Neither trained as an economist, nor experienced as a central banker, 63-year-old Christine Lagarde starts as the European Central Bank’s first female president on November 1.
As the former French finance minister as well as International Monetary Fund managing director takes over from Mario Draghi, the outlook for the 19-nation eurozone is going from bad to worse. Figures are due to show the euro area’s worst economic performance since 2013 and inflation slipping further from the ECB’s goal.
With a manufacturing slump threatening to spill over into services, euro-area growth was probably just 0.1% in the third quarter. France is cooling, while Italy’s economy is predicted to have stagnated. Germany is likely in a technical recession.
Adding to the problems, the ECB got a warning last week that faith in its ability to maintain price stability is waning. In its survey of professional forecasters, the outlook for longer-term core inflation was cut to 1.6%. The ECB aims to keep the headline rate – seen at 0.7% in October – below, but close to, 2%.
Lagarde comes to the helm of the ECB against the backdrop of a global economy badly in need of treatment.
The IMF has lowered its growth forecasts yet again. Global output is projected to rise by just 3% this year (down from the 3.3% predicted in the spring) and by a still-sluggish 3.4% (down from 3.6%) in 2020. Economic momentum is fading almost everywhere — the IMF calls it a “synchronised slowdown.”
The revised outlook is already the weakest since the crash 10 years ago.
Draghi pushed the interest on bank deposits well below zero, buying €2.6tn worth of assets, mostly government bonds. He has credited this policy with averting deflation in the eurozone and helping create 11mn jobs.
But more than a third of the ECB’s Governing Council opposed a decision to resume bond purchases at the September meeting, and policymakers from the Netherlands, France and Germany took the unusual step of making their disagreement public.
Draghi will be known for his “whatever it takes” approach to save the euro during the global financial crisis. But some 95% of respondents in a Reuters poll said the stimulus package would not significantly help in bringing inflation back to the ECB’s target of just under 2%.
Turmoil within the ECB is likely to persist, and Lagarde will have to deal with objections that the ultra-easy policy hurts savers, squeezes banks and pension funds and inflates financial bubbles while doing little for inflation.
Given the ECB’s depleted arsenal and growing aversion against further action, Lagarde may find herself following Draghi’s lead of encouraging European governments to add some of their firepower.
Lagarde brings a different skill set than her predecessors.
Draghi’s successor (a former member of the French national team for synchronised swimming) is going to synchronise all her political and technocratic skills to steer European monetary policy toward growth – in spite of bureaucracy, nationalism and populism – with a long-term vision.