31 October 2019 sees the departure of Mario Draghi as President of the European Central Bank (ECB), after an eight-year tenure. Draghi has fulfilled his promise to ‘do whatever it takes’ to save the euro. In the process, he has moved the ECB to be innovative in areas of monetary policy. He has led the Council to pursue policies which have been especially helpful to the peripheral countries. To his critics, he has come close to breaking the principle of ‘no bail out’ and ‘no government financing’, although to his supporters he has averted deflation and the breakup of the euro.
Draghi gained stature and authority during a period of crisis and near-collapse in peripheral financial markets. These conditions no longer apply, and his successor, Christine Lagarde, will have to establish her own authority against the backdrop of stalling economic growth – a difficult task. Christine Lagarde has less of a challenge in that the euro economy is growing, albeit at a snail’s pace but will have very little ammunition to fight the next recession. If the economy revives, all will be well. If not, her tenure could well be fraught with difficulties.
With interest rates negative and close to the effective lower bound, Lagarde has precious little scope to ease monetary policy further and has limited room for manoeuvre. Her greatest challenge probably lies outside her monetary policy remit; needing to build a consensus for a major fiscal expansion in Europe. In this respect her experience at the International Monetary Fund (IMF) and the French Finance Ministry will stand her in good stead. Draghi moved the ECB into areas that came close to fiscal policy but were within the control of the ECB. Lagarde must take it one step further and convince politicians to ease fiscal policy explicitly.