July 11, 2019

An International Politician Needed to Resolve EU's Economy

As the new president of the European Central Bank, Christine Lagarde will replace Mario Draghi, who has held the role since 2011 and whose term ends on Oct. 31. Men and economists have predominated among the 19 euro-area central banks that make up the E.C.B. Lagarde is neither, yet many people felt she would be the ideal E.C.B. president.

She has an impressive background. As a corporate lawyer, she was the first woman to rise to the top job at Baker McKenzie, a Chicago-based law firm. Then, as a politician, Lagarde was France's first woman finance minister (or any of the G7 industrialized democracies, for that matter). She was also the first woman to lead the International Monetary Fund, and is now the first non-economist to head a major central bank. What sets her apart as a successful politician is her ability for consensus-building among central bankers at a time of unprecedented monetary policies. She has great political instincts and a deep understanding of global macroeconomics. Besides her strong connections with the international community, she also is a gifted communicator.

Even so, Lagarde confronts stiff challenges when she officially takes the role on Nov. 1. First and above all, she needs to reboot EU economic growth. Its gross domestic product is an anemic 1.2 percent this year with further signs of weakness, and inflation is stubbornly low (just under 2 percent). Lagarde labeled the eurozone as having a “delicate moment.”

So what policy changes should we expect in the E.C.B. with Lagarde as chief?

First, in terms of monetary policy, she's likely to remain dovish, maintaining continuity. As a former finance minister, she may emphasize the importance of coordinating fiscal policy with monetary policy. Certain EU nations' fiscal policies need to be enhanced and some of the monetary policy burden needs to be eased. But on the other hand, she needs to also encourage fiscal responsibility in countries such as Italy, where government debt is still projected to stay above 130 percent of GDP this year. Lagarde does have a track record of successfully leading in a fiscal crisis, such as we've seen in Greece and Argentina, showing empathy when necessary.

Second, she needs to identify the source of sluggish growth within the euro zone. She revealed some of her thought process as she spoke about the risks of opaque trade policies. “For the global economy to function well, it needs to be able to rely on a more open, more stable, more transparent, more predictable, and rules-based international trade system.” The comment seems to criticize both President Trump's protectionist trade policies and Brexit, where the United Kingdom still does not have a plan to protect its own trade when it exits the EU. Uncertainty surrounding global investments, a weaker UK economy, tariffs and customs disrupting supply chains, - all these situations have more negative impact on the economy than politicians may think.

Lastly, Lagarde needs to defend the existence of the single currency against other forces that may potentially disrupt the financial system. She has revealed her position on crypto currencies – basically open but most interested in avoiding disruption to the current financial system, which more than ever needs stability.

My View: Clearly, I endorse Christine Lagarde. She is someone who does not close her eyes on issues, but attempts to resolve them with well-rounded solutions. I look forward to her new leadership.

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