(Bloomberg Opinion) -- As Christine Lagarde takes over as president of the European Central Bank this week, the job looks less daunting than what greeted her predecessor, Mario Draghi, in 2011. Don’t be misled. Thanks to his efforts, the euro system is no longer in imminent danger of breaking apart. But this certainly doesn’t mean all is well. Sooner rather than later, in fact, the problems that Draghi suppressed are likely to resurface.
What’s more, when they do, the ECB’s tools will be much less powerful than before. As the former head of the International Monetary Fund, Lagarde is well-versed in the issues. Her main task is to help Europe’s political leaders to see the danger — and to persuade them that, next time around, they’ll need to shoulder much more of the economic-policy burden.
The ECB’s inflation target is “below, but close to, 2%.” Prices in the euro area are rising at just 0.8% (which isn’t close) and meanwhile Europe’s economies show signs of stalling. Yet interest rates can’t go much lower — the ECB’s deposit rate is already minus 0.5%. The central bank is resuming its bond-buying program, but quantitative easing hasn’t been as potent as hoped, and the ECB is bumping up against legal and political constraints on its use.
Compounding Lagarde’s difficulties is the split on the ECB’s Governing Council. This was laid bare last month, when seven members opposed a new round of monetary loosening, and one from Germany resigned in protest. The hawks are led by a “Germanic” core (from Germany, Austria and the Netherlands). Some of them oppose low rates, and all of them reject QE. Germany has nominated a less trenchant critic, Isabel Schnabel, to replace its outgoing board member, but the new leader of Austria’s central bank, Robert Holzmann, says he wants to overturn the ECB’s whole “neo-Keynesian paradigm.”
Lagarde can’t hope to stifle such voices, so she’ll have to win the argument. Moreover, she’ll need to be seen as winning, otherwise investors’ expectations will be destabilized and monetary policy will lose even the limited effectiveness it still retains. To this end, Lagarde should end the ECB’s unusual practice of keeping its minutes secret: Make the debates transparent, prevail over the dissenters, and insist on collective responsibility for the bank’s decisions.
That will be difficult — but not as difficult as her other big task. She must convince the euro area’s political leaders that monetary policy can no longer work without the help of fiscal policy. Draghi and his predecessor, Jean-Claude Trichet, both tried to get this message across, and failed. Germany and some other economies have ample room to increase government spending or cut taxes, thereby boosting aggregate demand, but they’ve held back. Collectively, despite very low inflation and sagging demand, the euro-area countries are providing negligible fiscal stimulus.
Lagarde should make the case for closer fiscal coordination, and preferably for a jointly devised budget for the euro area. Every other currency union has one. The euro area cannot be the exception and expect to remain intact.
Asking Europe’s central-bank technocrats and national politicians to focus more closely on the needs of the whole euro area, and not just on the needs of their own national economies, amounts to a cultural revolution. It falls to Lagarde to lead it.
Editorials are written by the Bloomberg Opinion editorial board.
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