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Lagarde Top Choice To Head ECB: Wealth Managers React

Jackie Bennion, Deputy Editor, 4 July 2019

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After much wrangling behind closed doors, Christine Lagarde has emerged as Europe’s top choice to replace Mario Draghi as president of the European Central Bank in November. In uncertain economic times, the stakes are high.

In a tough fews days in Brussels, European leaders have chosen International Monetary Fund head Christine Lagarde as their candidate to lead the ECB, and German Defense Minister Ursula von der Leyen to become the next commission chief. Pending parliamentary approval where resistance is expected, it will be the first time two women have taken the top two policy jobs in the bloc.

This changing of the guard comes at a vexing time for the EU as Brexit negotiations must crack on with whoever succeeds Theresa May as the next UK prime minister. There is some hope that fresh faces on both sides will find a creative way through the deadlock. Also weighing on Europe is a protectionist US heading into a re-election campaign, and China's economic dominance when the eurozone’s own economy is hardly motoring along. Questions surround what leverage, policy or otherwise, is left for the central bank to pursue. After Tuesday's decision, the industry has been quick to comment on what Lagarde - as a non-economist but a global heavyweight with considerable diplomatic élan - could bring to Europe’s top monetary post. Here is a round up opinions from wealth managers.

Oliver Blackbourn, portfolio manager on the UK-based multi-asset team at Janus Henderson
Without eulogising Mario Draghi too much, he has been the figure to step up when others have failed as conventional monetary policy failed. His “whatever it takes” comments remain a watershed moment in both central banking and eurozone politics. Therefore, Christine Lagarde is stepping into a very large set of shoes at the European Central Bank (ECB). Her nomination follows a torturous process for filling the various top-level roles in European politics, and could yet theoretically still unravel given how difficult finding consensus has been.

Hopefully Lagarde’s experience at the International Monetary Fund (IMF) will serve her well. However, there are concerns that the move out of this more structured, academic institution into the politically-fraught and ideologically-stretched ECB might be a difficult one, even for such a distinguished figure. The ECB presidency is perhaps the most difficult central banking job in the world.  Europe remains an unfinished monetary and political union, with deep divides between regional blocs, and that is before we get to the frankly dire economic situation. Lagarde will need to bring all her connections and political nous to the job, and perhaps seek wide-ranging counsel on new economic policy responses given her lack of background in this area. Philip Lane, the new chief economist, is likely to be a key individual in this.

Markets are likely to be relieved that the hawkish Jens Weidmann has missed out on the role. He has remained staunchly unconvinced by the innovations that have kept the eurozone barely ticking over. His nomination would have caused significant north-south splits and likely upset financial markets that have only just been buoyed by a Draghi pivot. There may be relief in the short term that the more dovish Lagarde has been nominated, but she faces a very difficult challenge.

German 10-year yields are close to the ECB’s deposit rate at -0.40 per cent and even Italy now has negative yields on its one-year debt. The question remains, what can the ECB do next and how will a change at the top alter that?
 

David Zahn, head of European Fixed Income at Franklin Templeton
Christine Lagarde’s appointment as head of the ECB is not a complete surprise following years of policy experience at the IMF. However, the big difference between her and all previous leaders is that she is not an economist. Like Jerome Powell at the US Federal Reserve, Lagarde is a lawyer by training, which means that the two largest central banks will be run by non-economists for the first time. This reflects an evolving economic climate where central banks require a leader who is able to communicate effectively, while being unconstrained by having an economist background when reviewing innovative approaches to monetary policy.
 
Fixed income markets have opened in positive territory this morning, encouraged by the strong likelihood of a continuation of monetary easing as the baton passes from Draghi to Lagarde. The main concern for markets had been an interruption of the return to accommodative policy which Draghi has outlined for September, but a continuation and even expansion of easing is possible when Lagarde assumes control in October. Having no central bank background, she will not have any pre-conceptions about what monetary policy should look like and will be largely unconstrained to pursue more adventurous forms of easing.
 
The appointment has reconfirmed the idea that the ECB will support the market over the short-to-mid-term at least. A continuation of quantitative easing means higher yielding debt will do well, including credit and peripheral debt, and we expect to see a continuation of the yield curve flattening. Italy and Spain are likely to be beneficiaries of further monetary easing, while we remain positioned for rate cuts in Europe.

Andrea Iannelli, investment director, Fidelity International
The nomination of Mrs Lagarde to succeed Mario Draghi at the helm of the ECB is unconventional given her background. She brings no experience in central banking, having played more “political” rather than policy-related roles in her career.
 
Draghi’s shoes would be hard to fill by any successor after his impressive tenure and the role that the ECB played under his watch. More importantly, the politics around the ECB are now more intense than in the past, and Lagarde will perhaps focus more on that than on building an economic and monetary policy framework to shape policy.
 
It is important to note, however, that the role of the president of the Governing Council (GC) is less about setting a view and monetary policy stance, and more about consensus building among the GC members who can have some very contrasting views at times.
 
On this basis, Mrs Lagarde's appointment is unlikely to bring a major shift in stance by the ECB, but rather on continuity, following the path set under Draghi. Over the longer term, however, she will have to work hard to ensure that the ECB’s credibility remains as strong as it has been under her predecessor.

Ben Lord, fixed interest manager at M&G Investments
Yesterday's announcement that Christine Lagarde has been nominated for the ECB presidency makes it even more likely that the central bank will loosen monetary policy this year. The nomination of a more hawkish president would have posed a significant risk to the market but Lagarde is probably more dovish than the departing president, himself an advocate of QE, of fiscal policy being used to aid monetary, and in the past of more European integration. She may even have a go at persuading Germany to change tack on its current account surplus.

Nigel Green, chief executive of deVere Group
The nomination of Christine Lagarde is both surprising and controversial. It is surprising because previously she has appeared to rule herself out from the job. Also, because she is not an economist, she’s a political figure with no direct experience of central banking.

It’s controversial due to her ‘baggage.’ Under her leadership, the IMF’s conduct “raised issues of accountability and transparency,” according to a report. She was also found guilty of negligence by a French court over her handling of a case during her time as the French finance minister.

“However, despite some scepticism, I believe Christine Lagarde’s appointment would be well-received by financial markets. She is a known quantity. She is broadly considered a safe and competent pair of hands. She represents certainty. All this benefits markets. Criticism is being directed at her because her remit is to try and assimilate different fiscal policies with a single monetary one and she is not known as a leading economist, but more as a political figurehead.  

"But with many of Europe’s most pressing economic issues stemming from the political sphere, her political savvy could be an important advantage.

“Ms Lagarde can be expected to share Draghi’s liking for aggressive and innovative monetary policy. She is likely to insist on quantitative easing should inflation remain sluggish. Markets will appreciate this, especially as global economic growth appears to be slowing.”

Michael Browne, co-manager of the Legg Mason Martin Currie European Equity Long/Short strategy
Christine Lagarde's nomination - and that of Ursula von der Leyen as Head of the Commission announced today in Europe - means that the risk of a hard Brexit has risen.

These appointments smack of the thesis ‘the trouble with Europe is it is not integrated enough’ we should do more, and I expect the UK to be the first country to struggle with this, as it attempts to re-negotiate Brexit. This looks like a closing of ranks.

The same risk of conflict will come from the populist politicians around Europe, who did well in the last elections and who have clearly been shunned. Italy and the Eastern European states have lost out on the top jobs and thus influence. Again, the risk of conflict is obvious, and we believe the risk of an Italian debt crisis in the next five years is high.

These appointments still have to get through the European Parliament and there could well be significant resentment from the leading political groupings there who dislike the ending of the Spitzenkandidaten system - where the largest party in the European Parliament nominates its candidates for positions - as well as the populists. They will also decide on who to make the Leader of the Parliament, the one job still in their control.

Lagarde took over the IMF post in June 2011 at the height of the Greek crisis, replacing the disgraced French politician Dominic Strauss-Kahn. She provided a steady hand during this period and a figurehead, leaving the technical work of renegotiating Greek debt to the bank technicians.

A lawyer by training, she has managed to negotiate through problems – although very much an iron fist in a velvet glove. The ECB role is different, being as much a technical one, as a ‘presidential’ one. We have not had a non-expert in the post before, although it is quite possible that bringing pragmatism will be useful – but I do not expect her to be radical. For the ECB, this is a continuity candidate and, as the appointment is for eight years, it is an important one. The market has certainly seen her as pro-easing, rather than a Germanic monetary purist, and reacted favourably.

Andreas Billmeier, sovereign research analyst at Western Asset Management
With Christine Lagarde at the helm of the ECB, another accomplished communicator and crisis manager would take over from Mario Draghi. Her background as French minister of finance might be helpful in cajoling her former peers into a more expansionary fiscal stance where appropriate, thereby easing the burden on monetary policy – a point Draghi has made repeatedly in the recent past.

On monetary policy, we think she will be similarly dovish to the current stance, and she certainly would not stand in the way of restarting the asset purchase programme if the need for that became (more) obvious. We hope that her lack of institutional knowledge – Duisenberg, Trichet, and Draghi had been running national central banks before they became ECB president and knew the European process and procedures well – does not lead to more pronounced volatility in communications – a risk we saw playing out recently during the early tenure of Jerome Powell at the Federal Reserve Bank.

Francis Scotland, portfolio manager and co-director of global macro research at Brandywine Global
We will soon have individuals who studied law running three of the world’s major central banks: the Bank of Japan, the Federal Reserve and now the ECB on news of Lagarde’s appointment. Good thing or a bad thing? Is asking a lawyer to run monetary policy a bit like asking an economist to serve as a judge on the Supreme Court?  It remains to be seen what the new tilt in European monetary policy will become.

Kuroda rode in on the coattails of Prime Minister Abe and bought half the national debt of Japan. Draghi reversed Trichet’s tight money and raised the hackles of all the European hard money hairshirts by buying sovereign debt. Powell charged off on a path of normalization before being humiliated into submission by the markets late in 2018. Lagarde rode the helm of an organization charged with imposing fiscal sobriety on countries in exchange for bailouts. She might turn out to be a foil for the modern monetary theorists advocating relentless government spending being financed by printing money.

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