What does Christine Lagarde, as ECB president, need to do to tackle Europe's stagnant growth? (Part I)
The Big Question on the central bank's newly appointed head
With Christine Lagarde now at the helm of the European Central Bank (ECB), eight industry experts give their views on what she needs to do improve the continent's financial health.
Photo: IMF Photo/Stephen Jaffe/Flickr CC BY-NC-ND 2.0
Aneeka Gupta, associate director, research at WisdomTree
Boost Investment
Europe's chief problem is not one of lack of access to capital for companies or high cost of capital, but rather one of deficient external and internal demand.
Due to external shocks such as trade wars, Brexit and China's slowdown, global demand conditions remain weak.
Owing to this, fiscal policy in Europe, which remains tighter than it needs to be, must do more in order to support internal demand conditions. It is becoming increasingly evident monetary policy alone cannot fix Europe's problems.
I believe Christine Lagarde's chief role will be to convince countries with budget surpluses, such as the Netherlands and Germany, to invest more to support growth.
There is currently deep division within the ECB. Reports following the ECB meeting indicate nine out of the 25 members of the Council expressed their opposition to the latest easing package announced by former ECB president Mario Draghi.
In this regard, Lagarde will also be tasked with improving the coherence among members of the ECB governing council.
Finally, in doing so Lagarde will be able to provide effective and credible communication to investors by representing a united front for the governing council.
Ed Smith, head of asset allocation strategy research at Rathbones
Comprehensive restructuring
The eurozone underwent a textbook, property-led banking crisis, and the textbook on banking crises is large and conclusive. Scores of case studies covering 125 years of history tell us you cannot just chuck liquidity at the problem.
Unless you restructure comprehensively the balance sheets of the lenders involved – and, preferably, the borrowers too – a banking crisis is highly likely to recur.
Our conversations with current and former policymakers suggest a limited appetite for any federal programme, but history suggests this could do wonders to resolve underlying structural issues that are constraining European growth.
Christine Lagarde should find the political will to create an independent restructuring agency that establishes a rules-based restructuring programme free from political interference. This could also involve a temporary asset management company – a so-called 'bad bank'.
The stable intermediation of funds between savers and borrowers is an essential feature of prosperous economies. If Lagarde could set up the institutions necessary to give investors confidence that this is a feature of the eurozone economy, the results could be transformative.
Stewart Robertson, senior economist at Aviva Investors
Fiscal expansion
In his last press conference, former ECB president Mario Draghi was asked what advice he would give the incoming Christine Lagarde. He diplomatically replied that none was needed: "[s]he knows perfectly well what she has to do."
Asking what should be done to “"tackle Europe's stagnant growth" may be the wrong question. Growth averaged 1.3% a year under Draghi, the same as under his predecessor, Jean-Claude Trichet.
Trend growth in the eurozone is no higher – it might become lower as society ages. Central banks can do little about this.
Lagarde will need to maintain the position of extreme policy stimulus and push for governments to help out with expansionary fiscal programmes where there is room.
Draghi opened this door recently and Lagarde should have no trouble pursuing the case, given her previous role as head of the International Monetary Fund (IMF). She will also continue to argue for longer-term structural reforms.
Lagarde will be judged more favourably if she can preside over an interest rate hike and a higher rate of inflation.
Another key, and delicate, area is enabling closer integration in the region. The ECB cannot make this happen but could make it difficult. It is hoped – and expected – that Lagarde will facilitate, not obstruct.
James Dowey, manager of the Liontrust Global Equity fund
Reduce divisions
I would like to see Christine Lagarde do three things at the ECB. First, further Mario Draghi's efforts in committing the ECB to doing 'whatever it takes' to jumpstart economic growth in the eurozone.
The ECB is currently doing quite a lot to help but its efficacy is a function of the credibility of its commitments to stick at it. Everyone knows there are serious divisions at the ECB and Lagarde needs to take control on day one.
Second, get to the bottom of the potentially counterproductive effects of negative interest rates on economic growth and the banking sector in particular. Get a good understanding of the issue, be honest about it on the ECB's behalf and, if necessary, come up with new tools.
Third, be crystal clear in the public domain and behind the scenes that while the ECB must do everything it can, it can only do so much.
Basic economics tells us that with the eurozone economy close to recession, inflation below target and interest rates below zero, the ball is really in the court of the EU Council and eurozone governments to reassess obsessive fiscal rules and go for growth.
Ewan Millar, senior investment manager at Cornelian Asset Managers
Political prowess
Mario Draghi, before his imminent departure as ECB president, has largely set the scene for the incoming Christine Lagarde.
In September's ECB board meeting the deposit interest rate was further reduced from -0.4% to -0.5%, and the resumption of the €2.6trn quantitative easing (QE) programme was announced, due to begin in November at €20bn of assets per month.
In this context, Lagarde's options do appear somewhat restricted and the road ahead fairly clearly mapped out. Beyond this, resorting to unconventional monetary policy has been mooted, particularly since, in 2016, Draghi admitted to finding the concept of so-called helicopter money “very interesting”. However, this policy is untested, unsure and unlikely.
Notwithstanding a broad recovery in global trade and a general pick-up in economic conditions, Lagarde's most probable route to success with regards to tackling Europe's growth problems is likely to rest in her using her experience as a politician as much as her prowess, or lack thereof, as an economist.
If she is able to help persuade Germany and other northern European nations to open the fiscal tap – something that her predecessor has tried and failed to do – then she may, in hindsight, prove to have been a very astute appointment.
Silvia Dall'Angelo, senior economist at Hermes Investment Management
Co-ordinated fiscal policy
The dawn of fiscal activism fundamentally changes the role of the ECB and its chair. Christine Lagarde's most important role will shift from policy-setter to 'chief mediator', in a context of closer coordination between monetary and fiscal policy.
A one-size-fits-all monetary policy – that has largely run out of road – should be complemented by coordinated fiscal policy within a supranational framework.
Such an approach should provide an effective response to asymmetric shocks and a truly counter-cyclical structure, which allows for convergence, while also ensuring the stability of the eurozone as a whole.
Ultimately, Lagarde's input on fiscal policy will be limited to the advisory domain and other policymakers – national governments and European institutions – will have to step in.
Post-Draghi's 'whatever-it-takes' era, the progenitors of a fiscal framework fit for a world of negative rates must be equally activist and brave in their intent, as they take up the mantle to sustain future economic growth.
Andrea Iannelli, investment director at Fidelity International
Political acumen
The incoming ECB president Christine Lagarde will have plenty on her plate, bearing the weight of Mario Draghi's legacy with little ammunition left and growing discontent within the governing council around the latest QE programme.
She will have to use all her political skills to navigate still-troubled waters, amid trade wars and a slowing domestic economy.
On the monetary policy front, we therefore expect continuity and the new ECB leadership to remain accommodative. While a new 'sovereign crisis' is not currently on the radar, the latest round of asset purchases is unlikely to prove sufficient, given the weakness of the economy.
We therefore expect the ECB to ramp up its efforts in spite of the internal discontent. Expect upsizing in asset purchases, a bigger balance sheet and yet lower rates, but no major uplift to ensue.
With limited room for further manoeuvres, it will be all the ECB can manage to keep the eurozone economy on a stable, albeit very slow, growth path. Indeed, further asset purchases and even more negative interest rates may prove detrimental in the long run.
Negative rates, in particular, place a heavy burden on banks' profitability, challenging their traditional business models, while forcing savers to take additional risks in their search for a positive income stream.
Mohammed Kazmi, portfolio manager at Union Bancaire Privée
Fiscal stimulus
In the near term, Christine Lagarde's most important role will be to convince governments within the eurozone that now is the time for fiscal stimulus to boost growth effectively.
She will be aware that incremental easing through monetary policy will have only a limited impact on the real economy given how easy financial conditions already are and, as such, it is time for governments to not only pick up this burden, but take advantage of historically low and negative interest rates.
Given her experience of dealing with heads of state, Lagarde appears to be well placed to pursue this aim, focusing on countries such as Germany, which has the fiscal space, as well as the need to provide effective growth-supportive measures.
Within the ECB itself, Lagarde's main role will be to rebuild a consensus on the board, as the decision to restart QE was clearly not a unanimous one, where showing a united front will provide a clearer message for investors.
Given a lack of inflationary pressures still, it is imperative for Lagarde to make sure the bank maintains accommodative monetary policy, so that the hard work of previous years is not undone.
With Christine Lagarde now at the helm of the European Central Bank (ECB), eight industry experts give their views on what she needs to do improve the continent's financial health.
The former head of the International Monetary Fund became the central bank's first female president, succeeding Mario Draghi.
But on her appointment, she inherits a Europe plagued by political turmoil and growing unease towards the single market.
Eight executives tell Investment Week what Lagarde needs to do to overcome those challenges.
- Topics
- Europe
- Equities
- Markets
- christine lagarde
- European Central Bank
- ECB
- International Monetary Fund
- mario draghi
- Europe
- Ewan Millar
- Silvia Dall’Angelo
- Andrea Iannelli
- Mohammed Kazmi
- Stewart Robertson
- central banks
- monetary policy
- Restructuring
- fiscal stimulus
- fiscal policy
- Ewan Miller
- Ed Smith
- James Dowey
- Aneeka Gupta
- WisdomTree
- Rathbones
- Aviva Investors
- Liontrust
- Cornelian Asset Managers
- Hermes Investment Management
- Fidelity International
- UBP
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