IMF Managing Director Christine Lagarde has been nominated to replace Mario Draghi as new president of the European Central Bank.
The head of the International Monetary Fund (IMF) has been a major supporter of the adjustment policy to help the eurozone recover from the global financial crisis and the ensuing eurozone debt crisis. The euro’s overall movement fell sharply as traders expected that the ECB, managed by Lagarde, would stick to the very low interest rate policy prevailing in Draghi’s era.
After months of uncertainty, clarity emerged as to who would be the next ECB president. With German Chancellor Angela Merkel using her declining political capital to nominate German Defense Minister Ursula von der Leyen to become the next president of the European Commission, France, the second largest economy in the eurozone, was able to put someone among the leaders of the most important organization in the European Union and in perhaps the most important job in all Europe: the presidency of the European Central Bank.
The next ECB President is … Christine Lagarde
Former French finance minister and current managing director of the International Monetary Fund and President Christine Lagarde have been appointed to replace Mario Draghi as new president of the European Central Bank. The move is a complete surprise for market participants, who hadn’t expected Lagarde to be one of the key contender to succeed Draghi as new president of the European Central Bank.
How will Lagarde affect the ECB’s policy?
Although the nomination does not guarantee the post, all references point to Christine Lagarde taking over the ECB presidency. In recent months, as IMF director and president, Lagarde has lowered the IMF’s global growth forecasts, describing the situation as a “delicate moment” for the global economy. It’s fairly simple to understand that they are talking about collateral damage to the American-Chinese trade war.
To this end, as euro zone growth slows and inflation expectations fall, Lagarde appears to be preparing to take the ECB presidency over from Draghi and continue the policy of very low rates and asset purchases if required (Draghi has talked about further stimulus in recent weeks). Because of the lack of financial reform over the past few years, Lagarde is aware that the ECB should continue to use stimulus. Accordingly, any hopes that the next ECB President will end the era of adjustment policies have dissipated.
In the midst of a wave of nominations for the next category of EU leaders, the euro has fallen rapidly from its daily highs. The EUR / USD dropped from 1.1312 to a low of 1.1292 in 15 minutes, before rebounding to 1.1301 so far. Elsewhere, as US equity markets pressured and US Treasury yields fell, the JPY managed to benefit from a shift in news, as the EUR / JPY hit its lowest level the day after the reports.