The ECB Will Soon Be Run By A Politician. Here’s What Christine Lagarde Has Said About Monetary Policy

Earlier this week, when Christine Lagarde was officially nominated to succeed Mario Draghi, we took a few minutes to detail why she may be a good choice to lead the ECB given prevailing economic and political trends.

Here are the relevant passages in that regard from “Christine Lagarde Will Try To Fill The Big Shoes“:

Part of the problem with the monetary policy transmission channel in the eurozone is that it’s expected to work across disparate economies operating under a hodgepodge of fiscal regimes. In her capacity at the IMF, Lagarde has all manner of experience dealing with that.

The political landscape in Europe is more fraught than ever. Although the worst-case outcome (defined here as a populist/euroskeptic wave) was averted in the EU elections, League’s performance in Italy and Rassemblement National’s showing in France underscored the lingering appeal of nationalism and suggested centrists have failed to stem the populist tide that swept across the bloc in 2015 during the migrant crisis.

In Lagarde, the ECB will get a seasoned political operator and something of a consensus builder. That may prove especially useful going forward in the event the eurozone economy careens into a downturn, raising the stakes in contentious relationships between, for instance, Rome and Brussels.

On monetary policy, Lagarde is generally seen as carrying on the Draghi legacy and, indeed, she likely won’t have a choice. Europe is mired in a manufacturing slump, inflation is notoriously stubborn and the “Japanification” narrative is now ubiquitous in the bloc.

For Goldman, Lagarde’s recent remarks do in fact suggest continuity amid the transition. “Her stated economic and monetary policy views appear broadly similar to President Draghi‘s”, the bank wrote Wednesday.

Goldman looked at five years’ worth of speeches from Lagarde and compiled the following handy table which backs up the idea that Lagarde will likely favor more easing.

(Goldman)

Goldman does a bit of editorializing around the monetary policy remarks in an effort to provide some context. To wit, from the note:

Lagarde was a vocal advocate for bold and pre-emptive ECB easing in 2013-14 to “stall further declines in inflation and inflation expectations” and argued in 2015 that QE had done much to “stave off the threat of deflation and support weak demand.” On monetary tools, she has been supportive of both QE and negative interest rates to provide accommodation, but has noted that their side effects warrant “vigilance.” Regarding eventual policy normalisation, she has argued that ECB policy should remain supportive until “private demand has fully recovered” and that the more conventional policies should be adjusted well before assets are sold. Lagarde has strongly supported President Draghi’s “whatever it takes” approach to managing the European debt crisis. On the day the Outright Monetary Transactions (OMT) were announced, she welcomed the new framework as “an important step” and later stated that this became the “turning point” in the Euro crisis, holding the “currency union together.” She has argued that the crisis raised the spectre of “catastrophic outcomes for Europe” and that “radical solutions” were needed.

The takeaway, in case it’s not clear enough, is that Lagarde will almost certainly support a new easing package, especially to the extent it’s already in place (or in the process of being implemented) when she takes the reins. As far as her background in politics, Goldman emphasizes what everyone else has said this week, namely that “her extensive crisis experience and negotiation skills bode well for any future crisis response”.

She inherits a fun house mirror of a bond market. On Thursday, 10-year bund yields officially fell below the ECB depo rate which is, of course, negative.