Lagarde — unlike any of the others considered for leadership of the ECB — fits in more naturally with the group of European heads of state who meet regularly in Brussels than with the group of central bank heads who meet in Basel, Switzerland. This is a reflection of her extraordinary presence, political ability and experience with European affairs. It is also a consequence of the fact that, unlike most central bank governors, she is not an economist or an experienced financial technocrat.
Lagarde’s strengths are well matched to this moment. The greatest risk to European monetary union and Europe’s contribution to the global economy is the persistence of the belief that the ECB, acting independently, can stabilize the European economy. At the IMF, Lagarde showed a willingness to assert that the austerity doctrines that were appropriate in an inflationary, high-interest-rate era are not appropriate in an era when markets believe central banks will not succeed in getting inflation up to their 2 percent target even over a decade. A focus on going beyond monetary policy in stimulating demand will be essential for the European economy to perform adequately in the years ahead.
In addition to good macroeconomic policy choices, the success of the ECB will require institutional reforms bringing more consolidation in banking regulation and emergency response across Europe and allowing the issuance of debt backed by all of Europe. There are sharp disagreements on these matters within Europe, and so moving forward will require the political stature and agility of someone such as Lagarde, not just technical explanations.
Current ECB President Mario Draghi saved the euro system with his famous promise to “do whatever it takes.” In the future, however, such an assurance may not be enough unless the ECB can also persuade governments to do what is necessary. There is the further consideration that “money only” strategies for supporting the European economy will probably mean a weak euro and exacerbation of global trade friction. So it will be very fortunate that the ECB has strong, politically credible leadership.
What about the IMF that Lagarde leaves behind? The good news is that, under her deft leadership, the IMF has moved a long way from seeming to people around the world to be a stern dispenser of austerity in the interest of financiers to earning trust by taking on a broad range of problems of concern to regular people. In addition to supporting larger deficits and fiscal stimulus when appropriate, the Lagarde IMF has successfully promoted necessary debt relief, cooperation in collecting reasonable levels of tax from global corporations, measures to reduce inequality and the curtailment of subsidies that promote greenhouse gas emissions.
Lagarde’s successor will need to build on all of this to lead in minimizing the risks of a catastrophic recession. Among other things, this means strengthening financial monitoring as risky private-sector lending rises after years of economic expansion, focusing on national policies that adequately maintain demand, assuring that the IMF has adequate resources to deal with the emerging-market crises that will surely come at some point, and carrying the torch for collaboration in maintaining global trade and international economic cooperation at a time when there is no one else with the capacity and will to take a global view.
Financial-policy leadership has something in common with the administration of anesthesia. It is least noticed when it is done best. But when done badly, the consequences can be catastrophic. Between rising populist pressures, liquidity-trap low interest rates, U.S. abdication of leadership and an expansion that is aging, this is a perilous moment that will require confident and competent financial leadership. We must all hope that Christine Lagarde at the ECB and whoever is chosen as her successor at the IMF will provide.