The current head of the International Monetary Fund, Christina Lagarde, is the likely replacement for Mario Draghi at the European Central Bank. Draghi’s eight-year term ends on October 31.
In practice, this has meant negative interest rates and huge growth in the ECB’s balance sheet. Via these mechanisms, the central bank has intervened to prop up demand for government debt in Europe, and bail out a financial system in desperate need of liquidity.
Under Draghi’s leadership, ECB’s key target rate has been negative since June of 2014, and has been -0.4 percent since March of 2016.
There had been some speculation that the EU might nominate a compromise candidate who was inclined to moderately more hawkish policy favored by some German policymakers.
With the nomination of Lagarde, it looks like that’s not going to happen.
Thus, in response to Lagarde’s nomination, Alasdair MacLeod averred on Twitter: “Lagarde replaces Draghi. Bundesbank will be most unhappy: goodbye euro, hello mark?”
Macleod is likely engaging in hyperbole, as in the short term it seems unlikely the Bundesbank will be looking to make an exit. However, when the next recession hits, it becomes increasingly likely Europe will continue to splinter into two camps: the productive, savings-minded, and relatively financially-sound northern bloc versus the more profligate and less financially stable southern bloc.
German savers will be left all the more yield-starved by the ECB so as to keep interest rates for government debt down and liquidity high. It will essentially be a wealth transfer from northern Europe to southern Europe.
With Legarde at the helm of the ECB, this looks to be likely, and is no departure from the current road that Europe and the ECB are already headed down.
After all, as the AP reports today, Lagarde’s easy-money leaning have long been quite apparent:
Under Lagarde’s leadership, the IMF has called for the ECB to continue its monetary stimulus efforts aimed at raising inflation and supporting a recovery that appears to be losing steam. The IMF’s review of the eurozone last year warned against premature interest rate increases and urged clear forward guidance, that is, promises to keep rates low well into the future. The report echoed much of what Draghi had been saying, including his urging for governments to do more to support their economies with well-targeted spending, and to engage in pro-business reforms.
Moreover, Lagarde sang the praises of negative interest rates back in 2016:
“We see the recent introduction of negative interest rates by the ECB and Bank of Japan—though not without side effects that warrant vigilance—as net positives in current circumstances,” Ms. Lagarde said.
For the established political powers, of course, Lagarde is a sound choice. She is by training not an economist at all, but a lawyer and politician. She knows how to manipulate Europe’s regimes to buy support for the EU and to keep the status quo going by any means necessary.
If that requires a near-total takeover of financial markets— as recently described here by Thorstein Polleit, then Lagarde can be counted on to offer no resistance.
