Following intense negotiations, EU leaders agreed in early July on the succession plan for the presidency of the EU Commission and the ECB.
- Ursula von der Leyen, Germany’s defense minister, emerged as the compromise candidate for President of the Commission
- France’s Christine Lagarde will head up the eurozone central bank
- Belgium’s Charles Michel becomes president of the European Council
- Spain’s Josep Borrell will be the EU’s head of foreign affairs
Unlike previous ECB presidents, Largarde has never been head of a national central bank. She is also a lawyer, not an economist, by training.
A wealth of experience
However, Lagarde brings to the table a wealth of national and international experience. Her deep understanding of both the private and public sectors and her experience at the IMF suggest that she has the political knowhow and gravitas to build bridges across the political landscape, and to collaborate with policymakers in various institutions. These are exactly the qualities that the ECB needs right now given its limited toolbox, at a time when economic growth is slowing, inflation is stubbornly low and global trading relationships are at a precarious stage.
At the IMF, Lagarde joined the ECB and the European Commission in orchestrating a bailout for Greece, whose debt load put the eurozone and the euro at risk.
Should an Italian debt debacle threaten the euro during her presidency, investors should feel assured that Lagarde will be able to go beyond the constraints of her position and collaborate with other institutions to find the right policy mix.
Continuity and a capacity to deal with the challenges the eurozone may face
Lagarde’s appointment is welcomed by financial markets as signs of continuity beyond Draghi’s term.
Firstly, the fact that some of the more hawkish and radical candidates were being side-stepped pointed to a high likelihood of the ECB continuing on the dovish path currently set by Draghi.
One could also argue that Draghi could use his remaining ECB meetings to set the course through 2020, which would then allow time for Lagarde to fully settle in and take full control of the organisation, before launching a review on the ECB’s tools and targets in the near future.
Secondly, in the aftermath of the sovereign debt crisis, Draghi and the ECB have made numerous call for structural reforms and a setup in efforts from other policy areas to bring about higher inflation. Lagarde’s support for further integration of the euro area, her openness to unconventional monetary policy, and her varied experience would allow her to gravitate towards the major political challenges facing the eurozone when dealing with the next crisis or economic downturn.
This is an extract from the second quarter 2019 Inflation-Linked Bonds Outlook, published on 12 July.
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Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.