Tuesday 16 July 2019

Gearoid Keegan: 'Central banker wanted: Economists need not apply in this new world order'

On the money: The impressive CV of Christine Lagarde does not include formal training as an economist. Photo: Simon Dawson/Bloomberg
On the money: The impressive CV of Christine Lagarde does not include formal training as an economist. Photo: Simon Dawson/Bloomberg

Gearoid Keegan

Much has been made of who would 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 last week.

A former finance minister, chief of the IMF since 2011, politician, and a lawyer by training, Ms Lagarde has an impressive CV.

Notably however, one thing she is not, is an economist by training, making her 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.

This is not to suggest that Ms Lagarde's education and career path will not stand her in good stead.

Influence: Philip Lane takes on the chief economist role. Photo: Stephen Collins/Collins Photos
Influence: Philip Lane takes on the chief economist role. Photo: Stephen Collins/Collins Photos

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 had been 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. It 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 Donald Trump's presidency (a correlation that may not be unrelated) have given Mr 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 time as president.

Mr 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 US president, most often in the form of 280-character verbal assaults on Mr Trump's favourite social media platform - Twitter.

In the UK, Mark Carney, the governor of the Bank of England, has seen the amount of political scrutiny of his role explode since the Brexit vote.

He has been accused of fuelling 'Project Fear' by stating that Brexit could be bad for the UK economy.

He was also accused of stoking hysteria by noted Brexiteer Jacob Rees-Mogg late last year for having the audacity to publish Brexit forecasts which were slightly worse than the business as usual outlook.

Mr Carney's successor, due to take over in January, will need a thick skin, and could well benefit more from a political background than from one in economics, given the disdain that Brexiteers have displayed towards experts and rational 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 its representative on the ECB, Jens Weidmann.

During his time at the head of the ECB, Mr Draghi also took on a task slightly beyond his remit of persuading European leaders to adopt more accommodative fiscal policy, and a 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 Ms 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.

It is a goal that her predecessor pursued but ultimately failed in.

With the ECB failing to "normalise" monetary policy after eight years of very accommodative monetary policy, many question whether it has the ammunition to see off another downturn on its own.

If we do see a sustained recession, Ms 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, one other possible knock-on effect of Ms 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 has been 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 is an executive with Investec Treasury

Irish Independent

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