It’s always daunting to walk into a new job: trying to remember the names of new colleagues, how to log onto the IT system, finding out where the toilets are and working out how to put money on your card for the staff canteen or vending machine.
All of these tasks, however, are relatively straightforward compared with what Christine Lagarde faces as she formally begins work today as the fourth president of the European Central Bank.
Liam Byrne, who was the last chief secretary to the Treasury in the most recent Labor government, left a jokey note to his successor in which he wrote: “Dear chief secretary, I’m afraid there isno money.Kind regards – and good luck! Liam. “
Mario Draghi, Ms Lagarde’s predecessor, is unlikely to have left a similar missive.
Yet he might as well have done. The Italian’s final months in office saw him cut the interest rate for the Eurozone from -0.4% to -0.5% and relaunched the ECB’s asset purchase scheme – quantitative easing in the jargon – with a pledge to buy € 20 bn worth of government and corporate bonds until further notice.
The measure has highlighted the limits of monetary policy in terms of stimulating economic growth. The ECB has already bought up € 2.6bn worth of bonds in itsfirst spell of QE that ran from 2015 to the end of last year. It has already cut interest rates deep into negative territory.
Despite all that, at 0.7% in October, inflation in the Eurozone remains well below the ECB’s target rate of 2%. It is doubtful that more QE or setting rates even lower will stimulate more growth and, in any case, the ECB will eventually run out of bonds to buy because, under its rules, it may only buy up one-third of any Eurozone government debt . Ultra-low interest rates, meanwhile, crush the profitability of banks. As if to illustrate the point, beleaguered Deutsche Bank, Germany’s biggest lender, on Wednesday reported a loss of € 832 m for the three months to the end of September. This came on top of a loss of € 3. 15 bn in the previous quarter.
Accordingly, with Mr Draghi having left Ms Lagarde very little in the way of ammunition, she will have to find other ways of stimulating growth.
The extent of that challenge was highlighted yesterday with figures revealing growth across the single currency area during the three months to September was just 0.2 % – unchanged on the previous quarter and representing an annual growth rate of just 1.1%. The Eurozone economy is more or less stagnating.
The obvious solution to break out of this trap, as Mr Draghi continually reminded anyone who would listen during his eight years at the helm of the ECB, is for fiscal stimulus and, in particular, for countries like Germany and the Netherlands which run budget surpluses, to start spending. Mr Draghi also called regularly for a common budget across the Eurozone and for fiscal transfers between members.
It was a point taken up by Ms Lagarde herself when, during an interview with RTL Radio in France on Wednesday , she said: “We share a currency but we don’t share much budgetary policy for now.
” Those that have the room for manoeuvre, those that have a budget surplus, that’s to say Germany , the Netherlands, why not use that budget surplus and invest in infrastructure? Why not invest in education? Why not invest in innovation, to allow for a better rebalancing? “
This has already raised hackles in Germany, a land of ferocious savers, whichreacted indignantly to Mr Draghi’s most recent interest rate cut.
It means Ms Lagarde, a former lawyer, will require all of her powers of persuasion to convince Germans, in particular, that negative interest rates are a necessary evil.
Christine Lagarde told Der Spiegel that she had hired a tutor to help her learn German and that she had acquired a cook book full of recipes for Frankfurt
There is reason to hope, though, that Ms Lagarde may fare better than Mr Draghi. The latter was hampered by the fact that he is Italian – sparking suspicion among Germans that he was seeking to transfer their money to southern European countries like Italy.
Ms Lagarde’s previous jobs as managing director of the International Monetary Fund and as a minister for economic affairs in France also mean that, unlike her predecessor, she has practical working experience and knowledge of fiscal stimulus.
As Paul Diggle, senior economist at Aberdeen Standard Investments, puts it: “If anyone can nudge Eurozone governments into action, it’s Lagarde. She has unique experience both in overseeing national fiscal policy in France and advising governments on their fiscal policies around the world. She is the consummate political operator that the Eurozone economy needs . “
That diplomacy will have to start on Ms Lagarde’s own doorstep. Mr Draghi was bedevilled by criticism from senior German officials within the ECB. The latest such incident, at the end of September, saw Sabine Lautenschlager, the most senior German official at the bank, resign from the ECB’s executive board in an apparent protest at Mr Draghi’s resumption of QE and latest interest rate cut. )
To that end, Ms Lagarde will be helped by some looming personnel changes. Two-thirds of the ECB’s executive board will have changed within a few months. Apart from Ms Lagarde herself, the key appointment is Isabel Schnabel, professor of financial economics at the University of Bonn, who has been named by Berlin as Ms Lautenschlager’s successor. She is being touted as more easier-going than her countrywoman and less of a hawk on monetary policy. It is being suggested that, with so many senior German officials having left the ECB in recent years, the German government has deliberately appointed someone less likely to make waves.
Notwithstanding her remarks on Wednesday, Ms Lagarde has also taken care to try and charm the Germans. She told Der Spiegel, the influential German news magazine, in an interview this week that she had hired a tutor to help her learn German and that she had acquired a cook book full of recipes for Frankfurt specialties.
Approvingly, the magazine also reminded its readers of her warm relationship with Wolfgang Schauble, Germany’s influential former finance minister: “Normally, Schauble allows nobody to push him in his wheelchair, but he makes an exception for Lagarde, who is permitted to push him around in public. “
Another advantage Ms Lagarde will enjoy is that Emmanuel Macron will have her back. He, too, wants a common Eurozone budget and will give Ms Lagarde more support than Mr Draghi ever received from Eurozone leaders. Significantly, as someone who also enjoyed cordial relations with the Trump administration, she may also enjoy backing from the US. Steven Mnuchin, the US Treasury Secretary, said earlier this week that he was concerned about the Eurozone economy and added: “They need to do more on the fiscal side.”
And there may still be monetary levers to pull. One would be for the ECB to be allowed to buy more than one-third of a Eurozone government debt. It is already being suggested the cap may be lifted to (% or even) %.
So, while Ms Lagarde faces a daunting challenge, there are plenty of reasons to hope that she can succeed in this most difficult of jobs. The living standards of the Eurozone’s 341 million people will depend on it – as will those of people living in the wider EU and, yes, even those in post-Brexit Britain.
Sky Views is a series of comment pieces by Sky News editors and correspondents, published every morning.
Previously on Sky Views:Rowland Manthorpe – Why Mark Zuckerberg won’t ban political ads on Facebook
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