The Next ECB Chief Economist Is More Than a Dove

(Bloomberg Opinion) -- Philip Lane, the governor of the Central Bank of Ireland, is set to be the next chief economist of the European Central Bank – a key policy-setting position. Lane is considered a monetary policy dove, but there’s more to his views on how the euro area should function. He has controversial positions on the need for a European safe asset and is in favor of tight macroprudential regulation.

The impression that Lane is more of a monetary policy dove than the current ECB chief economist, Peter Praet, is backed by an analysis of the two economists’ speeches recently performed by BBVA Research. The researchers speculated that Lane’s seeming preference for a looser policy has to do with the outlook for his native Ireland’s economy once Brexit is completed. That could be a factor. But Lane, who is expected to step into his ECB post at the end of May, also has policy preferences and convictions shaped by his academic career – he was previously a professor at Trinity College, Dublin – and his recent experience at the Irish central bank.

Lane doesn’t share the widespread view that membership in the euro exacerbated the economic crisis in European countries. If anything, he argues, it may have been helpful, even though euro countries were unable to devalue national currencies and improve their competitiveness. As Lane said in a 2018 speech:

While devaluation may be helpful in stimulating economic recovery by improving domestic cost competitiveness over time, its immediate impact is to further exacerbate balance sheet problems in relation to foreign-currency debts. Taken together, these forces could have led to a more acute type of crisis, with a deeper initial recession, larger movements in interest rates and asset prices, a jump in the domestic price level and more debt restructuring.

The euro, according to Lane, helped prevent this more acute crisis – but more could have been done had Europe’s financial union been closer. Lane is a strong proponent of creating a European safe asset: bonds backed by euro zone countries’ sovereign debt and divided into tranches according to risk level. Creating a market for such securities along with disincentives to investment in national debt, Lane has argued, would wean banks from their dependence on their countries’ sovereign debt, reducing their exposure to policies of national governments that might be unwise. 

Lane led a high-level expert group that developed a proposal for sovereign bond-backed securities, or SBBS, that was ultimately approved by the European Commission last year. The proposal, however, met with criticism, both among economists, who pointed out the bonds’ potential limitations as assets,  and from a political perspective, notably in Germany, where any international risk pooling is viewed with suspicion. As far as Lane is concerned, though, a common safe asset is a necessary logical step in the monetary union’s development.

Tougher macroprudential regulation is another key aspect of his thinking about central banking. He knows first-hand how important it is to regulate banks so they aren’t tempted to take on excessive risks. Since late 2015, as governor of the Irish central bank, Lane has  been charged with the practical work of overseeing one of Europe’s more problematic banking systems.

Lane’s predecessor, Patrick Honohan, did most of the structural rebuilding and rethinking of rules that were necessary for the central bank to restore its reputation after the global financial crisis. Under Lane, however, the regulator has been investigating so-called tracker mortgages, floating rate loans on which tens of thousands of bank clients in Ireland were systematically overcharged. The tracker scandal has triggered public anger, giving Lane a close look at the kind of problems many European banks have swept under the rug in the post-crisis years.

The central banker believes in strict guidelines on loan issuance based on debtors’ income level as well as collateral value, sectoral concentration limits and curbs on the use of short-term funding. In 2016, the Irish Central Bank, along with its European peers, introduced a tool called a countercyclical capital buffer, which makes it necessary for banks to stockpile capital in periods of economic expansion. The Irish bank was one of the first to raise the requirement above zero, telling banks last year to hold an extra 1 percent of risk-weighted assets against a rainy day starting in July 2019.

Lane’s views and qualifications are well-known, so, even though European Parliament members grumbled when members states’ finance ministers presented him as the sole candidate for the ECB position, the Parliament’s Economic and Monetary Affairs Committee gave him an overwhelming vote of approval on Tuesday. 

Whoever succeeds ECB President Mario Draghi after his term runs out in October will have a realistic chief economist: Lane understands that the euro zone won’t be run under common fiscal rules anytime soon, which places a limit on its effectiveness in preventing and fighting crises. The Irish professor, however, is well-versed in the detail of both banking regulation and European debt markets and he’ll be pushing for a closer union on these fronts. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Leonid Bershidsky is Bloomberg Opinion's Europe columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website

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