What an extraordinary month the first month of this year proved to be for the European Central Bank (ECB), indeed! To begin, this month marked the 25th anniversary of the euro’s inception. To commemorate this milestone, major newspapers across eurozone countries published an article by ECB President Christine Lagarde, among others, just before the year-end.
Yet, it was also the month when the bank truly engaged with financial markets. Despite increasingly explicit warnings from various ECB officials about the anticipation of imminent interest rate reductions, the markets appeared unmoved by these forecasts. At the World Economic Forum’s annual meeting, Lagarde strongly suggested interest rate cuts only in the summer, but the market scarcely reacted.
However, in Davos, Switzerland, President Lagarde made even more striking comments. She criticised economists – all economists, to be precise. They have an unwavering faith in their models, stated the Frenchwoman, who characterised the entire profession as a tribal clique, akin to a sort of sect.
Economists are “the most tribal scientists you can find, they quote each other — men more than women by the way,” Lagarde asserted, suggesting that institutions like central banks and their economists should engage more with “epidemiologists, climate scientists, geologists”, and others.
I wonder how Lagarde envisions integrating the insights from those dialogues into economic models that already become unstable when the money supply is factored in. The lawyer Lagarde likely hasn’t considered this.
The economists strike back
Subsequently, the results of a recent ECB staff survey were disclosed. The best way to describe this is ‘the economists strike back’, referencing Lagarde’s critique of their profession (although the staff completed the survey before her speech in Davos, but the point stands).
More than half of the respondents rated Lagarde as a weak or very weak central banker. Ouch. Staff members believe Lagarde intervenes excessively in political matters to advance her own agenda or interest, at the expense of the bank’s reputation. “Mario Draghi was there for the ECB, but it appears the ECB is there for Christine Lagarde,” one ECB employee noted on the survey.
Several ECB staff members suspect that Lagarde is using her position at the ECB primarily as a stepping stone into politics. Additionally, it emerged that Lagarde was offered the role of French foreign minister in the new French government, which she declined. In my view, this suggests that if she harbours political aspirations, she is aiming for a more prominent role. What is more significant than foreign minister?
Prime Minister, one might suggest, but not in France, where the position holds limited sway. No, there’s only one role more prestigious in France. In this context, I immediately thought of the upcoming presidential elections in France in 2027. Do you know when Lagarde’s single term at the ECB is due to end? The end of 2027! Moreover, I wouldn’t be surprised if she aspires to this; having been the first woman as IMF head and the first female ECB president, the prospect of being the first female French president might well appeal to her.
Doubts
More than half of ECB staff also doubt the ECB’s ability to restore price stability in the eurozone. Another ouch. This refers to achieving an annual inflation rate of 2 percent. Lagarde seizes every chance to emphasise that eurozone inflation will revert to 2 percent by 2025, or that the ECB will ensure price stability by then. However, these are the predictions of the ECB’s economic models – models constructed in such a way that inflation invariably returns to 2 percent after a year or two. The same models that Lagarde denounces when she categorises all economists, including those at the ECB, as members of a cult.
In conclusion, January was a special month for me as well. I never imagined that more than half of the ECB staff would ever concur with my view that Lagarde is a weak central banker. Since her appointment, my stance has been that the ECB, the euro, and the currency union deserve better. I maintain that view. On my desk, meanwhile, is a countdown clock. Today it reads: 1370. What does this signify? The number of days until Lagarde’s departure from the ECB.
Edin Mujagić is the chief economist at OHV Asset Management and author of the book “Turning Point 1971.” He pens a monthly ECB Watch on European Central Bank monetary policy for Investment Officer.