Parachuting into the heart of enemy territory, Christine Lagarde on Friday began what’s widely viewed as one of her toughest tasks in the year ahead: to recruit her first allies in a campaign to restore legitimacy to the European Central Bank, starting inside its host country of Germany.
Lagarde arrives at the ECB at a time when Germany’s media has fomented opposition to the central bank’s ultra-lax monetary policy in a campaign often likened to the repeated attacks on Brussels by UK broadsheets such as the Daily Telegraph.
The first female president of the Frankfurt-based institution in its 21-year-history, Lagarde has openly spoken of her conviction that gender can be a powerful asset when faced with adversity.
Introducing her to the Frankfurt finance community at the European Banking Congress last week, Commerzbank CEO Martin Zielke alluded to such remarks before welcoming her to the stage for her inaugural speech as ECB President.
“She is ideally suited to serve as guardian to our common currency in these unsettled times… Describing her appointment to the IMF in 2011, she said ‘Whenever the situation is really, really bad, you call in the woman,’” Zielke told the audience. “We hope the situation will only get better, and we are absolutely delighted that the ECB has called you in.”
Lagarde then took the podium and warned that government investment remains materially below levels prior to the global financial crisis. She called on member states to loosen public purse strings in an effort to make the euro area more resilient to the slowdown in global trade. Germany in particular has come under fire for refusing to open the fiscal spigots in a bout of countercyclical spending, despite its unique ability to borrow out to thirty years at negative interest rates.
Getting the Germans to spend
Lagarde addressed Berlin’s concerns about government profligacy as a contributor of the euro area sovereign debt crisis, arguing spending was prudent so long as it targeted an increase in overall output per unit labor cost.
“If countries boost growth by investing in productive areas of the economy, it not only lifts demand in the short run, it also provides the ingredients for maintaining competitiveness in the face of long-run global challenges,” she explained.
While exports serve as a “vital shock absorber,” Lagarde insisted a rebalancing of the economy towards internal demand would allow the euro area to better withstand external shocks and protect jobs. Consumption tends to be linked to labor-intensive services rather than capital-intensive manufactured goods, she argued.
“(Current account) surplus countries tend to grow faster than the world economy during periods of global upswings, but also contract more sharply during periods of global downturns,” Lagarde said, adding the opposite was true for deficit countries.
Her comments won praise from event sponsor Deutsche Bank, which has only recorded a full-year profit once in the period since the ECB began driving rates lower in 2014.
“Madame Lagarde, this was the most encouraging speech I’ve heard over the last two or three years on Europe,” said CEO Christian Sewing, adding her idea of sustainable growth could “eliminate the right and left wing (political) extreme.”
Whatever it took
Upon its creation, the ECB was intentionally headquartered in Frankfurt in the hopes that its proximity to the Bundesbank, long the postwar institution most trusted by Germans, would lend the fledgling central bank legitimacy.
Lagarde’s predecessor Mario Draghi steadily eroded support for the ECB, however, by radically, critics say, re-interpreting its mandate to include outright quantitative easing in a bid to “do whatever it takes” to save the euro.
Shortly after Draghi reinstated large scale asset purchases using fresh central bank money in September, his German Executive Board member, Sabine Lautenschläger, resigned in a move that experts said exposed deep divisions within the ECB. Meanwhile, conservative tabloid Bild published a picture of the Italian brandishing photoshopped vampire fangs next to the headline, “Count Draghila is sucking our accounts dry,” and claims that billions of euros of savings were lost due to his inflationary policies.
Unlike Draghi, the former Goldman Sachs investment banker, Lagarde is more of a bridge-builder. During the eurozone’s sovereign debt crisis, she formed a close professional relationship with her fellow German finance minister, austerity disciplinarian Wolfgang Schäuble, by finding common ground in their shared dedication to the European project.
Speaking to Quartz in an interview, Lagarde said women are ideally suited to take on the really challenging assignments “when the financial situation is really poor, when budgets have been blown, then there are opportunities for women,” arguing male candidates often fear they may not be associated with success. “As a former central bank governor said to me… ‘The men go to war and the women pick up the pieces’”
Appointed for an eight-year term this autumn, Lagarde won out over potential rivals including Bundesbank chief Jens Weidmann. Long a favorite to become the first German to hold the post, Weidmann’s overtly hawkish views ultimately cost him support among members of the policy-setting Governing Council.
Attending the same Congress, Weidmann called on Lagarde’s upcoming strategic review to include an analysis of how Draghi’s ultra-lax monetary policy, which introduced sub-zero interest rates and fines on excess bank reserves deposited at the ECB, might affect risks to price stability in the longer term beyond the bank’s policy horizon.
There seems to be little animus between the two. Weidmann expressed his support for the message Lagarde brought with her to Germany. If she succeeds in browbeating Germany into spending more to boost productivity, it might ultimately address some of Weidmann’s longstanding concerns over financial imbalances as a result of rates being too low for too long.
“Near the effective lower bound of interest rates, fiscal policy is less at risk of crowding out private demand,” he told EBC participants. “Under current conditions, this makes it a potentially powerful instrument if economic developments were to take a marked turn for the worse.”
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