Christine Lagarde Won, but This Isn’t a Game

by Adam Tooze – July 3, 2019

Foreign Policy

Europe is celebrating new leadership, but its central bank will have to confront problems that have no easy answers.

The haggling over the European Union’s top jobs has been a remarkable drama. The effort by German Chancellor Angela Merkel to broker a deal for Europe at the G-20 summit in Osaka, Japan, last week was shot down in flames. It was perhaps the most embarrassing reversal of her career, whether in Germany or in the European arena—although she eventually saved face by securing the European Commission’s presidency for a political ally, German Defense Minister Ursula von der Leyen.

But the game of musical chairs was not just a spectacle. It has real significance—and poses real risks. Act by act, Europe could be seen working its way toward a unique type of transnational politics. There’s reason to fear, however, that all the attention devoted to politics came at the expense of looming questions of policy.

The eventual outcome is certainly no victory for democracy at the European level. In the race for the top jobs, the so-called spitzenkandidaten who headlined the EU parliamentary elections in May were sidelined. Rather the process has confirmed once again the priority of national leadership. France and Germany each got one of the top jobs—von der Leyen for the commission presidency, IMF Director Christine Lagarde for the presidency of the European Central Bank (ECB).

But the process has also demonstrated that within the EU, a wider array of states matter than ever before. The Eastern Europeans are making their voices heard. It was above all their opposition that killed Merkel’s plan to install a leading Dutch social democrat, Frans Timmermans, as European Commission President Jean-Claude Juncker’s replacement. The process has also affirmed the priority of party loyalty. Both the top positions have been claimed by members of the center-right European People’s Party—before directing the IMF, Lagarde served as a minister in the cabinets of the center-right presidents of France Jacques Chirac and Nicolas Sarkozy. And, as Lagarde’s critics point out, she shares the legal troubles of her bosses, having been previously convicted on charges of “negligence with public money” in the Bernard Tapie affair.

Nationality, party, and political identity were all crucial to the selection process. By contrast, the specifics of policy barely entered into the discussion. This is what made the question of who got the top job at the ECB different. The presidency of the ECB, as the EU’s one truly federal institution, is not just the most powerful position in Europe, far more significant than the commission presidency. It is one of the most significant policymaking positions in the world.

After the U.S. Federal Reserve, the ECB is the most influential central bank in the world. After the dollar, the euro is the second most important reserve currency and the only one likely to seriously challenge America’s exorbitant privilege. And the ECB has work to do. Since the beginning of 2019, the eurozone has been limping badly. The pressure on the ECB to respond with more monetary stimulus is, if anything, even more intense than it is on the Fed. At the same time, Italy’s financial health continues to be a major worry. 2018 revived fears of a so-called doom loop between weak public finances and weak bank balance sheets; in extremis, only the ECB could break that circuit.

It would be simple to say that in choosing ECB President Mario Draghi’s successor it should be competence that decides the appointment and then go on to reiterate the familiar lines about ECB independence. But that mantra belongs to the age gone by when wonkish characters like then-Fed Chair Ben Bernanke ruled the roost. Lagarde is a lawyer and politician, not an economist. She has no operational experience at a central bank. Following the non-economist Jerome Powell’s appointment to the Fed last year, her nomination signals the end of the age of the central banker as super wonk. Rather than raising howls of outrage, the appointment of a skillful politician-lawyer for the top job at the ECB should be taken as a sign of the times. Lagarde’s appointment is political through and through and as such does justice to the pivotal position that the ECB occupies in the EU’s evolving political economy.

As the crisis of the eurozone demonstrated with painful force, the dividing line between politics and economics is not a given but has to be constantly renegotiated. Draghi is no doubt a brilliant policy intellectual. But his success has depended no less on his diplomatic skills and his clear alignment with the political project of consolidating the European monetary union. This was the mission on which he embarked at the Italian Treasury in the 1990s. The record of fiscal rectitude he acquired in that role is what won him the trust of Berlin. Without it, he would never have dared in July 2012 to issue his famous declaration that the ECB stood ready to do “whatever it takes” to stabilize the euro. Nor in 2015 could he have embarked on a dramatic quantitative easing program. And as Draghi has also demonstrated along the way, the ECB boss needs a politician’s thick skin.

As has been obvious for the last decade, if the ECB acts like the central bank of one of the world’s largest economic blocs—supporting public bond markets and ensuring that prices even in the weaker parts of the eurozone do not slump into deflationary territory—this is unlikely to play well with German conservatives and their allies in Northern and Eastern Europe. On the other hand, a policy that plays well with the right wing in Northern Europe is quite likely to blow the eurozone up. Given the painfully slow progress in making the eurozone stable and Italy’s dangerous debt burden, the risk of a catastrophic crisis is real. This is what made the question of who would succeed Draghi so critical, not just for Europe but for the global financial system.

Jens Weidmann, who as Bundesbank chair was the leading German candidate for the job, was long regarded as the front-runner. He is a savvy central banker who has recently made some effort to show ideological flexibility. But he also had an unfortunate track record of pandering to German conservative public opinion. Most disastrously, he disowned Draghi’s promise to do “whatever it takes” at the most dangerous moment in the summer of 2012. If he had thrown the weight of the German central bank squarely behind the ECB at that moment, he would have been a shoo-in for the ECB presidency this summer. But he opted instead to pose as the defender of German savers against monetary experiments.

And the fact is that Axel Weber, Weidmann’s predecessor at the Bundesbank, did the same to Draghi’s predecessor, Jean-Claude Trichet, in 2010, disowning his desperate efforts to stabilize the markets by means of bond purchases. Issues of character aside, the problem is structural. German Bundesbankers enjoy their vaunted independence at the indulgence of other political players. They either toe a rigidly conservative line, or the powerful German media, the Bild and Frankfurter Allgemeine newspapers in the lead, will make them pay the price. After the torture inflicted on the eurozone between 2010 and 2015 by Berlin, many of its members were determined not to have a German at the helm of the ECB. On the other hand, a head-on clash over Weidmann’s appointment would have been ruinous and would likely have exacerbate Euroskepticism in Germany.

Originally published in Foreign Policy.