Central banker wanted: Economists need not apply

Central banker wanted: Economists need not apply

Much has been made of who would eventually succeed ECB chief Mario Draghi at the end of his current term in November. Months of speculation were finally put to bed when IMF chief Christine Lagarde was nominated by EU leaders this week. A former Finance Minister, chief of the IMF, politician, and a lawyer by training, Lagarde has an impressive CV. Notably however, one thing she is not, is an economist by training; the first non-economist to take up the reigns at the ECB.

She is in good company at the moment, as current Fed Chairman Jerome Powell is also not a trained economist, the first non-economist to head up the Fed since 1979. Not to suggest that Lagarde’s education and career path will not stand her in good stead, but the trend seems to suggest a subtle change in the job spec for Central Bank chiefs recently.

As Mr Powell has learnt in the US, the ability to navigate political pressure, something that was almost completely absent from US central bankers’ lives for decades, became a much more significant factor during the last few months of his predecessor’s tenure, and has only intensified since then. Every new Fed appointment has become a hugely politicised decision, particularly as a significant number of retirements just before or during Trump’s presidency (a correlation that may not be unrelated) have given Trump a significant amount of influence in the shape and composition of the board of the Federal Reserve which could last well beyond his own term(s?) as president. Powell himself, despite being nominated by Mr Trump, has had to shoulder an enormous amount of vocal criticism and very public pressure to cut rates from the President, most often in the form of 140 character verbal assaults on Trump’s favourite social media platform.

Likewise, in the UK, Mark Carney, governor of the Bank of England has seen the amount of political scrutiny of his role explode since the Brexit vote. He has regularly been accused of fuelling project fear for stating that Brexit could be bad for the UK economy, and was accused of stoking hysteria by noted Brexiteer Jacob Rees-Mogg towards the end of 2018 for having the audacity to publish Brexit forecasts which were slightly worse than the business as usual outlook. His successor, due to take over in January, will need a thick skin, and could well benefit more from a political background rather than economics given the disdain that Brexiteers have displayed towards experts and rationale analysis.

While the pressure on Mr Draghi hasn’t been nearly as extreme as that endured by US and UK central bank chiefs recently, he hasn’t been immune from political pressure during his tenure. He managed to forge a consensus at the ECB early on to reverse damaging rate hikes by his predecessor and pursue very accommodative monetary policy. This was despite formidable resistance from Germany, and their representative on the ECB, Jens Weidmann. During his time at the head of the ECB, he also took on a task slightly beyond his remit of persuading European leaders to adopt more accommodative fiscal policy, and unified set of fiscal tools to complement the monetary policy tools at his disposal and support the ECB’s efforts during times of financial stress.

Perhaps Lagarde’s most significant task in her new role will be navigating the mechanisms and structures of the various EU institutions and member states, plámásing EU leaders and finance ministers, and pushing for closer banking union and more unified fiscal policy, a goal that her predecessor pursued but ultimately failed. With ECB failing to “normalise” monetary policy after eight years of very accommodative monetary policy, many question whether they have the ammunition to see off another downturn on their own. If we do see a sustained recession, Lagarde’s ability to persuade leaders to implement fiscal reform will be far more important than implementing another 10bps cut in the deposit rate. Certainly, her political experience, will serve her better in succeeding in this task than any training in economic theory.

As a brief addendum, another possible knock-on effect of Lagarde’s appointment may be that the role of ECB chief economist, will take on even more importance as the most prominent voice on economic matters remaining at the ECB. As of the start of June, this role is currently held by Ireland’s Philip Lane, former Governor of the Central Bank of Ireland. In his new position, Ireland will have the most prominent voice at the European monetary policy setting table since its inception.

Gearoid Keegan, Investec Treasury