Assuming her nomination is confirmed, Lagarde will not only have to follow in the footsteps of Draghi, regarded in Europe as the man who saved the eurozone and the “European Project” in the aftermath of the financial crisis, but she will be doing so at a delicate moment for the eurozone economy.
It was Draghi who, in 2012, declared that the ECB would do “whatever it takes” to stabilise the eurozone in the midst of a financial crisis that threatened to see the fragmentation of the bloc under the weight of a financial crisis that had enveloped southern Europe.
Greece was on the verge of exiting the eurozone as its debt levels threatened to overwhelm it and other economies like Italy’s and Spain’s were wobbling.
Draghi did just that, with the ECB embarking on a European version of unconventional monetary policies that saw it acquire €2.6 trillion ($4.2 trillion) of mainly sovereign bonds – about 90 per cent of the bonds issued by eurozone governments since 2012 – to hold interest rates down before the program was halted last December. The central bank also cut the interest rate it pays on bank reserves to minus 0.4 per cent.
While the asset-purchasing program ended in December, Draghi last month signalled that it might be re-started imminently, with eurozone growth faltering again.
That drew a fierce reaction from Trump.
“Mario Draghi just announced more stimulus could come, which immediately dropped the euro against the dollar, making it unfairly easier for them to compete against the USA. They have been getting away with this for years, along with China and others,” he tweeted.
The euro has been weak relative to the US dollar but, given the weaker growth in Europe relative to the US and the interest rate differential between the two economies, that is what one would expect.
Lagarde won’t take up her new position until November 1, which probably means she will inherit a renewed program of ECB monetary policy stimulus, and become a focus for Trump’s ire.
She has in the past been supportive of Draghi’s policies and, while there might be some resistance from Germany, is expected to maintain the “dovish” approach established by him.
The likelihood that the ECB will be forced to adopt more unconventional policies has led some to question whether someone with no central banking credentials (Lagarde was a highly-credentialed lawyer before entering politics) will be able to cope with raft of challenges confronting the eurozone.
Lagarde’s IMF and political experiences and the esteem in which she is held by world leaders may prove useful in negotiating the complex eurozone internal politics and producing a consensus around European monetary and fiscal strategies.
She and the eurozone are, however, going to be very dependent on her ECB staff to develop and implement the bloc’s next suite of unconventional policies.
There are some particular technical issues that she may have to resolve, if Draghi doesn’t solve them for her before he departs.
The ECB’s bond-buying program was funded with liquidity provided by the central bank, with the national central banks of the eurozone members doing the actual buying. On average, those central banks own more than 20 per cent of each other’s debt, pushing up towards the ceiling of 33 per cent of the debt of any individual government imposed by its governing council’s rules.
The ECB will either have to negotiate an increase in the ceiling or the ability to buy a broader suite of assets – corporate bonds, for instance – if it wants to embark on another large-scale bout of bond buying.
Also, while it could cut the rate it pays on the bank reserves it holds, moving further into negative territory would squeeze the profitability of the already vulnerable eurozone banks even harder.
There are also more macro challenges, like Brexit, or the debt-laden Italy’s breaches of European Union fiscal rules, or the global economic slowdown to which Trump’s trade conflict with China has contributed.
With von der Leyen, Lagarde will also have to respond to the very real prospect that the Trump administration will follow through with its threat to slap more tariffs on European exports to the US. The eurozone isn’t in great shape to respond to a full-blown trade war with the US.
With China’s growth rate slowing and a questionmark over the sustainability of US growth, the outlook for the rest of the world if the second-largest economic zone were to fall back into recession would be bleak.
Stephen is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.