped to address these as they arise

Codogno, Lorenzo

Monti, Mara

English

LSE Research Online

Taking	stock	of	Christine	Lagarde’s	challenges	at	theECBLorenzo	Codogno	and	Mara	Monti	argue	that	Christine	Lagarde’s	challenges	at	thehelm	of	the	ECB	remain	daunting,	despite	smooth	sailing	during	her	first	press	conferenceand	a	notably	different	communication	style.	Issues	will	emerge	from	different	sources,not	least	the	ECB’s	problematic	relationship	with	political	actors,	but	she	appears	wellequipped	to	address	these	as	they	arise.Christine	Lagarde’s	reign	at	the	European	Central	Bank	(ECB)	has	heralded	a	shift	not	in	the	monetary	policy	field,but	mainly	in	terms	of	communication,	at	least	judging	from	her	first	press	conference	in	December.	She	is	notMario	Draghi	or	Jean-Claude	Trichet,	her	predecessors,	and	she	wants	to	affirm	her	own	different	style	asPresident.	“Each	and	every	President	has	his	or	her	own	style	of	communicating.	I	know	some	of	you	are	keen	tocompare	and	rate	or	rank.	I	will	have	my	own	style.	As	I’ve	said	before,	don’t	over-interpret,	don’t	second-guess,don’t	cross-reference.	I’m	going	to	be	myself	and	therefore	probably	different.”	What	a	brilliant	start	for	thePresident	of	a	Governing	Council	formed	by	her	and	23	men!She	bypassed	attempts	to	label	her	a	dove	or	a	hawk,	suggesting	an	owl	instead,	due	to	its	perceived	wisdom.“Once	and	for	all,	I’m	neither	dove	nor	hawk	and	my	ambition	is	to	be	this	owl	that	is	often	associated	with	a	little	bitof	wisdom.	I’m	not	full	of	vanity	but	I	will	certainly	try	to	bring	the	best	out	of	the	members	of	my	Governing	Councilin	order	to	arrive	at	monetary	policy	decisions	and	use	of	instruments	that	will	be	as	consensual	as	possible.”Lagarde	will	favour	a	more	collegial	decision-making	process	to	address	the	divisions	that	came	to	the	surface	inSeptember	after	the	decision	to	confirm	the	Asset	Purchase	Programme.	She	will	possibly	even	allow	public	votingby	Governing	Council	members.	Currently,	there	is	an	informal	voting	system,	which	tends	to	achieve	unanimity,but	is	not	public.	Still,	Draghi	supposedly	resisted	such	a	change.	Those	who	sit	on	the	Governing	Council	de	factorepresent	their	central	bank	and	country,	although	in	principle	they	should	not.	Country	weights	and	rotation	logicsstrictly	drive	even	the	appointments	at	the	Executive	Board.	Thus,	allowing	Governing	Council	members	to	voteformally	and	making	their	vote	public	may	be	unduly	risky,	as	it	may	exacerbate	country	divisions.Christine	Lagarde	during	the	ECB	press	conference	on	12	December	2019,	Credit:	European	Central	Bank	(CC	BY-NC-ND	2.0)Lagarde’s	bold	start	was	also	a	way	to	deflect	criticism	for	not	having	a	central	banking	background,	although	shewas	previously	Managing	Director	of	the	International	Monetary	Fund	and	Finance	Minister	in	the	Frenchgovernment.	Actually,	her	background	should	prove	a	great	asset	given	today’s	need	to	table	a	dialogue	with	euroarea	policymakers	while	maintaining	the	ECB’s	independence	and	monetary	dominance.LSE European Politics and Policy (EUROPP) Blog: Taking stock of Christine Lagarde’s challenges at the ECB Page 1 of 4		Date originally posted: 2020-01-09Permalink: https://blogs.lse.ac.uk/europpblog/2020/01/09/taking-stock-of-christine-lagardes-challenges-at-the-ecb/Blog homepage: https://blogs.lse.ac.uk/europpblog/Indeed,	the	role	of	the	ECB,	its	policies,	its	independence	and	relationship	with	political	actors	may	be	challenged,as	has	already	happened	in	many	other	countries/areas.	Tensions	inside	Europe	have	not	gone	away.	Brexit	hasbolstered	support	for	populist	parties	and	potential	splits	within	and	in	the	immediate	surroundings	of	the	monetaryunion.	In	Spain,	the	far-Right	Vox	has	called	for	a	‘Spaxit’.	In	Poland,	apparently,	the	populist	government	isconsidering	whether	to	follow	the	same	path	of	the	UK	and	exit	the	European	Union.The	key	question	is	how	much	influence	anti-establishment	parties	will	have	in	the	European	Parliament	and	EUcountries,	and	in	which	way	this	could	affect	the	appointments,	and	thus	policies,	at	the	ECB.	It	is	a	crucial	questionbecause	the	head	of	each	National	Central	Bank,	appointed	nationally,	sits	on	the	ECB’s	Governing	Council.For	instance,	in	Austria,	the	Eurosceptics	played	an	essential	role	in	the	appointment	of	Robert	Holzmann	asOesterreichische	Nationalbank’s	governor.	The	two	ruling	parties	at	that	time,	Chancellor	Sebastian	Kurz’sconservatives	and	the	far-right	Eurosceptic	Freedom	Party	chose	him.	It	happened	just	before	a	scandal	strippedKurz’s	coalition	partners	off.	The	issue	of	whether	national	governors	will	remain	free	from	political	interferenceonce	appointed	remains	an	open	one.Within	the	Executive	Board,	there	are	also	many	changes	due	to	a	number	of	mandates	expiring,	therebypotentially	making	for	discontinuity	in	policies.	With	the	departure	of	Benoît	Cœuré	at	the	end	of	last	year,	four	outof	the	six	members	of	the	Executive	Board	have	left	recently.	Yves	Mersch	is	the	only	long-standing	member	(sinceDecember	2012	and	he	will	stay	until	December	2020),	while	Luis	De	Guindos	joined	in	June	2018.The	core	of	the	new	presidency	will	be	a	strategic	review.	Lagarde	has	said	that	implementing	a	strategic	reviewsome	16	years	after	the	previous	one	is	“nothing	unusual	or	extraordinary”.	The	Governing	Council	goal	is	tocomplete	it	before	the	end	of	2020.	She	has	made	it	clear	that	it	will	be	comprehensive,	as	“it	will	turn	each	andevery	stone”.	It	will	reach	out	not	just	to	the	usual	quarters	but	also	to	the	European	Parliament,	academics	and	civilsociety,	with	“no	preconceived	landing	zone”.	It	will	also	cover	technological	and	climate	change,	inequality,	andhow	businesses	are	affected	by	monetary	policy.	It	will	re-examine	the	appropriateness	of	each	monetary	policyinstrument,	although	the	framework	for	doing	this	“is	not	yet	fully	agreed”.The	launch	of	the	strategic	review	could	potentially	mark	a	significant	departure	from	the	previous	presidency,	asDraghi	reluctantly	accepted	calls	by	Finnish	Governor	Olli	Rehn	and	others	to	open	the	Pandora’s	box	of	the	ECB’smonetary	policy	strategy.	Rehn	said:	“In	my	view,	a	review	of	monetary	policy	strategy	is	a	sound	way	to	prepare	forthese	longer-term	challenges.	I’m	glad	this	option	is	now	discussed,	and	assume	that	the	ECB	will	conduct	a	reviewat	an	opportune	time,	in	the	relatively	near	future.”	The	strategy	was	reviewed	previously	in	2003,	and	Otmar	Issing,the	then	Chief	Economist,	was	very	much	in	the	driving	seat.	At	that	time,	the	exercise	was	mostly	restricted	to	ECBstaff.Probably	the	most	critical	part	of	the	discussion	will	be	about	the	inflation	target.	The	definition	of	price	stability	isentirely	in	the	remit	of	the	Governing	Council,	i.e.	there	is	no	formal	need	for	a	policy	review.	The	introduction	of	an‘inflation	aim’	in	Draghi’s	introductory	statement	on	25	July	last	year	was	already	a	change	in	the	definition	of	pricestability:	“if	the	medium-term	inflation	outlook	continues	to	fall	short	of	our	aim,	the	Governing	Council	is	determinedto	act,	in	line	with	its	commitment	to	symmetry	in	the	inflation	aim.”	Therefore,	the	issue	is	whether	the	strategyreview	will	confirm	the	shift	in	the	definition	of	price	stability	more	explicitly	with	a	formal	endorsement,	and	will	gobeyond	that.	The	shift,	however,	has	faced	staunch	opposition	within	the	board	and	outside.	Six	former	centralbankers,	including	Otmar	Issing,	wrote	a	memorandum	saying	that:LSE European Politics and Policy (EUROPP) Blog: Taking stock of Christine Lagarde’s challenges at the ECB Page 2 of 4		Date originally posted: 2020-01-09Permalink: https://blogs.lse.ac.uk/europpblog/2020/01/09/taking-stock-of-christine-lagardes-challenges-at-the-ecb/Blog homepage: https://blogs.lse.ac.uk/europpblog/“In	October	1998,	the	Governing	Council	announced	its	definition	of	price	stability	as	an	average	annualincrease	in	the	price	level	for	the	euro	area	of	below	2%.	The	Council	did	not	change	this	definition	in	the2003	evaluation	of	its	monetary	policy	strategy	at	all.	In	the	past	few	years,	the	ECB	has	de	facto	alteredthe	initial	definition	of	price	stability	by	considering	an	inflation	rate	for	example	of	1.5%	as	unacceptable.For	years	now,	the	ECB	has	failed	to	meet	its	self-imposed	target	of	raising	the	euro	area	inflation	rate	toa	level	of	below,	but	close	to,	2%,	which	in	the	ECB’s	interpretation	seems	to	be	a	“point	target”.	TheECB	essentially	justified	in	2014	its	ultra-loose	policy	by	the	threat	of	deflation.	However,	there	hasnever	been	any	danger	of	a	deflationary	spiral,	and	the	ECB	itself	has	seen	less	and	less	of	a	threat	forsome	time.	This	weakens	its	logic	in	aiming	for	a	higher	inflation	rate.	The	ECB’s	monetary	policy	istherefore	based	on	a	wrong	diagnosis.	The	frequently	used	argument	that	the	ECB	would	be	violating	itsmandate	with	low	inflation	rates	is	simply	inaccurate.	The	Maastricht	Treaty	enshrines	this	mandate,according	to	which	the	primary	objective	of	the	ECB	is	to	maintain	price	stability.	Current	considerationson	defining	the	2%	threshold	as	a	symmetrical	inflation	target	represent	a	clear	departure	from	a	policyfocused	on	price	stability.	This	is	particularly	true	if	“symmetry”	is	understood	in	the	sense	that,	afteryears	of	undershooting	the	2%	mark,	a	similar	period	of	time	should	be	spent	allowing	for	anovershooting	of	the	2%	inflation	rate.	And,	incidentally,	how,	after	years	of	unsuccessful	“inflationarypolicy”,	does	the	ECB	intend	to	convince	the	public	and	the	markets	that	it	will	succeed	in	stoppinginflation	at	a	certain	level	in	good	time?”Why	is	a	change	in	the	definition	of	price	stability	so	important?	After	many	years	of	underperformance	relative	tothe	current	definition	of	price	stability	of	“below	but	close	to	2%”,	the	ECB	would	be	forced	to	react	if	inflation	startsto	exceed	2%.	Average	inflation	was	1.2%	during	Draghi’s	eight-year	mandate.	A	symmetric	target	would	call	for	anovershoot	for	a	sufficiently	long	period	to	allow	for	a	modification	in	economic	agents’	behaviour	and	marketexpectations.	Making	the	target	symmetric	would	not	make	any	difference	for	today’s	policy,	but	it	would	be	hugelysignificant	in	the	future.	The	policy	strategy	review	will	also	encompass	an	assessment	of	the	effectiveness	andappropriateness	of	the	main	policy	tools,	an	exercise	that	will	also	be	vital	for	future	policies.On	top	of	that,	unorthodox	policies	are	increasingly	less	effective	when	it	comes	to	propping	up	inflation	andincreasingly	risky	for	financial	stability.	The	November	Financial	Stability	Report	of	the	ECB	was	unusually	hawkish,de	facto	pointing	to	the	trade-offs	that	the	ECB	is	facing.	“Signs	of	excessive	financial	risk-taking,	including	for	somenon-bank	financial	institutions,	highly	leveraged	corporates	and	real	estate	sectors,	requires	monitoring	andtargeted	macroprudential	policy	actions.”	Furthermore,	“The	euro	area	banking	sector	has	increased	its	resilience	inrecent	years.	But	slow	progress	in	improving	underlying	profitability	and	renewed	cyclical	headwinds	may	hamperbanks’	ability	to	respond	to	downside	risks	to	growth.	[…]	A	more	active	use	of	macroprudential	instruments,including	the	countercyclical	capital	buffer,	could	mitigate	some	of	the	risks	to	euro	area	financial	stability	in	somecountries.”Some	businesses	may	be	sustainable	only	because	of	the	low-interest-rate	environment,	and	there	may	bemispricing	in	asset	prices	amid	robust	risk	appetite	and	valuation	reliance	on	low	rates	and	re-leveraging	in	theprivate	sector.	The	ECB	increasingly	perceives	these	side	effects	as	a	high	price	to	pay	in	the	attempt	to	prop	upinflation	by	continuing	the	ultra-expansionary	policy,	despite	the	risk	of	de-anchoring	inflation	expectations.The	tradeoffs	between	achieving	price	stability	and	maintaining	financial	stability	are	even	stronger	than	in	the	past.Unusually	accommodative	policies	across	the	globe	have	inevitably	increased	the	risks	of	misallocation	ofresources	and	credit	events.	There	is	no	obvious	metric	by	which	we	can	say	that	the	ECB	is	more	concernedtoday	about	financial	stability	than	in	the	past.	However,	surveillance	work	on	the	banks	seems	to	be	increasinglyfocused	on	the	need	to	build	up	sufficiently	large	capital	buffers	to	withstand	the	next	crisis	without	significanthurdles,	in	an	era	in	which	there	are	many	structural	challenges	to	their	business	model.	This	debate	will	becomeeven	louder	in	the	future.On	12	December,	Lagarde’s	premiere	at	the	ECB	press	conference	showed	a	line	of	continuity	in	policies	withDraghi’s	era:	interest	rates	and	policies	were	left	unchanged,	with	forward	guidance	and	even	the	overall	languagepretty	close	to	that	used	at	the	previous	press	conference	by	Mario	Draghi,	with	no	hints	at	future	policy	shifts	atleast	for	now.	Moreover,	the	strategic	review	has	increased	the	bar	for	any	possible	near-term	adjustment.	Manypotential	changes	are	brewing	in	the	background,	however.	It	is	no	longer	about	hawks	versus	doves;	it	is	aboutstructural	versus	cyclical,	and	the	best	policy	strategy	and	tools	for	the	future.LSE European Politics and Policy (EUROPP) Blog: Taking stock of Christine Lagarde’s challenges at the ECB Page 3 of 4		Date originally posted: 2020-01-09Permalink: https://blogs.lse.ac.uk/europpblog/2020/01/09/taking-stock-of-christine-lagardes-challenges-at-the-ecb/Blog homepage: https://blogs.lse.ac.uk/europpblog/Fiscal	imbalances	and	still-increasing	public	debt	remain	key	issues,	especially	in	Southern	European	countries.Accommodative	monetary	policy	from	the	ECB	makes	borrowing	cheaper	for	European	governments,	but	it	doesnot	solve	the	structural	problems	and	fiscal	imbalances,	nor	the	ongoing	global	underlying	phenomena	such	astrade	wars.	Sound	economic	policy	and	fiscal	consolidation	at	the	national	level	are	still	necessary,	as	well	aseconomic	reforms.Despite	unanswered	questions	about	monetary	policy,	recovery	and	prosperity	in	the	euro	area	ultimately	dependmore	on	the	decisions	of	policymakers	on	structural	reforms,	the	flexibility	and	resilience	of	domestic	economies	aswell	as	the	future	shape	of	European	integration.	Draghi,	before	his	departure,	called	for	help	from	the	fiscal	sideand	a	Fiscal	Union,	claiming	monetary	policy	alone	is	not	sufficient.	How	can	the	need	for	fiscal	expansion	tocomplement	monetary	policy	in	supporting	aggregate	demand	be	adequately	combined	with	addressing	public	debtdynamics	and	structural	impediments?Many	parts	are	thus	moving,	and	navigating	this	magmatic	world	will	not	be	easy	for	President	Lagarde.Please	read	our	comments	policy	before	commenting.Note:	This	article	gives	the	views	of	the	authors,	not	the	position	of	EUROPP	–	European	Politics	and	Policy	or	theLondon	School	of	Economics._________________________________About	the	authorsLorenzo	Codogno	–	LSE,	European	InstituteLorenzo	Codogno	is	Visiting	Professor	in	Practice	at	the	LSE’s	European	Institute	and	founder	andchief	economist	of	his	own	consulting	vehicle,	LC	Macro	Advisors	Ltd.	Prior	to	joining	LSE,	LorenzoCodogno	was	chief	economist	and	director-general	at	the	Treasury	Department	of	the	Italian	Ministryof	Economy	and	Finance	(May	2006-February	2015).	Throughout	this	period,	he	was	head	of	theItalian	delegation	at	the	Economic	Policy	Committee	of	the	European	Union,	which	he	chaired	fromJan	2010	to	Dec	2011,	thus	attending	Ecofin/Eurogroup	meetings	with	Ministers.	He	joined	the	Ministry	from	Bankof	America	where	he	had	worked	over	the	previous	11	years.	He	was	managing	director,	senior	economist	and	co-head	of	European	Economics	based	in	London.	Before	that,	he	worked	at	the	research	department	of	Unicredit	inMilan.Mara	Monti	–	LSE,	European	InstituteMara	Monti	is	Visiting	Fellow	at	the	LSE’s	European	Institute	and	a	journalist	at	Il	Sole	24	Ore,	Italy’sleading	financial/economic	newspaper,	based	in	Milan.	She	completed	an	MSc	(Econ)	in	Politics	of	theWorld	Economy	at	LSE	career	in	journalism,	specialising	in	the	financial	sector.	Over	the	past	16years,	she	has	been	part	of	the	financial	team	at	Il	Sole	24	Ore,	writing	extensively	on	financial	issues,sovereign	crisis	and	monetary	policy	issues.	Prior	to	joining	Il	Sole	24	Ore,	Mara	worked	as	editor-in-chief	for	international	news	agency	Dow	Jones	Telerate	in	Milan.	She	wrote	several	books	investigating	thebankruptcy	crisis	of	the	past	ten	years	and	probing	into	financial	scandals.LSE European Politics and Policy (EUROPP) Blog: Taking stock of Christine Lagarde’s challenges at the ECB Page 4 of 4		Date originally posted: 2020-01-09Permalink: https://blogs.lse.ac.uk/europpblog/2020/01/09/taking-stock-of-christine-lagardes-challenges-at-the-ecb/Blog homepage: https://blogs.lse.ac.uk/europpblog/

Taking stock of Christine Lagarde's challenges at the ECB

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Taking stock of Christine Lagarde's challenges at the ECB

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