Christine Lagarde at the ECB: chronicle of a failure foretold
By Etienne Chaumeton, courtesy of IREF
In economics, the future is necessarily uncertain, because it is subject to the decisions of a multitude of individual actions. The recent arrival of Christine Lagarde to the presidency of the European Central Bank (ECB) on November 1, 2019, however, seems to mark the first stage of an inevitable economic failure.
After a brilliant career as a lawyer, which led her to head the powerful Baker & McKenzie law firm, the former student in Nanterre swapped the law for ministerial duty. Christine Lagarde joined the French government in 2005 and stayed there for 6 years, mainly at the Ministry of Economy and Finance. The ouster of the socialist Dominique Strauss-Kahn gave her the opportunity to replace him at the head of the IMF from 2011 to 2019, at which point Emmanuel Macron and the European Council nominated her to succeed Mario Draghi at the head of the ECB, although she had never been an economist, nor held any role in a central bank.
Throughout her functions in ministries, the IMF and now at the ECB, there has been a consistent thread in the positions of Christine Lagarde, reflecting her attachment to an economy directed and administered by political decision makers and the experts who surround them.
In an interview dating from 2018 [ 1 ] , when she was managing director of the IMF, she already affirmed that “central bankers have the tools to intervene” in economic policy and that their intervention is “necessary”.
On December 12, in the press conference following the first monetary policy meeting of the Governing Council of the ECB [ 2 ] , she gave solid guarantees to statists and supporters of inflation.
In accordance with the ECB’s statutes, Ms. Lagarde vowed to pursue inflation “close to, but less than 2%”. Without entering here into the complex debate of the definition of inflation, we will simply state that it always involves a loss of money’s purchasing power. Aiming for a certain amount of inflation means accepting that all holders of euros lose part of their capital.
From 2011 to 2019, during the eight years of Mario Draghi’s presidency, cumulative inflation in France was 8.4%, which means that 1/12 of all savings in euros were destroyed. What will happen under the chairmanship of Christine Lagarde? The ECB just announced that the key ECB interest rates remain “unchanged”. It is committed to “a high degree of monetary support”, which is to say that the printing press will turn on again… It also announced the resumption of the asset purchase program, at a monthly rate of 20 billion euros. This corresponds to 120 billion euros per year, or half of the annual wealth created in Ireland.
By affirming “the need to maintain a very accommodating stance in monetary policy for an extended period,” Mrs. Lagarde assures European governments that they will be able to continue to go into debt under very advantageous conditions … to the detriment of euro asset owners, whose value will continue to depreciate, and private banks, whose reserves are remunerated by the ECB at negative rates. If Christine Lagarde says that negative rates were set up to “try to revive activity and encourage investment” [ 3 ] , it would have been more honest to recognize that negative rates are a tax on capital.
Savers be warned: the President of the ECB announced at the start of her mandate that “in the medium term, inflation should accelerate.” The former lawyer was successful in defending her clients; we should not count on her to defend the purchasing power of Europeans.
The President of the ECB is the most economically powerful person in Europe, whose control of the euro gives her much more power than any minister or boss. However, Christine Lagarde is not limited to defending a lax and inflationary monetary policy. She openly takes a position on political subjects which obviously go beyond her functions.
Questioned in Brussels on December 2 by the Economic and Monetary Affairs Committee [ 4 ]on the issue of gender parity, she regretted being the only woman on the ECB’s board of governors. She considers it “essential that this situation can evolve in a positive way to better reflect society. The real development to wish for the ECB is not so much to know the number of women or men who work there, but the policies they carry out and the consequences they generate for society.” It would be better to safeguard European monetary freedom and ensure that currency is not an additional instrument of state policy, and that the Central Bank, in accordance with its institutional mandate, ensure the stability of the euro rather than make it the chief manipulator.
Even more astonishing, Christine Lagarde spoke on climate change. After recalling that the ECB’s priority mandate is price stability, she asserts that climate change can constitute a “secondary” mandate. The ECB has therefore begun to favor so-called “green” financial instruments. Not content with the immense power already incumbent in her position, Ms. Lagarde intends to use her prerogatives to finance certain specific activities, even the most improbable, to the detriment of others… and at the expense of savers.