Lagarde’s political bent leaves critics fearing for ECB independence

Controlling Frankfurt would be 'the French elite’s wildest dream,' Belgium’s former finance minister says.

Christine Lagarde at the European Parliament | John Thys/AFP via Getty Images

Everyone expects Christine Lagarde to get political as the next European Central Bank president — but it could put the institution’s independence in question.

Lagarde is tipped by analysts to push the institution toward fighting climate change, lobbying governments to help stimulate the economy by spending more, and repairing internal rifts over the ECB’s own stimulus efforts: bond purchases and negative interest rates.

That would push the ECB into the realm it has always tried to avoid: politics. Doubters say that if the former boss of the International Monetary Fund goes too far, it could jeopardize the ECB’s sacrosanct freedom from political pressure.

“The French elite’s wildest dreams remain to reduce central bank independence,” Johan Van Overtveldt, Belgium’s former finance minister and now a conservative MEP, said in an interview. “Someone like Lagarde is very much part of the French elite.”

Van Overtveldt’s warning comes as Lagarde takes the hot seat in Frankfurt on Monday, starting an eight-year term as successor to Mario Draghi from Italy.

“Lagarde is the right person, perhaps the only person, to take this baton forward.” — Lena Komileva, chief economist at G+ Economics

Without independence, ECB efforts to keep prices stable and maintain financial stability could lose credibility and leave the eurozone economy at the mercy of market sentiment.

German Chancellor Angela Merkel — whose government is the prime target of calls for stimulus spending — emphasized the point on last Monday at Draghi’s farewell fête, with Lagarde also in the front row. Remaining free of interference protects the ECB to make unpopular decisions, she said — but added a nudge for the institution to keep focus on its monetary remit.

“This independence is also an essential prerequisite for a central bank to fulfill its prime objective: namely, ensuring price stability,” Merkel said. “As a guarantor for price stability, that indeed is the only thing that will be ensuring the acceptance of the citizens.”

Getting political

Others said Lagarde has no choice but to get political.

Lena Komileva, chief economist at G+ Economics, said the key role for the next president will be “consensus-building” within the eurozone to overcome the growing division between capitals on the ECB’s stimulus policies.

“Lagarde is the right person, perhaps the only person, to take this baton forward,” Komileva said by email.

The incoming president’s balancing act comes at a precarious time for the currency union. Draghi’s presidency was beset by financial crises, sluggish inflation and slowing growth from global trade tensions.

To answer those challenges, the Italian cut interest rates into negative territory and launched an easy-money monetary policy, with a multitrillion-euro bond-buying program intended to keep recession at bay.

Those initiatives split the ECB’s governing council of eurozone central bankers, who together decide on monetary policy for the 19-country union. German and Dutch governors have been particularly hostile toward Draghi’s initiatives, especially his €2.7 trillion bond-buying program.

Frustration

Some eurozone governments, meanwhile, have done little to spur the economy with tax and spending policy, much to Draghi’s frustration.

“Monetary policy can still achieve its objective, but it can do so faster and with fewer side effects if fiscal policies are aligned with it,” he said in his farewell speech at the event where Merkel also spoke on October 28.

Large economies with cash have been reluctant to invest in their economies. Germany and Netherlands, for example, have sat on their surpluses and defended their pursuit of a balanced budget.

“It’s the political skill that will be required to rebuild trust and consensus at a time of heightened contention.” — Guntram Wolf, director of Bruegel

Italy, on the other hand, has pursued expensive initiatives like a basic income for the poor despite having a debt pile of some 138 percent of economic activity — second in the EU only to Greece.

Lagarde could use her new ECB platform to pressure countries out of their uncooperative policies, and to do so “more openly and clearly in the public debate,” said Jonás Fernández, a Spanish Socialist MEP.

In any case, the former French agriculture and finance minister will have to use her political nous to win over the German and Dutch central bankers and governments, academics at the Brussels think tank Bruegel said.

“It’s the political skill that will be required to rebuild trust and consensus at a time of heightened contention,” Guntram Wolf, the director of Bruegel, and visiting fellow Rebecca Christie wrote in a column for POLITICO. “Not just to mend fences but to ensure fiscal policy can play its role in reviving the economy.”

Backfire

Lagarde’s lobbying already seems to be in effect. The 63-year-old went on France’s RTL broadcaster five days before her job started, with a call for Berlin and The Hague to loosen their purse strings.

Demands like that could backfire.

“She said three weeks ago that she would intensify a political campaign,” said Van Overtveldt, who is also an open critic of Draghi’s stimulus measures. “That’s horrible. Really horrible. If you interfere, be sure that they will interfere with your job.”

Lagarde’s climate efforts also could face a backlash for moving into other policy arenas. She told EU lawmakers at her September confirmation hearing that the central bank’s bond-buying program, also known as quantitative easing (QE), could be used to encourage green investments.

Jens Weidmann, president of Germany’s Bundesbank, pushed back on Wednesday.

“I am very critical when people say that monetary policymakers need to ‘go green’ by launching ‘green QE,’ say, or granting specific privileges to green assets within the collateral framework,” Weidmann said in a speech. “In the long run, the central bank’s independence might be called into question.”

John Rega contributed reporting.

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