Central Banks Get Less Independent, and Investors Cheer
The choice of Christine Lagarde as head of the ECB confirms that central bankers are taking on a more political role
By Jon Sindreu
Christine Lagarde has lauded ECB chief Mario Draghi in the past, which makes it more likely that she will react to the current economic slowdown in the eurozone with another round of generous stimulus policies. Photo: saul loeb/Agence France-Presse/Getty Images
Central-bank independence is dying to the thunderous applause of investors—for now.
In a surprising turn of events, the heads of state of the European Union decided late Tuesday to nominate International Monetary Fund chief Christine Lagarde to succeed Mario Draghi at the head of the European Central Bank.
Investors and analysts cheered. Ms. Lagarde, who is French, has lauded Mr. Draghi in the past, which makes it more likely that she will react to the current economic slowdown in the eurozone with another round of generous stimulus policies. Other potential candidates, like Germany’s Jens Weidmann, raised more doubts.
Yields on German 10-year government bonds dropped Wednesday to yet another record low of minus 0.394%.
Yet her nomination also confirms that central banks are moving away from their once-prized status as uber-technocratic, apolitical institutions full of academics.
Ms. Lagarde is a former lawyer with no formal training in economics—the first of her kind to lead the ECB. Both she and the ECB’s vice president, Luis de Guindos, are essentially high-profile politicians.
Many analysts expect them to play a more active role in Europe’s complex political machinations—pushing for structural reforms in the bloc and perhaps nudging Northern European governments to be looser with fiscal policy—than in the design of monetary operations. ECB chief economist Philip Lane is expected to shoulder responsibility for the latter.
This echoes what has happened in the U.S., where Federal Reserve Chairman Jerome Powell is the first non-economist to hold the job in nearly 40 years.
Fairly or not, investors have regularly expressed doubts about his leadership. Often, he has appeared to bend to either political pressure from President Trump or to market turmoil in order to ease policy. Ultimately, however, financial markets end up celebrating the potential for lower interest rates. This week the S&P 500 hit another all-time high.
A new breed of central bankers may not be a bad thing. Throughout most of their history, these institutions were led by people who were closer to business than universities—Marriner Eccles, the legendary Fed chairman during World War II, didn’t even have a degree.
Independent academic technocrats didn’t anticipate the 2008 financial crisis, and still struggle to explain why growth and inflation remain so low. More coordination between governments and central banks may be a necessity during the next downturn.
Yet central bankers taking more active political roles will likely stoke popular demand for more democratic accountability. Political turmoil may become too much for investors’ tastes if candidates aren’t carefully chosen.
Neither the way that Ms. Lagarde was picked—behind closed doors as a bargaining chip for other top EU jobs—nor her professional trajectory are spotless: Her CV includes a criminal conviction for negligence while at France’s finance ministry and several issues of accountability and transparency while at the IMF. Mr. de Guindos was a European adviser for Lehman Brothers in the run-up to the financial crisis.
Right now, financial markets have reasons to cheer the new status quo in central banking. In time, they may come to regret it.
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» CENTRAL BANKS GET5 LESS INDEPENDENT, AND INVESTORS CHEER / THE WALL STREET JOURNAL
viernes, 5 de julio de 2019
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