Analysts and investors reacted with surprise on Wednesday after International Monetary Fund (IMF) chief Christine Lagarde was picked as the next head of the European Central Bank (ECB).
A “rock star” of geopolitics, Lagarde will be the first women to lead one of the world’s most important central banks.
But though she comes with a far higher profile than her predecessors, she has much less of an economic pedigree.
Current ECB president Mario Draghi and his two predecessors all spent time as academic economists. Lagarde is a lawyer by training and rose to prominence as a politician.
Her appointment is a “dangerous look when it comes to credibility,” Michael Hewson of CMC Markets said.
“In any other role, her CV wouldn’t pass muster, which makes this appointment all the more political,” he said.
Lagarde’s surprise appointment came about in part due to the unusual timing of the ECB appointment.
For the first time, the role came up at the same time as the EU’s other leadership positions, meaning the ECB presidency was subject to the kind of backroom horse trading it normally avoids.
Lagarde has served as the managing director of the IMF since 2011, where she played a leading role in the management of the controversial Greek bailout. She previously held several senior ministerial roles in the French government, including as finance minister during the financial crisis.
Years of politicking no doubt gave her the connections and goodwill to secure another top job at the European table, but it has left analysts scratching their heads.
‘A steep learning curve’
“Hawk or dove? Actually, impossible to tell as Lagarde so far has not caught any attention with outspoken views on monetary policy,” according to Carsten Brzeski, chief economist at ING Germany.
Lagarde “faces a steep learning curve when it comes to the often delicate communication between markets and central bank officials,” Claus Vistesen, an economist at Pantheon Macroeconomics, said.
“This is something that investors will have to take into account in the opening exchanges between them and the new president.”
Others question whether such a political choice is right at a time when central bank independence is under threat globally.
"Given her relative inexperience with the ECB’s (complicated) policy toolkit, there is a credibility risk, especially if and when things get more complicated economically,” Jim Reid, a strategist at Deutsche Bank, said.
US Federal Reserve governor Jay Powell came from investment banking — and some fear the appointment of another non-economist to lead a major central bank could deprive the world of technical expertise.
However, some see Lagarde as a pragmatic choice for the unusual challenges facing the eurozone.
"Europe needs a political ECB head to push through agreement on fiscal policies,” Bill Blain, the chief strategist at Shard Capital, said.
Another problem requiring political skill is Italy’s deputy prime minister Matteo Salvini, who wants the EU to relax its spending rules and has called for the ECB to guarantee government debt.
The ECB president must also assert the bank’s independence in times of crisis — former head Jean-Claude Trichet was known to butt heads with German chancellor Angela Merkel and former French president Nicholas Sarkozy, for instance.
Lagarde’s experience negotiating between sparring interests at the IMF could also serve her well in dealing with the bank’s governing council, analysts said.
“Markets will like the fact that she is a skilled and well connected political operator,” Deutsche Bank’s Reid said.
The role of the ECB president is less about setting monetary policy stances, according to Andrea Iannelli of Fidelity International, and more about “consensus building” among members of the council, which is mainly comprised of the heads of eurozone central banks.
But her leadership could also have other consequences.
“The question is whether Lagarde at the helm of the ECB could lead to a subtle shift in the balance of power, away from the executive board and towards national central bank governors,” ING Germany economist Brzeski said.