Farewell to Draghi, and Welcome Lagarde



Every beginning has an end, and the tenure at the helm of the European Central Bank is no different. From taking the baton back in 2011, from the former ECB president Jean Claude Trichet, to handing it over later this year to the new ECB head Christine Lagarde, the reign of Mario Draghi has been one of the most charged and tumultuous periods in unconventional central bank policy. His term will certainly go down in future economics texts, which will be revisited over and over again. The saga of the European Union, is however far from over, and the in-tray for the incoming ECB president will present challenges of existential nature for this institution.

In evaluating the legacy of Mr. Draghi, one of the most important developments was the emergence of the ECB’s consensus. The role of the central bank, is not only to implement policy, but also to convince the markets of its ability to make true on its promises. In this regard, the ECB, has become similar to the US Fed. This can be seen in the importance given to policy meetings and announcements and the market reaction in this respect.

One of the most famous statements that Mr. Draghi will be remembered for will be the “whatever it takes” statement, in the face of the looming debt crisis which threatened the monetary union’s existence.  The rhetoric, flanked with the co-ordinated stimulus programme, delivered what he had promised on the same day “it will be enough”. The introduction of quantitative easing and ultra-low interest rate policy, will remain the hallmark of Mr. Draghi’s policy.

Unfortunately the results of European policy have not delivered the same level of impact, as those of the Fed in the United States – however, the crisis was averted, and the European economies recovered most of the lost ground following the recession.

The term over which Mr. Draghi presided, gave the rise to increasing Banking regulation and integration. This was partly as a result of the effects of the Great Recession, and the Sovereign Debt Crisis, which gave rise to the introduction of stress tests and monitoring mechanisms over systematically significant banks. The mandate and tools of the regulators have been expanded in order to address such risks in the future.

Mr. Draghi, an Italian, elected to the ECB presidency during the sovereign debt turmoil, that his native country was and still is a part of, proved to be the right person at the helm of the ECB. The fact that in his first job of director general of the Italian Treasury, he survived a total of eleven different governments, goes to show the type of resilience which earned him his nickname of Super Mario. During his term in office he did not spare his compatriots from criticism, reprimanding them for the lack of structural reforms and for not clamping down on their inefficiencies.

The designate successor to the job, Christine Lagarde, is no stranger to the world stage, a former French finance minister and current head of the International Monetary Fund. Mrs. Lagarde is no stranger to the inner working of the ECB. Most noteworthy, was her involvement back in 2010 in providing the Greek bailout which staved off the potential default of Greece and the potential contagion to other European counterparties, which would have resulted from the event.

One of the “criticisms” towards Mrs. Lagarde is that by profession she is a lawyer rather than an economist. The critique is rooted in the fact that sceptics doubt her Economic credentials compared to some of the other candidates to the post. These included, Jens Weidmann, head of Germany’s Bundesbank and chair of the Bank of International Settlements, and Francois Villeroy governor of the Bank of France, amongst other European respected economists. So what does the choice of Mrs. Lagarde bring that these other Economists do not?

Her nomination, is bound to deliver first and foremost a certain level of political reputation to the ECB. Additionally Mrs. Lagarde is seen as an influential figure on the international stage, which may help in pushing through reform. In different stages of his presidency, Mr. Draghi, sustained the need for greater harmonisation which is a mandate Mrs. Lagarde has already indicated she supports. Additionally the increasingly political nature of the tasks ahead, and the support of seasoned ECB economists ensure that she is the right person for the job ahead.

Looking at the in-tray of challenges for the new president, the most important task in the short term is to give markets confidence and assurance of continued support. Secondly and more importantly, if the Euro is to survive it requires a more centralised policy making structure. Having nineteen (Euro-zone) countries with no common governance reduces the effectiveness of ECB policy. This would mean further integration, which is something most of the so called Populist or Nationalist parties in the European Parliament resent.  However, critics from within and outside have pointed out this as the single most critical issue impinging on the Euro’s survival.

On a valuation basis Europe remains one of the most attractively priced markets, compared to other developed markets. Such markets include the United States, Japan and other OECD countries. One of the potential reasons for this is that countries such as Germany and France, face an ongoing onslaught of internal struggles, which are preventing business investment and consumption. Additionally countries such as Italy and Greece remain in dire straits, despite not being in imminent danger of collapse.

On the other hand, countries such as Ireland and Portugal, which have implemented reforms have improved their status and registered above average growth. On the East of the bloc, increasing Euroscepticism over immigration especially from countries such as Poland and Hungary, undermine the strength of the Union. These factors, combined with external issues which include direct and indirect impact of American – Chinese tariffs, and the uncertainty surrounding Brexit add further pressure.

In terms of resources, the European Union has the right cards in its deck, which include high quality human capital, advanced capital markets, international logistical connections and innovative corporations which can scale into the size of their American and Chinese peers. In my opinion the issue preventing the European Union from achieving this, is the inability to agree, as different actors push in different directions. In geo-political terms, a fragmented Europe becomes insignificant next to international players such as the U.S, China and India. Only when it acts as one will it be able to stand on an equal footing with these powers.

Daniel Gauci HnD Management, CeFa Investments, is an Investment Advisor at Jesmond Mizzi Financial Advisors Limited. This article does not intend to give investment advice and the contents therein should not be construed as such. The Company is licensed to conduct investment services by the MFSA and is a Member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on Tel: 2122 4410, or email [email protected];