Lagarde’s ‘agenda’ is a risk for the ECB

The Christine Lagarde-era at the European Central Bank (ECB) is barely a week old, but these first few days raise concern that her political agenda risks undermining trust in the institution.
More specifically, Lagarde is expected to use the might of her new position to push through ideas that European elites prefer, such as closer fiscal coordination, but that broader populations are uneasy about in general. Using a central bank as a blunt instrument to force controversial political goals is not a good idea, but Lagarde appears poised to take the ECB in this direction. In an interview with French radio RTL, Lagarde said: Those that have the room for maneuver, those that have a budget surplus, that’s to say Germany, the Netherlands, why not use that budget surplus and invest in infrastructure? Why not invest in education? Why not invest in innovation, to allow for a better rebalancing?
It’s normally the job of elected officials to tell the Germans they are not spending enough on schools, or the Dutch that they have too many potholes, not the head of their collective central bank. Will the French head of the ECB take the next step and punish Germany if it does not spend on schools to the level she thinks is appropriate?
Central bankers have long understood the risk of unelected technocrats making such statements. Europe’s populist movement is, in part, a pushback to just these types of technocrat demands, but Lagarde risks further inflaming the situation.
Regarding negative interest rates, most bankers and insurance executives think they are a bad idea because they hurt the foundation of the financial system. Lagarde suggests they are a good idea and have made things better, as she also said.
Would we not be in a situation today with much higher unemployment and a far lower growth rate, and isn’t it true that ultimately we have done the right thing to act in favour of jobs and of growth rather than the protection of savers?
Those savers, though, are often the poor with meager savings who lack the investment options afforded the rich. When Lagarde was asked why Europe is either close to a recession, or in recession, she responded that the problem is US President Donald Trump’s Twitter account, not any of the policies Europe has pursued.
Lagarde has also weighed in on so-called green bonds, or debt financing to fight climate change. She is in favor of using the ECB’s balance sheet to purchase them. A laudable goal, but a political one nonetheless.
If ECB’s policy is to increase its balance sheet to purchase green bonds, can it ever stop? What happens when the European economy turns around and inflation accelerates, and the ECB needs to shrink its balance sheet? Can it do so without being accused of putting the climate at risk? This is not a good position to be in for a central bank.
Lagarde shouldn’t use the power and prestige of the ECB to browbeat member countries into her priorities and agenda. If it continues, it has the potential to impact all central banks.
—Bloomberg

Jim Bianco is the President and founder of Bianco Research, a provider of data-driven insights into the global economy and financial markets. He may have a stake in the areas he writes about