Twenty months into Covid-19, the European Central Bank is deliberating the end of the pandemic emergency purchase programme. David Marsh, chairman, OMFIF, spoke to Der Spiegel about how President Christine Lagarde has steered the central bank through this crisis, how she has calmed dissonance among factions of the governing council and possible choices for the next Bundesbank president.
SPIEGEL: Mr Marsh, how do you rate the first two years of ECB President Lagarde’s term of office?
David Marsh: I would give her a medium grade. On the one hand, she has pacified the most important body, the long-divided ECB governing council. On the other hand, under her direction – mainly because of the Covid crisis, for which she naturally bears no responsibility – the ECB’s dependence on euro area governments has increased. She doesn’t have any deep fundamental principles when it comes to monetary policy.
SPIEGEL: What do you mean by that?
Marsh: She says that she is neither a hawk, i.e. a monetary policy hardliner, nor a dove. Someone like her, who can live with an ultra-loose monetary policy for a long time and who also reflects the overriding somewhat dovish character of the council, may be appropriate for the current situation, but it’s an open question whether this will be just as useful for the remaining six years of her mandate.
SPIEGEL: First things first: How did she pacify the governing council?
Marsh: Her predecessor Mario Draghi was a thoroughbred economist and central banker, convinced that he was right, and hardly interested in what his council colleagues thought. His economic arguments bore the intellectual rigour of his doctoral studies at the Massachusetts Institute of Technology, also of his Jesuit upbringing. Lagarde follows a different, more chalorous approach. From the beginning she tried to accommodate hawks like Dutch central bank president Klaas Knot and Bundesbank chief Jens Weidmann, to show them that she took them seriously. She is a lawyer and can get on with other people, deploying empathy, charm and humour.
SPIEGEL: Lagarde has a reputation for being a good communicator. Has this impression been confirmed?
Marsh: Internally, definitely yes. The hawks believe the climate has greatly improved. They know that Lagarde understands less about the technical side of monetary policy than they do, but also that she has other talents.
SPIEGEL: Which do you mean?
Marsh: Her persuasiveness, her many years of experience as managing director of the International Monetary Fund, her contacts in politics, especially with French President Emmanuel Macron. But also the connections she has established in the US, Germany and Italy.
SPIEGEL: The mood may be better, but Weidmann has now announced his resignation for the end of the year. He seems frustrated by his powerlessness in the council. So in fact nothing has changed under Lagarde.
Marsh: That’s right. Weidmann did his best to convince the other council members of the validity of his conservative monetary approach. But in the end – given his permanent status as leader of the council’s orthodox minority, the results are rather meagre. In addition, because of his ordoliberalistic principles, he has fallen out with Europe’s most powerful politicians – Macron and Italy’s Prime Minister Mario Draghi.
SPIEGEL: What kind of successor should the federal government appoint: another hawk for the German public? Or a dove who won’t resign in frustration in a few years?
Marsh: The successor will have to be a new type of president. If Isabel Schnabel, professionally qualified as she is, switched from the ECB to the Bundesbank, it would be a setback for Claudia Buch, who in return would have to go to the ECB to maintain gender policy, a rather inefficient changeover. I would prefer a tandem solution, as has already been successfully practised at the Bundesbank over the years.
SPIEGEL: What could this look like?
Marsh: The rather apolitical Claudia Buch would take over the presidency for two years until the end of her eight-year mandate. Marcel Fratzscher – close to the Social Democratic Party, president of the DIW, a man of great renown well beyond Germany’s borders, and a former ECB official – would become vice president for two years with a strong international focus and then would take the presidency. But the longer the procedure goes on, the more political it will become.
SPIEGEL: Back to Lagarde. Right from the start, she declared she would communicate more transparently to the general public and explain the ECB’s monetary policy as simply and jargon-free as possible. Is that realistic?
Marsh: She wants to be popular and accessible and tries to communicate in a down to earth way. If, however, central banks broadening their positioning becomes too much, they run the risk that the electorate will consider them to be over-powerful. When the phase of low interest rates finally ends, governments’ debt problems will increase. Since central banks seem to be responsible for everything, politicians will tend to blame them for general economic setbacks. In addition, the idea that everyone should understand central banks contradicts real-life experience. We are talking about extremely complex issues and interactions. Telling the public that monetary policy is really very simple doesn’t help educate the masses.
SPIEGEL: Perhaps not everyone is interested in the intricacies of monetary policy. But people are realising that prices are rising rapidly and that the ECB may have something to do with it. Surely it makes sense to explain yourself in this situation.
Marsh: Indeed, that’s what the ECB does in regular publications that are translated into the respective languages. But ultimately, monetary policy remains something for specialists. It would be more important, for example, if the Bundesbank president would speak to the finance and/or budget committee of the Bundestag every three months. Then the public could actually learn more, in the German language, about the ECB’s way of thinking and future direction.
SPIEGEL: That proposal has been on the table since summer 2020.
Marsh: Yes, but it didn’t seem to work out. However, the accounts of the monetary policy discussions, which are usually published three weeks after the council meetings, are now more precise and accurate than under Draghi. During his tenure, the hawks’ objections were often played down. But it would be better if the ECB published the verbatim minutes of its council meetings after a longer period of time, for example five years, as the American Federal Reserve does, including by stating which national central bank governor said exactly what. A modern central bank, which has now grown up to the age of 23, should be able to do that.
SPIEGEL: What exactly do you think Lagarde has to do?
Marsh: The ECB has already announced that it will ‘moderately’ reduce the monthly purchases of government bonds under the PEPP, launched in the wake of the pandemic, compared with the last few months’ €80bn. The programme has lowered interest rates and stimulated the economy, which was a good thing. But now we need a route to the exit.
SPIEGEL: The term ‘moderate’ is extremely vague.
Marsh: Yes, in September, PEPP purchases were still a significant €75bn. But it was a step in the right direction. Ideally, the ECB should let the PEPP run out as planned at the end of March 2022. At her press conference on 28 October, Lagarde said she expected it to end on 31 March. The PEPP may have to be extended by three months, until the end of June, for political reasons – for example, because of the need to avoid financial market turbulence shortly before the French presidential elections in April 2022. But then it must be ended for good. Lagarde should announce this at the council meeting on 16 December, without any ifs or buts. The ECB still has the Asset Purchase Programme – used to buy bonds – which will run until the ECB finally increases key interest rates again.
SPIEGEL: And when will Lagarde raise key interest rates?
Marsh: The ECB has to end PEPP first, then at some point there has to be an end to negative interest rates on overnight deposits by commercial banks. But apart from that, the inflation debate is getting hotter because inflation is becoming stuck at a higher level.
SPIEGEL: That drives Lagarde into a corner.
Marsh: Yes, then she will get problems not only with the ECB hawks, but also with politicians from right and left. When, in a period of accelerated prices, people no longer get the returns they need on standard savings products, then they will switch to real estate investments, fuelling house and apartment price rises, including rents, with painful results for many consumers. Then the ECB would have to reckon with criticism from Germany’s ‘traffic light’ coalition too, and not just from people like Friedrich Merz, Markus Söder and other opposition politicians.
SPIEGEL: It goes without saying that Lagarde faces a critical time. Will she manage her task of integrating doves and hawks and normalising the ECB’s monetary policy within the next two years?
Marsh: People say the British like to bet: I would put the probability that she will make it at 65%. So I’m cautiously optimistic. Typically British, even if I now have a German passport.
Image source: Martin Lamberts/European Central Bank