Blain’s Morning Porridge, 26^th Jan 2024: The ECB needs a political leader like Lagarde.

“Grit your teeth and smile. In the face of adversity, go on. They don’t deserve you.”

Christine Lagarde is under attack from within The ECB from staff who say they mistrust her. They clearly don’t understand their jobs or her role. Lagarde is a politician leading a political central bank. She has already achieved many of her goals. Generals don’t need to be popular – they need to be effective.

Despite much of Europe teetering on the edge of recession, the ECB left Europe’s interest rates unchanged yesterday, but traders expect the dismal state of the European economy, led by Germany, will force a cut in April – although more think June. ECB chief Christine Lagarde made some comments about the increased risks of inflation in freight costs from the attacks on Red Sea shipping, geopolitical tensions, energy and wages. The usual blah, blah from a central bank in “wait-and-see” mode.

The EBC is has one objective – the maintenance of price stability. However, there seems to be a fundamental misunderstanding among markets, and even her own staff, as to the role of Lagarde as President of the ECB.

A recent trade union survey revealed over 50% of ECB staff rate her as very poor or poor. Nearly 25% of the ECB’s staff took part in the report – so it’s not insignificant.  She was described as overly political and of using her position to further her own political agenda. Many believe she has sullied the bank’s reputation through political interference – using it as a platform to garner a senior political role in France or Brussels. They want her to focus solely on bringing down inflation (shades of Bundesbank dogma)!

In the report she is criticised for being an autocrat, making her staff work too hard, for issues like hot desking and enforcing diversity (in other words, giving jobs male German bankers expected to women from other nations), and for encouraging staff to speak up and then batting them down. Have you ever watched Emily in Paris? Lagarde is French. Doh!

Concurrent with leaking the survey, the union is fighting the ECB for a pay rise, unhappy with the 4% they have been offered. I wonder if there is any connection?

If I was Lagarde – I’d fire the whole lot of them. They clearly don’t understand their jobs, the role of the ECB, or why Legarde is running it.

The national branches of the ECB, the former central banks of nation states, can handle the nitty gritty of monitoring economic data, trends, prices, growth and rates in the ECB’s battle versus inflation, but ECB HQ is central banking by a committee of all the member states – which makes it political! Lagarde is primarily a politician – and as the record shows, a highly competent one.

Although The ECB looks unwieldy (it is) and slow to act, it has kept the Euro together these past 25 years, and achieved enormous success simply by surviving. Much to the surprise of many – including myself – it has weathered periods of crisis including the GFC, its own Sovereign Debt Crisis, and the Pandemic. Its’ survival has largely been through the political nous and experience of characters like Lagarde being able to steer the ECB through the quagmire of trying to get multiple member states to agree on anything, including their common interest in the single currency.

Give Lagarde some credit. She understands the contradiction at the heart of the Euro: despite the recent “Stability and Growth Pact” it remains a monetary union, but not a firm fiscal, and certainly not a political union.

Former President Mario Draghi first addressed that conundrum when he famously declared he “would do whatever it takes” to avoid the crisis a member default would create. At that point he committed the ECB towards de-facto fiscal and political union, successfully rolling over objections like German workers would never agree to the pay the pensions of Italians hairdressers.

The Stabilty and Growth Pact (“SGP”) commits members to behave and stick (ahem) to debt thresholds – but they seldom have. For the Euro to succeed member nations have to understand their interests are aligned within the Euro. To police that the ECB requires leverage to herd the flock of cats that are the member states. (Germany clearly benefits from the Euro, and to continue to do so, so there will be costs – albeit difficult ones to sell to an electorate fired up by hostile right-wing rhetoric.)

Lagarde has thus far delivered on the political aspects of her role – she has moved the EU toward debt mutualisation, a critical step on the path to fiscal union. This gives her that critical leverage the ECB needs to enforce the SGP and ensure the continued success of the Union and its common currency. It is draconian, and it lacks transparency, and democracy doesn’t figure much, but thus far it’s working.

She has quietly moved the ECB towards control of Europe’s diverse sovereign debt markets and the de-facto mutualisation of its collective debt. Direct EU funding via the ECB’s recovery bond programme, and now by member states borrowing from the €800 bln Next Generation Fund, (which funds itself as an EC Semi-Sov from the market, but is clearly the EU), gives Brussels and The EC control: play by the rules, and we will fund you. This was illustrated by the EC “agreeing” the parameters of the Italian Recovery and Resilience plan and holding back funds from Hungary. It is a subtle lever – oft best played outside public gaze. Again, a lesson in practical politics.

Bond spreads vs German Bunds for the “peripheral” states such as Greece, Portugal, Spain and Italy have tightened on the perception the Next Generation EU common debt programme and the “transition protection mechanism”, (effectively a guarantee to stabilise any nation’s debt with unlimited ECB purchases), backstops these nations – as long as they play nice with Christine and Brussels. The confidence of markets is illustrated by Italy achieving an order book of €91 bln for a 30-year bond issue earlier this month.

The fact that Europe’s bond markets are working fine, and the Euro has thrived over its first quarter century is critical. For the EU to confirm its effective “Virtuous Sovereign Trinity” of stable currency, sustainable bond market, it still needs to demonstrate political competency – which is not without challenges. (The fly in the ointment remains – will fiscal union raise all boats, or just a few?)

Lagarde’s success offends many on the right, who see debt mutualisation as a step towards the Unified European Superstate they reject. They will be rejoicing in the apparent lack of support for Lagarde from her staff.

Generals don’t need to be liked. The need to be successful.

None of the above is to say that anything is easy in Europe. I received a marvellous email earlier this week from a former colleague from my Morgan Stanley days in the mid-80s. He is now based in Berlin:

• “Angry German farmers have brought this city to a standstill, not the chill.  By looking out the window we have learned that they drive new looking €350k+ 4WD tractors with full trunk road capabilities and rather plush, heated cabins incorporating state of the art sound systems.  I am not suggesting Farming is an easy life, it absolutely is not, but what happened to the idea you wear a frayed shirt when asking the boss for a pay rise?”  

When Germany sniffles, the rest of Europe should probably prepare for the plague…

No doubt The ECB (like every other Central Bank on the planet) will make mistakes, easing too late/early and tightening at the wrong time (if has form in that respect.) But The ECB also has the most difficult brief – managing very different economies with very mixed performance with a single set of policy tools. That inevitably means some economies will do better as a result. That makes the role of ECB President critical. It has clearly moved from the need for an academic president to a political role.

Christine Legarde has made some mis-steps, and said a few silly things – but who has not? 4 years ago Lagarde became the first woman, and first non-Economist to be given the role (but, only the third president of the bank after following Draghi, Jean-Claude Trichet and Wim Duisnenberg.) She has a further 4 years to serve.

After a very successful career in international law, she went into French politics, culminating as Minister of Finance in 2007-2011, where she received plaudits for her handling of the Global Financial Crisis, before being parachuted in to replace the scandal-ridden Dominique Strauss-Kahn as head of the IMF in 2011. At the IMF she acted decisively (and much to the chagrin of many emerging nations that had supported her appointment) by focusing the IMF’s resources on bailing out European peripheral states as the European Sovereign Debt crisis exploded. She was a pivotal figure in the Greek debt crisis – which could have sunk the Euro – attracting opprobrium from Greek politicians for her austerity demands.

Herding cats in The ECB’s central committee needs a politician – the World would miss Lagarde, but the Bundesbanker clique in Frankfurt… well.. Germans are great practical engineers, but bankers? (Apologies to all my German pals in banking… but you know what I mean..)

Out of time and have a great weekend..

Bill Blain

Author of the Morning Porridge