Christine Lagarde Must Learn to Run an Economy That’s Slowing to a Crawl

She doesn’t have the typical résumé — no doctorate in economics, no post as a central banker — for running the body that sets monetary policy for one-fifth of the global economy. But investors are betting that Christine Lagarde, the surprise nominee to be the next president of the European Central Bank, will act in much the same way as the bank’s last leader.

Interest rates fell to record lows in the days after she was named, a clear sign they expect her to follow her predecessor, Mario Draghi, and do “whatever it takes” to protect the euro and keep easy money flowing.

But the background of Ms. Lagarde, who is the respected managing director of the International Monetary Fund, has raised some questions, beyond the usual political intrigue, about her candidacy.

Ms. Lagarde, a lawyer, will take over at a time of economic uncertainty. Growth in the eurozone has slowed to a crawl, and central banks in the United States, Japan and Europe have largely exhausted their arsenals of stimulus measures.

The organization overseen by Ms. Lagarde warned as much on Thursday. “Even in the absence of a major shock,” the I.M.F. said in a report prepared before her nomination, “there is a danger that the area could enter a prolonged period of anemic growth and inflation.”

European finance ministers easily endorsed Ms. Lagarde last week. The European Parliament and the European Central Bank’s governing council will now weigh in, though neither has the power to block her from taking charge Nov. 1. Here is what they will be talking about.

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CreditClodagh Kilcoyne/Reuters

There is plenty of precedent for people without advanced economics degrees to run central banks. Jerome H. Powell, chair of the Federal Reserve, trained as a lawyer. So did Ms. Lagarde before entering politics as a minister in the French government. Jean-Claude Trichet, president of the European Central Bank before Mr. Draghi, studied economics but did not have a doctorate. He spent most of his career as a civil servant.

Both Mr. Powell and Mr. Trichet had central banking experience.

Ms. Lagarde’s most perilous moments, analysts say, will come when she cannot rely on a prepared text, like the news conferences that follow monetary policy meetings of the European Central Bank’s governing council. The sessions are broadcast live on the web, and financial markets react instantly to nuances in the bank president’s language. The president must display great finesse to avoid sending false signals. That has sometimes been a problem for Mr. Powell, despite his experience.

Ms. Lagarde may well commit a few gaffes as she finds her footing, said Edwin Truman, a fellow at the Peterson Institute for International Economics in Washington.

“That’s probably true of every person who rises to the level of central bank governor — there is a possibility to make a misstep,” Mr. Truman said. “She probably will need to learn a little bit of central bank speak.”

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Ms. Lagarde will become the European Central Bank’s president just as it is losing some of its finest economic minds.

Peter Praet, the chief economist, left in May after an eight-year term. Benoît Cœuré, a widely respected member of the bank’s executive board, will leave in December. And of course the bank will lose Mr. Draghi, who earned a doctorate in economics from the Massachusetts Institute of Technology. All have been pivotal in the bank’s efforts since 2011.

Philip Lane remains as the only hard-core economist among the six members of the executive board, which sets policy with the other 19 members of the governing council.

Mr. Lane, who was governor of the Central Bank of Ireland, has an enviable depth of practical and academic experience. He was previously a professor at Trinity College in Dublin, where he did groundbreaking research on how the movement of money across borders contributed to the 2008 financial crisis.

“It’s a reasonable assumption that she would rely a lot on the judgment of the chief economist and more experienced members of the E.C.B.,” said Ángel Talavera, an economist who follows the European Central Bank at Oxford Economics. The challenge, said two other economists who have observed her closely and asked not to be identified for fear of offending someone so powerful, is whether Ms. Lagarde has the economic know-how to recognize and challenge bad advice.

Mr. Trichet blundered in 2011, late in his term, when he raised interest rates, braking the economy even as the eurozone hurtled toward crisis. Jürgen Stark, the chief economist then and an inflation hard-liner, certainly influenced the decision. Mr. Draghi, who took office that year, quickly reversed the cuts.

Ms. Lagarde’s supporters point out that she has spent eight years at the I.M.F. and certainly learned a lot. One of the I.M.F.’s main functions is to monitor the economic performance of member countries, and the fund played a crucial role in preventing the collapse of Greece during the eurozone debt crisis.

But the I.M.F. does not have nearly as much power as the European Central Bank to determine the course of the global economy.

“The core monetary policy part of it is really hard, and that’s where she’ll have to come up a very steep learning curve,” said Krishna Guha, head of the global policy and central bank strategy team at Evercore ISI, a firm that advises investment banks.

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CreditFrancois Mori/Associated Press

Ms. Lagarde has a record as a strong manager.

She took over the I.M.F. when it was in crisis. Dominique Strauss-Kahn, her predecessor, was forced out in 2011 after being accused of sexually assaulting a housekeeper in a New York hotel. The charges were later dropped.

The I.M.F. “was in disarray,” said Douglas Rediker, who then represented the United States on the fund’s executive board. “One of the first things she did was restore the reputation, integrity and confidence of the I.M.F.,” said Mr. Rediker, now chairman of International Capital Strategies, a consulting firm.

Ms. Lagarde is known as a boss who scolds employees when they check their mobile phones during meetings. But she is also more informal than Mr. Draghi. During a visit to the European Central Bank in June, probably before she realized she could become president, she bantered easily with lower-level employees, according to a person who was present.

Ms. Lagarde once said she tried to do something for women every day, and can be expected to address gender imbalance at the central bank. Just two of the 25 members of the governing council are women.

Ms. Lagarde, who was the French finance minister before leading the I.M.F., may rely on her political skills to get eurozone governments to do more of the heavy lifting if there is another crisis, Mr. Rediker and others said.

That’s important because there is probably not that much more that the European Central Bank can do if the eurozone sinks into recession. Benchmark interest rates are at record lows. Countries like Germany that are in good financial shape could stimulate the eurozone economy by spending more on infrastructure. Eurozone leaders could agree on a common deposit insurance fund to strengthen the banking system.

“Everything in Europe, whether tacitly or overtly, has a political element to it,” Mr. Rediker said. “Christine Lagarde’s skills might be ideal for the E.C.B. at the current moment.”


Here’s a quick read on what they say:

Mr. Draghi, June 18, 2019:

In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required.

Ms. Lagarde, April 2, 2019:

Monetary policy should remain accommodative where inflation is below target, and should anchor expectations. Exchange rate flexibility should be used, as needed, to help absorb shocks.

QUICK TAKE: Central banks should step in if inflation is weak.

Mr. Draghi, June 18, 2019:

Monetary policy can always achieve its objective alone, but especially in Europe, where public sectors are large, it can do so faster and with fewer side effects if fiscal policies are aligned with it.

Ms. Lagarde, Oct. 5, 2017:

Of course, monetary policy is most effective when complemented with sound fiscal policies that promote long-term, sustainable growth.

QUICK TAKE: Moves by the central bank are most effective when they work in tandem with government spending policies.

Mr. Draghi, April 12, 2019:

The Economic and Monetary Union needs to be strengthened, first and foremost by implementing what has already been agreed and finishing the common projects we have started: completing the banking union, strengthening the operational capacity of the European Stability Mechanism in full compliance with Union law, and making ambitious progress on the capital markets union.

Ms. Lagarde, March 28, 2019:

Going on 20 years, the time is ripe for the euro area to show new resolve and complete the banking and capital markets unions — so it can harvest the benefits now and in the future.

QUICK TAKE: Deeper integration of the eurozone’s financial sector will make it stronger.

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