Habemus praeses. Incumbent IMF chairwoman Christine Lagarde was recently nominated to become the next president of the ECB after the agreement reached by European leaders last week. The French politician will take up the position next November, bringing an end to Draghi’s eight-year mandate.
Draghi’s presidency has been characterized by two key aspects. First, during his mandate, the ECB has resorted to a wide range of unconventional monetary tools (quantitative easing, negative interest rates, forward guidance, etc.) aimed at achieving its “close to but below 2 percent” inflation target. Second, Draghi has managed to maintain certain independence from political pressures, a necessary condition to accomplish its monetary-policy goals.
What can we expect from Draghi’s soon-to-be successor regarding these two crucial issues? Lagarde’s intentions in relation to monetary policy are unknown, but not very difficult to guess. A recent IMF report points out that the effects of ECB’s negative deposit-rate policy have been overall positive for aggregate demand and bank profitability. Given the Eurozone’s weak economic growth, it doesn’t seem far-fetched to argue that Lagarde, who’s been leading the Fund for years, will try to convince the Governing Council to continue with Draghi’s unorthodox monetary policy.
However, the most worrying aspect of Lagarde’s appointment isn’t so much related to her views on monetary policy (after all, the ECB’s president has limited power as it is the Governing Council which ultimately makes all important decisions), but the symbolic side of it. There is a wide consensus among economists that monetary authorities ought to place themselves beyond the political game. Independence from political power is what differentiates a serious central bank from a banana republic’s central bank.
Yet Lagarde has been a professional politician since she was appointed France’s Minister for Foreign Trade in 2005. Her political commitment has led her to be Minister for Agriculture and Fisheries, Finance and Economy Minister, head of the ECOFIN council, and Managing Director of the IMF for two terms; a very heavy burden to lead an institution that needs to be free from political influence.
It is true that the appointment of someone with such a strong political background as head of the ECB doesn’t necessarily undermine the independence of the Eurozone’s central bank (Draghi himself was general director of the Italian Treasury for a decade). Nonetheless, it casts doubt on the non-politicization of the ECB, at least until Lagarde shows she is not willing to give in to political interference.
The end of Draghi’s mandate would have been an excellent opportunity to appoint someone unrelated to the world of politics (an academic, for instance) as head of the ECB. Even though this wouldn’t have guaranteed complete independence from political pressures, it would have sent a very clear message to those politicians eager to control the designs of monetary policy, namely: the ECB isn’t an institution that can be manipulated by European bureaucrats at their whim.
Fortunately, the ECB isn’t the Central Bank of Venezuela. The Euro is today a reserve currency thanks to the good work of the Eurozone’s central bank since it was established on June 1, 1998. Yet, in order to maintain its effective independence, the European Central Bank must be like Caesar’s wife: above reproach. After all, when it comes to central banks, appearances matter.