Will Lagarde conquer the ECB’s German picture downside? – Monetary Instances


This is a guest post by Melvyn Krauss, a senior fellow at Stanford University’s Hoover Institution, who writes here that that one of the most important markers of Christine Lagarde’s success as European Central Bank president will be whether she is able to fix the institution’s German problem.

Since the region’s economic crisis broke out, the eurozone’s central bank has continually found itself at odds with the economic and political establishment of the region’s most powerful country. They have lambasted almost every policy move the ECB has taken, with the central bank regularly on the receiving end of criticism in the mainstream media.

That has undermined the central bank’s actions and led to questions about the degree to which all of the region’s policymakers are committed to raising inflation and supporting growth.

Christine Lagarde has only been in office a few months, but there are signs the German thinking is moving closer to the views of the ECB.

While her predecessor Mario Draghi frequently pressed Berlin to spend more, it was only late last year — after Draghi left — that Germany’s powerful Bundesbank changed its tune on the topic.

Jens Weidmann, its chief, took a big step towards the ECB consensus when he told the Süddeutsche Zeitung in December that a fiscal stimulus would be appropriate for Germany. He even paid lip service to the new ECB president’s keenness to do more to combat climate change — though he is nowhere near as green as she on policy fundamentals.

One might speculate that the policy adjustments show the Bundesbank president knows which way the political winds are blowing in Berlin.

Indeed the recent behaviour of German Chancellor Angela Merkel in two respects suggests she would like to heal the rift between the ECB and many here.

The first involves communication.

Unfair, untrue and unanswered criticism of the EU in Britain helped Brexit gain traction in the UK. Mrs. Merkel is thought to be especially concerned that criticism of the ECB in Germany (for example, the headlines in German tabloids that the ECB is stealing the money of the German savers) could pose an existential threat to the euro if left unchecked and unanswered.

To address this, when Sabine Lautenschläger, a former Bundesbank VP and virtual mouthpiece for Weidmann, retired from the ECB’s Executive Board last year, Berlin passed over a Bundesbank insider to replace her on the Board in favour of Isabel Schnabel.

Why is Schnabel’s appointment so important? Because it breaks Weidmann’s virtual monopoly for explaining ECB policies to the German people.

Schnabel is an articulate economics professor who has not been shy in warning Germans of the dangers of making a scapegoat of the ECB.

In an interview in the German newspaper Handelsblatt, Schnabel said that “It is dangerous that [German] politicians, journalists and banks reinforce the narrative that the ECB steals the money of the German savers.”

While they might not always end up on exactly the same page as regards policies, Schnabel and Lagarde are singing from the same prayer book at least. In return, Lagarde has granted Schnabel the powerful role of market operations, the department which oversees the implementation of bank’s quantitative easing programme, one of its most controversial policies. 

It will help the ECB’s image here too that Lagarde has great communication skills and, according to Bloomberg, is studying German to be able to directly talk with and explain to the German people what the ECB is doing— and why.

Both factors should dramatically improve the narrative about the ECB in Germany — which is exactly what Mrs. Merkel wants to happen too.

A second area where Ms. Lagarde and Mrs. Merkel are on the same wavelength is the need for policy to fight climate change.

In her 2020 New Year’s message, the chancellor vowed to put all her energies into fighting climate change. “We must do everything humanly possible to deal with this challenge for humanity,” the chancellor said in her message.

What could be clearer? Don’t be surprised if Merkel soon starts talking about a green fiscal stimulus for Germany, which would fit perfectly with the views of the ECB president and also that of the ‘Green New Deal’ that ex-defence minister and now EU Commission president, Ursula von der Leyen, is promoting in Brussels.

Europe’s three female leaders—Merkel, Lagarde and von der Leyen– are feeding off one another to give Germany and Europe hope for a greener and brighter future. 

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