It will be intriguing to see what approach she adopts on monetary policy. The low interest rates pursued by her predecessor, who has now been making tentative use of options for tightening monetary policy, although not nearly matching those measures taken by the Fed, has undoubtedly supported the economic upswing over recent years. However, this policy has also left us with no scope for dealing with the situation that will occur when the economy actually starts to take off.
Banks and insurance companies are having an equally tough battle in a zero-interest environment. The process of pricing risk into the capital market has been distorted. Meanwhile, the guaranteed interest rate has crumbled owing to the availability of cheap money, and traditional savers get virtually no interest now. The policy of the ECB has been associated with significant consequences for redistribution (between countries, segments of the population and business models) and disincentives. There is no way that this status can be maintained over the long term.
That’s why we believe it would be a welcome move if the ECB President designate were to gradually adopt a new approach to monetary policy that is more than a politically expedient instrument for redistribution (also across generations). A disciplined return to the stability principle of a single state as an explicit business platform and essential enabler for the success of the eurozone would benefit Europe. Equally apposite will be the self-evidential perception for Ms Lagarde as a lawyer that the actions of the ECB need to respect legal boundaries.