Changing of the Guard at the ECB

IIEA17th September 20196min
On 17 September 2019, Christine Lagarde secured the approval of the European Parliament to become the new President of the European Central Bank. What will be the priority objectives of her eight-year term?

Author: Cillian Rossi

Introduction

This morning, 17 September 2019, former Managing Director of the IMF Christine Lagarde secured the approval of the European Parliament to become the new President of the European Central Bank (ECB). In a vote at the European Parliament plenary session in Strasbourg, Mme Lagarde earned a comfortable 60% majority from lawmakers, with 394 MEPs voting in favour of her appointment, 206 against and 49 abstentions.

When appointing the new ECB President, the European Council consults the European Parliament, before taking its final decision on the basis of a Council recommendation through a qualified majority vote. Although the recommendation is not binding, the European Council’s consultation procedure places significant weight on the European Parliament’s opinion.

Despite receiving an invitation to attend, Mme Lagarde was not present at the plenary vote in Strasbourg. She did, however, make a public appearance as candidate for ECB President in a confirmatory hearing before the European Parliament’s Economic and Monetary Affairs Committee (ECON Committee) on 4 September 2019 in Brussels.

A new direction for the ECB

Mme Lagarde stated that she considered the ECON Committee hearing a “key step” in the appointment process. Lasting more than two and a half hours, the hearing provided Mme Lagarde with the opportunity to set out some of the priority objectives of her expected eight-year term. These included:

  • Improving ECB communication with EU citizens;
  • Addressing emerging challenges, and;
  • Greening the euro area.
  1. Improving ECB communication with EU citizens

In her remarks, Mme Lagarde promised “better and different” communication in explaining ECB decisions to the public. She described the euro as a “public good that belongs to the people” and because of this, the ECB must be more effective in explaining its decisions “to people, not only the markets”. Lagarde suggested that better communication of ECB policy would help EU citizens to understand when there are “downside[s] first and benefits later on” to decisions made at the ECB headquarters in Frankfurt.

In something of a departure from existing ECB practice, Mme Lagarde said that she would instruct staff to refrain from using “technocratic jargon” in their public announcements. This follows similar efforts made by Mme Lagarde in her time as Managing Director of the IMF, where she instructed staff to avoid the use of confusing acronyms. Lagarde said that helping “the people” to understand why decisions are made must be “the ultimate goal” of ECB communication.

Lagarde’s commitment to improving ECB communication with the public echoed comments made by the Vice-President of the ECB, Luis de Guindos, at an ECB policy panel in Manchester on 27 August 2019. According to Vice-President de Guindos, ensuring that the public understands the ECB’s mandate, and trusts in its ability to deliver on it, is of “first order importance”.

  1. Addressing emerging challenges

Significantly, Mme Lagarde stated that a review of the ECB’s policy framework may be needed in order to address new challenges such as the rise of non-bank lending and the emergence of fintech and crypto currencies. The last ECB monetary policy review was conducted in 2003. In response to an MEP’s query, Mme Lagarde also expressed interest in a radical proposal by Mark Carney, Governor of the Bank of England, for the world’s central banks to explore the creation of a digital currency.

Over the course of her remarks, Mme Lagarde largely avoided commenting on current ECB policy. She did, however, endorse the view of the ECB Governing Council that a “highly accommodative [monetary] policy” should continue to be pursued in order to bring inflation back to the target of below but to close to 2%.  Although she cautioned that the ECB must be mindful of the negative side-effects of unconventional policy measures, Mme Lagarde nevertheless expressed support for the ECB’s decision to initiate a programme of quantitative easing (QE) at the height of the eurozone crisis.

Mme Lagarde’s pro-QE stance comes as a timely fillip to outgoing ECB President Mario Draghi, as the ECB relaunched QE on 12 September 2019 in an effort to boost the euro area’s flagging economy, plotting €20 billion worth of purchases each month from November 2019. Draghi’s decision came in spite of reported opposition from a number of ECB Executive Board members, as well as key euro area Member States including Germany, France and the Netherlands.

  1. Greening the euro area

At the IMF, Mme Lagarde described climate change as “the great existential challenge of our times” and she pledged to prioritise action on climate change as ECB President during the ECON Committee hearing. Mme Lagarde spoke in detail on the issue in a clear indication that greening the euro area financial system will be a prime objective during her tenure.

Mme Lagarde stressed to the ECON Committee that the ECB must put environmental protection “at the core” of its mission due to the “macro-critical risks” that climate change could pose to the euro area. Mme Lagarde’s comments echoed a recent analysis by the ECB that found climate change risks have the potential to “become systemic” for the euro area, in particular if markets are not pricing the risks correctly.

In practical policy terms, Mme Lagarde stated that the ECB could begin to direct its corporate asset balance sheet away from polluting assets towards the purchase of so-called green bonds once EU regulators agree on a common taxonomy for green finance. Efforts are ongoing in the European Commission to establish a classification system of environmentally sustainable economic activity, and Mme Lagarde suggested that ECB support for the initiative could facilitate “the incorporation of environmental considerations in central bank portfolios”.

Conclusion

Following her public appearance before the ECON Committee on 4 September 2019, Mme Lagarde received 37 votes in favour of her appointment, with 11 votes against and 4 abstentions. This tally represents a significant vote of confidence in her appointment. Having secured the approval of the European Parliament on 17 September 2019, Mme Lagarde’s appointment as President of the ECB now looks to be a formality. She will in all likelihood secure final confirmation from the European Council in mid-October 2019 and assume office on 1 November 2019.

Building consensus among the many competing visions for the future of ECB monetary policy will be a significant challenge for Mme Lagarde when she assumes office. Another key question facing her in the early stages of her tenure will be whether her planned emphasis on improving ECB communication and addressing climate change can build confidence in an institution that enjoys an average trust level of just over 40% among EU citizens.