Lagarde's ECB and the UK Elections
This week had at least three notable highlights: the UK election, Christine Lagarde’s first press conference as ECB head, and a Phase I trade deal between the US and China. A few thoughts on the first two:
Lagarde confirmed my fears: she’s going to run the ECB like a politician, not a central banker. She claimed that she is “neither a dove, nor a hawk, but an owl”. She thereby charmingly laid her claim to a wisdom that I guess neither hawks nor doves possess, in her opinion. Her first statements did not signal much wisdom, in my view. She indicated that in the upcoming strategic review of the monetary policy framework, the ECB would consult not just academia but also “representatives of civil society”. I find that alarming and misguided. The management of monetary policy is a complex technical matter, not a social consensus project. I would not want the guidelines for open heart surgery to be decided in consultation with civil society representatives. In fact, I would never entrust my health to a surgeon eager to hear my wisdom on his technique. But it’s what you’d expect from a politician.
She also feels very strongly that the ECB should step up actions to fight climate change. So here’s a central bank that can’t hit its inflation target for love or money, has to keep a feeble economy on permanent life support, juggle the competing interests of divergent national economies, regulate and supervise a string of troubled banking systems and hold the Euro area together…but it wants to fight climate change. I do want the planet to survive, but I think the ECB has its hands full, it already has more targets than instruments; and even if it had nothing else to do, it is not the right institution for the job. But I am probably wrong, the ECB can probably do a lot more. In which case, President Lagarde, while you are at it, ending world hunger would also be nice.
The UK election was remarkable in two respects. First, it was a resounding confirmation of the 2016 Brexit vote—it should put to rest any further proposals for a second referendum. The exit process itself will be messy and costly, but probably a price worth paying for putting behind us the dithering and uncertainty of the past three years. Overall this should prove positive for business confidence. Second, the vote was a resounding rejection of Labour’s socialist economic agenda. Polls suggest that many British voters simply did not trust that a Corbyn government would be able to provide all the payouts it was promising—they distrusted the promise of a free lunch. Ninety per cent of economics is common sense—British voters still have it. This bodes well for the UK’s economic outlook, and it should make for a more interesting Presidential campaign in the US, where promises of free services and payouts also feature prominently.
Finally, I find it notable that, just as British voters overwhelmingly confirmed their decision to leave the EU, ECB President Lagarde signaled a stance that is bound to exacerbate divisions across Euro area member governments. This also might make for a more interesting decade ahead.