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7 September 2019

What can we hope from Christine Lagarde as ECB President?

Speaking to the European Parliament’s economic committee, the nominated president for the European Central Bank Christine Lagarde set expectations high that she will review the ECB’s strategy, prioritize climate change, and improve the ECB’s dialogue with civil society.
What can we hope from Christine Lagarde as ECB President?
By Positive Money Europe

Speaking to the European Parliament’s economic committee, the nominated president for the European Central Bank Christine Lagarde set expectations high that she will review the ECB’s strategy, prioritize climate change, and improve the ECB’s dialogue with civil society. 

Last June, Christine Lagarde has been proposed by the European Council to succeed Mario Draghi as next president of the European Central Bank. However, a number of steps have to be completed before she takes the position on November 1st. 

While the European Parliament does not have veto power in this appointment process, it nonetheless plays a crucial role allowing the public and MEPs to gauge concretely what the next ECB president will be up to. For this, the European Parliament submits a written questionnaire which the nominated president has to fill in, ahead of a public hearing. This took place on September 4th (you can watch the replay here) in Brussels and led to a positive vote in favour of Lagarde’s appointment (by 37 votes in favour, 11 against and 4 abstentions). Following this positive vote, there will be a final plenary vote to finally approve her appointment in the next weeks. 

Ahead of this key vote, which is likely to happen on September 17 or 18, we want to summarize the most salient points of Christine Lagarde’s testimony to the European Parliament.

1. Reviewing monetary policy

First and foremost, Christine Lagarde has firmly supported the idea of a review of the ECB’s monetary policy framework, as advocated for by Positive Money Europe

“Central banks need to reflect on whether their monetary policy frameworks are sufficiently robust to future challenges. My goal will be to ensure that the ECB, for its part, engages in such reflections with an open mind and dedication” she said, while going even further by suggesting in her reply to Spanish Member of the European Parliament (MEP) Jonas Fernandez, that such review should be carried out on a regular basis, as the Bank of Canada does.

In principle, a review would entail conducting an analysis of the ECB’s strategy, targets, tools and analytical framework. In this context, an important aspect of the review could lead to an adjustment to the ECB’s sacrosanct 2% inflation target (which is self-defined by the ECB and not set in stone in the Treaty). While some more flexibility on the current target would be warranted, in our view the most important issue would be to consider new instruments for the ECB, so that it can effectively deliver the agreed target.

On this note, German MEP Markus Ferber asked Lagarde whether she would be willing to use “helicopter money”. While Lagarde did not specifically reply to this point, her response implies that just like Draghi, she is not ruling it out. Indeed, Lagarde reminded MEPs that “In 2008 and consequently in 2014 very few people would have expected the kind of tools that were used, some of them invented by the various central bank governors from around the world”. 

However, it remains unclear how far she would go into uncharted territory. For example, she does not believe that we need an overhaul reform of the banking and monetary system along the lines of proposals known as the “Chicago plan” or “narrow banking” – which have been put forward by Positive Money UK in the past. In the written questionnaire, her answers suggest she is not willing to revisit the way most money is created:

“I personally have doubts that such a plan is either desirable or necessary. I am not convinced that eliminating the role of private banks in the supply of ‘broad’ money is a good idea, as there is no guarantee that governments would, on the whole, do a better job at providing financing for the real economy. Furthermore, if banks face such severe restrictions on their ability to lend, one can expect that private credit would quickly migrate to unregulated parts of the financial system, with unknown consequences.”

2. Greening the ECB

Perhaps more extraordinarily, Christine Lagarde has pledged to ensure that all institutions, including the ECB, “have climate change risk and protection of the environment at the core of their understanding of their mission.” Several MEPs asked the nominee to elaborate on how the ECB, under her leadership, could and would step up its climate action. 

German Green MEP Sven Giegold asked Lagarde on whether and how the ECB would divest from fossil fuels and carbon-intensive assets. Making a direct reference to Positive Money Europe’s research on Corporate QE, this point was reiterated by French MEPs Manon Aubry (France Insoumise) and Damien Carême (Greens), and by MEP Pascal Canfin, who is also the former director of WWF-France. Italian MEP Irene Tinagli also added a question on the role of the ECB in buying bonds from the European Investment Bank.

 

Rather unexpectedly, Lagarde went on to say that while the amount of carbon assets in the ECB’s portfolio “can’t change overnight” she said a “move to a gradual transition to eliminate this type of assets” was “something that needs to be done”.

“Primary mandate is price stability, of course,” Lagarde reasserted, “But it has to be embedded that climate change and environmental risk are mission-critical.” 

In practice, Lagarde committed to ensuring the ECB keeps playing an active role in the Network for Greening the Financial System (NGFS). But she also went further in sharing her personal views, for example by saying that she saw “no reason why the ECB could not make use of the taxonomy” that is being established by the EU to differentiate green assets. Quite remarkably, she also distanced herself from the ECB’s dogmatic principle of “market neutrality” under which the ECB, when conducting asset purchases, tries to mirror the composition of the market. “Once adopted by the European Parliament, the taxonomy can superimpose market neutrality,” she said.

Overall, climate change clearly dominated the discussion during the hearing, showing how important the Parliament’s determination to push the ECB to go green has become.

3. Better communication and dialogue with citizens and civil society

In her opening remarks, the nominee candidate to the ECB also stressed her willingness to make the ECB more “inclusive” and open to dialogue with citizens and civil society. But how could this look, in practice? 

In her response to the French MEP Damien Carême, Lagarde signalled her willingness to establish a regular dialogue with civil society, given her positive experience at the IMF:

“I can tell you that when I was at the IMF we organised in a systematic and intensive way this kind of consultations with civil society organisations. Even though we did not, of course, agreed on everything, it was very fruitful as it is fundamental to explain to NGOs what we do and push the boundaries of our institution. I can’t promise it will be done but I recognise the usefulness of these meetings.”

This statement comes in great support of our request for an annual dialogue with civil society organised at the ECB. In June, we co-signed an open letter with 14 other NGOs demanding such an initiative. 

On a similar note, French MEP Yon-Courtin asked Lagarde what was her strategy concerning the ECB’s communication: how to make the action of the ECB more understandable, open and concrete for people? 

“I think an Annual Dialogue is not enough,” Lagarde responded. “We need to use a language that can be understood by any citizens. For example, at the IMF I asked my staff to not use abbreviations. I think we have to limit the use of jargon so that people can grasp what the ECB does, its actions. We need to refresh the language of the ECB, and I hope the Governing Council agrees with me.”

4. Improving Diversity in the ECB

Set to become the first female president of the ECB, great expectations are also resting on Lagarde’s shoulder that she will dismantle the long-standing lack of diversity in the ECB. 

Lagarde has made female empowerment a key goal for the IMF since joining in 2011. The Fund’s research on this topic evidenced that banks would be more stable if there were more women on their boards. 

Her commitment to more diversity and inclusion was demonstrated during her time as managing director of the IMF. In fact, the IMF’s 2020 goal of 30 per cent of management positions filled by women has almost been reached by the Fund, tripling the ratio from ten years ago. It is positive that Ms Lagarde sounds committed to expand the IMF’s best practices to the ECB.

In comparison to the IMF, the ECB hasn’t reached yet its recently adopted gender targets. A challenge Ms Lagarde seems ready to address. “I am confident that the ECB can achieve significant further improvements in gender balance – and in the diversity of its workforce along with several other metrics” she replied in the parliament’s questionnaire. We are hopeful the leadership of Lagarde in the Executive Board will boost the ECB’s efforts in this regard.

Importantly, Lagarde’s commitment for diversity goes beyond the restrictive issue of gender. In her opening statement, Lagarde insisted that “Diversity means drawing on all talents from all backgrounds, and committing absolutely to all people being treated equally – be that on the basis of gender, race or nationality.“ She also pointed out the importance of “diversity of thoughts.”

5. Enabling a sustainable recovery for Greece

The mismanagement of the Greek crisis is at the core of criticism against the IMF – and of the perspective of having Christine Lagarde leading the ECB. 

Nevertheless, it is worth reminding that the IMF was the only Troika institution which officially apologised for the mistake made during the crisis. 

The Fund also expressed important dissent against the EU’s establishment. Back in 2015, the IMF’s director stated that a restructuring of Greece’s debt was essential so that the future of the Greek economy could be sustainable, a view which was directly conflicting with the one of the European Commission and of the ECB.

During the parliamentary hearing, Lagarde was asked by Dutch MEP Paul Tang whether she still subscribed to the IMF’s view that the target for the primary surplus 3.5% is unrealistic.

“We have been consistently – and we have been on record – to say that 3.5% primary surplus is in our view – IMF – and I’m speaking here still in my capacity – is excessive and is putting unduly pressure on the recovery of the Greek economy as it is hoped for,” Lagarde replied.

Following recommendations from Transparency International and the European Parliament, Lagarde also lent support to a recent decision by the ECB to revise and limit its mandate when part of the Troika.

Christine Lagarde and the return of politics in central banking

It is fair to say that many of Positive Money’s supporters feel very suspicious and sceptical at the prospect of having the former IMF’s director at the ECB’s helm. Yet so far Lagarde has made several important breakthroughs during the hearing, remarkably on climate change. She also stressed her willingness to review the ECB’s monetary framework, which will open the door for more reflection on the needed evolution of the theoretical framework and instruments of the ECB. As we wrote back in July, whatever one may think of Lagarde, she embodies the return of politics in central banking. And this, in itself, is a good thing.

Of course, Lagarde’s vision for the ECB will only materialize if she convinces the 24 other members of the ECB’s Governing Council to follow her lead. This is far from reality. 

As always, radical change does not happen without constant scrutiny, tireless pressure, and bold political convictions. Positive Money Europe is committed to keeping advising democratic representatives, institutions and civil society groups who share our vision that the ECB should contribute to a fairer, more democratic and sustainable economy. Count on us!

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