Column chart of Eurozone GDP (% change on previous quarter) showing ECB seeks to navigate the eurozone

Fraying ECB consensus poses diplomatic challenge for Lagarde

In her debut press conference as European Central Bank president last December, Christine Lagarde promised to bring her “own style” to the job and make decision-making among her squabbling team of policymakers “as consensual as possible”.

It is a pledge she has delivered on — but growing evidence that the consensus is fraying suggests that her diplomatic skills will be needed in the coming months, as the ECB seeks to steer the eurozone from a historic recession to recovery.

Nearly a year into the role, Ms Lagarde has established a much more collegial leadership approach than her predecessor Mario Draghi. One member of the ECB’s governing council said Mr Draghi “led from the front”, while Ms Lagarde prefers to “lead from the back”.

The change seems as much a reaction to the furious outbursts from other council members that followed Mr Draghi’s final easing measures last year as a reflection of Ms Lagarde’s ability to persuade meeting rooms — often full of men — to agree on a decision.

Ms Lagarde told the European parliament last week that she was “not overly concerned” by differing opinions among council members.

This is an ECB president . . . who wants the others to come to a common ground

“I don’t encourage massive dissent but I think that dissent and discussion are healthy among members of the executive board,” she said. “But I think what is important is that once a decision has been made and once a majority has been established then it is a question of staying the course and of being together at that time.”

Lena Komileva, chief economist at G+ Economics, said: “This is an ECB president with a very cohesive, collegial leadership style who wants the others to come to a common ground. She doesn’t want to prejudge their decisions.”

Ms Lagarde’s attachment to unity can make her communication harder to read. Mr Draghi often signalled his intentions early and counted on his ability to steamroll them through the council despite opposition from a few members.

In contrast, Ms Lagarde’s instinct is to stick to the middle ground. This can unsettle investors, as happened when she declared just as the coronavirus crisis was starting in March that the ECB was not there to “close the spread” between Italian and German bond yields — fuelling a sell-off in the debt markets of peripheral countries.

She also caused a stir among investors last month by downplaying concerns about the euro’s appreciation and the risk of deflation.

In both cases, ECB chief economist Philip Lane subsequently published a detailed blog post widely interpreted by economists and investors as an attempt to finesse Ms Lagarde’s comments. Some of her critics seized on it as evidence of her lack of monetary policy experience or economics training. 

But Mr Draghi has privately told friends that the partnership between Ms Lagarde and Mr Lane is working just as planned: the president is doing what she does best in building a consensus and the chief economist is supporting her with his technical expertise.

In the early days of the coronavirus crisis, when government lockdowns froze much of the economy and sent it crashing to a record postwar recession, Ms Lagarde touted the ECB council’s unanimity over its €750bn emergency bond-buying plan.

Lagarde’s testing first ECB year

© dpa/AFP via Getty Images

november 1 2019

Christine Lagarde takes over as ECB president from predecessor Mario Draghi.

December 12 2019

At her first press conference she vows to pursue her own communication style, telling reporters and analysts: “Don’t over-interpret, don’t second-guess, don’t cross-reference.”

March 12 2020

As coronavirus spreads across Europe, the ECB announces an extra €120bn of bond purchases and ultra cheap loans to banks. But Ms Lagarde triggers a market sell-off by saying in reference to the gap between bond yields of Italy and Germany that the ECB is “not here to close spreads”.

March 18 2020

The ECB announces a new €750bn emergency bond-buying programme and Ms Lagarde issues a “no limits” commitment to defend the eurozone against the “extraordinary” fallout from the pandemic.

June 4 2020

As the ECB slashes its growth and inflation forecasts, she announces a €600bn expansion of its emergency bond-buying plan and extends it until next year, warning the eurozone is “experiencing an unprecedented contraction”.

September 10 2020

After announcing that the ECB will “carefully assess” the impact of the rising euro on eurozone inflation, she downplays the medium-term risk of deflation, saying the “deflationary risks identified previously have actually receded”.

When it subsequently expanded the emergency plan to €1.35tn a few months later, there were the first initial mutterings of dissent in the governing council about the size of the increase. As the worst of the economic fallout from the pandemic ebbs, and the ECB progresses with its strategic review, it looks increasingly likely that Ms Lagarde’s consensus-building skills will be more severely tested.

In recent days senior ECB policymakers have engaged in verbal jousting on whether weakness in the economic recovery merits further monetary easing by the central bank, or whether it should rely on more fiscal stimulus from governments.

ECB executive board member Fabio Panetta — from the “dovish” camp in favour of more easing — warned that when the eurozone was confronting “a sizeable downward skew” the risks of “a policy overreaction are much smaller than the risks of policy being too slow or too shy”.

But fellow board member Yves Mersch followed this by saying that “nothing is pointing to a further deterioration, at least not on the front of prices and production”. He added dismissively: “Of course the markets like (it) if we buy up everything that they have.”

Some analysts believe the harmony Ms Lagarde has attempted to build is disintegrating. Carsten Brzeski, economist at ING, said: “With this tit-for-tat war I first of all wonder what happened to Christine Lagarde’s mission to strengthen the ECB’s team spirit and keep differing views behind closed doors.”

As northern countries such as Germany recover faster than southern states such as Spain, the tensions could grow between the ECB’s 25 council members, made up of 19 national central bank governors and six executive directors.

Jens Weidmann, president of Germany’s Bundesbank and one of the ECB’s most hawkish council members, recently warned governments that rates would not stay low forever and said monetary policy would have to “normalise” once the crisis ended.

However, it is hard for hawkish opponents of further easing to mount serious opposition, given that the eurozone slid deeper into deflation in September. Ms Lagarde warned last week that it was likely to stay there for some months to come.

“For now there is really no point objecting much if inflation is negative,” said a second council member. “When that changes and inflation starts to rise again it will be the real test for Christine’s ability to build a consensus.”