Defend Truth


The central banker Europe needs


Barry Eichengreen, Professor of Economics at the University of California, Berkeley, is the author, most recently, of ‘In Defense of Public Debt’.

The selection of the International Monetary Fund’s managing director, Christine Lagarde, to succeed Mario Draghi as the next president of the European Central Bank caught most observers by surprise. Now the critics are making up for the lost time.

Some commentators object that the International Monetary Fund’s managing director, Christine Lagarde, lacks experience as a central banker. Others complain that she lacks an advanced degree in economics.

Politico reports that “the tightly knit central banking fraternity… is aghast”. Whether this is an exaggeration is unclear, given a lack of supporting evidence. But if the central banking fraternity really does have qualms, then it’s important to consider their arguments.

As a card-carrying member of the economics profession, I might be expected to join those who find fault with Lagarde’s lack of a PhD. There is no question that, all else being equal, technical training helps. With the development of hi-tech financial markets, the conduct of monetary policy has become increasingly complex.

Past practices provide little guidance for formulating monetary policy today. Given the unprecedented decline of real interest rates, central bankers are more likely to find themselves at the zero lower bound, where conventional monetary policy is impotent. That means they have to understand the alternative mechanisms – the signalling, portfolio-balance, and risk-taking channels – through which unconventional policies work.

But, while having a president with specialised training as a monetary economist would benefit the ECB, is such training essential? In appointing Jerome Powell, who similarly lacks a PhD in economics, US President Donald Trump didn’t think so (though Trump’s recent remarks suggest that he may now regret Powell’s appointment).

Draghi’s predecessor at the ECB, Jean-Claude Trichet, also lacked a doctorate in economics. Yet having higher degrees in political science and state administration didn’t prevent him from becoming an effective central banker.

The critical attribute is not the diploma but, rather, the capacity to recognise sound economic arguments and advice. This, in turn, presupposes the ability to identify qualified professional colleagues. Here, Lagarde’s appointment, in her IMF years, of a pair of top-flight chief economists, Maurice Obstfeld and Gita Gopinath, and her long co-operation with a third, Olivier Blanchard (appointed by her predecessor, Dominique Strauss-Kahn), is reassuring.

So, too, is the fact that the IMF under Lagarde was prepared to change course in light of their advice. The leading example, though there are others, was the Fund’s critical postmortem on the merits of austerity, adopted with impetus from Blanchard’s analytical work.

As ECB president, Lagarde would have an able chief economist in Philip Lane, formerly of the Bank of Ireland, and talented staff. The record suggests that, if she is confirmed for the job, she will lean on them heavily.

The more substantial worry is that Lagarde has no prior experience as a central banker. Powell, like Lagarde, may lack a PhD in economics, but he served on the Federal Reserve Board for six years before assuming the chairmanship. Trichet served as governor of the Bank of France before heading the ECB. Both, therefore, had extensive exposure to the details of monetary policy and were familiar with the culture of central banks.

The IMF’s culture and concerns are different, as are its day-to-day operations. But decisions by the Fund, like decisions by a central bank, are reached through a process of debate and deliberation informed by technical background papers prepared by staff. Consensus is encouraged, but dissent is countenanced. Governments, not central banks, may be IMF members, but IMF surveillance has always been centrally concerned with monetary policy. When IMF staff go into the field, they always consult with central banks.

An IMF managing director, therefore, will necessarily have some exposure to the nuts and bolts of monetary policy. As for exposure to central banks’ culture, Lagarde will be familiar with monetary policymakers and their intellectual and personal quirks through participation in meetings of the Bank for International Settlements, the G7, and the G20, not to mention the IMF’s own annual meetings.

Then there is what else Lagarde brings to the table. First, she has political skills that will be useful in a period when the co-ordination of monetary and fiscal policies is at the centre of policy debate. Second, she has experience heading a national treasury, the agency responsible for the fiscal policies in question. Third, her international experience will be helpful in an environment where the cross-border spillovers of monetary policy matter more than ever.

Finally, Lagarde brings an avowed concern with gender balance. Politico’s reference to the central banking “fraternity” is revealing. Whether women make better central bankers is debatable, of course. What is clear is that an overwhelmingly male-dominated central bank board will have a legitimacy problem with half the population. In addition, broadening monetary leadership beyond that traditional fraternity arguably is one way to address the groupthink from which many central banks suffer.

In this context, it is worth observing that the ECB is one of the most male-dominated central banks in the world. One suspects that with Lagarde at the helm, that won’t last for long. DM

Copyright: Project Syndicate, 2019.


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