Lagarde’s Move to Top of ECB Makes Lane Her Monetary Brain

(Bloomberg) -- When Christine Lagarde takes over as the next head of the European Central Bank, one of the first people she’ll turn to is Philip Lane.

The Harvard-educated former Irish central bank governor, who’s been a consultant for the World Bank and Federal Reserve, could be the ECB’s most influential chief economist since Germany’s Otmar Issing at the birth of the euro two decades ago.

That’s because for all her leadership skills, Lagarde will be the first president without an economics qualification or a previous central bank career -- at a time when the euro zone’s need for stimulus will test the boundaries of policy innovation.

“There will really only be one person -- education and experience -- in monetary policy, and that will be Philip Lane,” Erik Nielsen, chief economist at UniCredit, said in a Bloomberg Television interview. “You could very well come into a situation like when the ECB started, when Otmar Issing was immensely powerful.”

Just one month into the role, Lane has already signaled he favors the aggressive approach to stimulus that marked the era of President Mario Draghi. In his first public speech as chief economist, he said this week that unconventional measures have worked and central banks must “proactively” respond to shocks.

Lane’s job is to write and present monetary-policy proposals for the 25-member Governing Council. While that’s done after consultation on the six-person Executive Board that Lagarde will lead, it’s typically closely linked to the staff economic projections that he’s also responsible for, giving him considerable weight.

His predecessor, Peter Praet, was seen as one of Draghi’s closest colleagues for the same reason. Yet Draghi was a former Bank of Italy governor and a highly regarded economist whose doctorate at the Massachusetts Institute of Technology was supervised by Nobel laureates.

Lane, 49, was an economics professor at Dublin’s Trinity College and ran the Irish central bank from 2015 until this year.

Lagarde, like Federal Reserve Chairman Jerome Powell, trained and worked as a lawyer. While her later roles as French finance minister from 2007-2011 and head of the International Monetary Fund since then have shown her to have a broad grasp of economics, the European Union leaders who nominated her this week mostly cited her leadership skills.

French President Emmanuel Macron said she has “the qualities and competence for the ECB.” German Chancellor Angela Merkel said her leadership was “convincing” and Lagarde “knows what she doesn’t know and perhaps will have to ask somebody.”

Leaders also suggested they voted for continuity by choosing someone who has previously endorsed the ECB’s unconventional stimulus. Lagarde was an early backer of ECB bond-buying.

The challenge for the central bank now though is that monetary policy might be getting much harder. Interest rates are already at record lows and the deposit rate is at minus 0.4%. A 2.6 trillion-euro ($3 trillion) bond-buying program, only capped last year, is running close to self-imposed limits.

Moreover, Lagarde’s Nov. 1 start date is also the day the U.K. is scheduled to begin life outside the EU -- possibly in a no-deal Brexit that shocks the continent’s economy.

If the ECB is to find room for more stimulus to fight its slowdown -- as Draghi signaled it might need to do -- then it’ll have to be imaginative, and Lane will have to come up with solutions.

There is an alternative route though, and one where Lagarde’s political skills may complement Lane’s technocratic ones. With central bank firepower depleted, pressure is rising on governments to play a stronger role with fiscal stimulus and structural reforms.

The IMF repeatedly made that argument under Lagarde, who said just last month that policy makers will need to “maximize their combined effort” in the next slump.

“We would expect to see fiscal policy being the new monetary policy going forward,” said Andrew Bosomworth, a portfolio manager at Pimco and former ECB economist. “The ECB will probably fit into that and support financing the governments through asset purchase programs.”

Central banks are still forecast to add stimulus yet again, and investors are betting that Lagarde will endorse such an strategy. The euro and bond yields fell on the announcement of her nomination.

Choosing Lagarde “virtually ensures that staff at the ECB will have an important role, and staff in key positions these days are probably more inclined to think like her than like more hawkish candidates,” said Roberto Perli, a partner at Cornerstone Macro LLC in Washington and a former Fed economist. “Her nomination increases the role of the staff and diminishes the importance of the hawks.”

--With assistance from Fergal O'Brien, Gregory Viscusi, Joao Lima, Patrick Donahue, Carolynn Look, Anna Edwards and Nejra Cehic.

To contact the reporter on this story: Paul Gordon in Frankfurt at pgordon6@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Fergal O'Brien, Craig Stirling

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