ECB Insight: Lagarde Abandons Pretence of Big Happy Family

13 July 2021

By David Barwick – FRANKFURT (Econostream) – Although both public comments by European Central Bank Governing Council members and the published accounts of their monetary policy meetings had pointed in the last months to a widening rift, ECB President Christine Lagarde has tended to gloss over any discord – until now.

In an interview with the Financial Times released Tuesday, Lagarde admitted that she was ‘not under the illusion that every six weeks we will have unanimous consent and universal acceptance, because there will be some variations, some slightly different positioning. And that is fine.’

Except that it is not all that ‘fine’ for Lagarde, who is known to seek consensus. In this respect, she has been a marked contrast from her predecessor, Mario Draghi, who would effectively pre-commit the Council via surprise public announcements, an approach that did not endear him to everyone. Lagarde cannot now regard as ‘fine’ the threat of sacrificing her standing as an honest broker for all sides.

Lagarde picked up the subject of dissonance again later in the interview - further indication, perhaps, that increasing strife about the course of monetary policy is preoccupying her. ‘[T]he weaving of monetary policy within that [new] framework is going to take multiple colours,’ she said. ‘So unanimous agreement on each and every weaving moment is not a requirement.’

She did not deny that it would however be preferable: ‘The more we can agree, the broader the agreement, the better.’

A recurring theme in Lagarde’s communication since the unveiling of the new strategy has been her insistence on the unanimity with which the outcome was reached. She did not miss the latest opportunity either to hammer that message home.

‘The strategy, which I regard as a sort of constitutional foundational framework chart for future monetary policy determination, is a strong signal’, she said. ‘We are all on the same page. There's a unanimous agreement. There is a total consensus around that foundational document, that constitution of ours.’

The irony is that this unanimity, which was the sine qua non of concluding the exercise, may convey a misleading idea of Governing Council members’ respective sentiments towards the outcome. Reluctant to be – or be seen or possibly even portrayed – as obstructionist, and eager to prevent what they would have considered a yet worse outcome, the new framework is more than anything else simply the lowest common denominator, and that just barely.

It would thus be misguided to equate unanimity here with full-throated support, and indeed, since the presentation of the new strategy, comments made by Council members at opposing ends of the hawk-dove spectrum have already brought into relief varying degrees of enthusiasm.

Tellingly, as part of the very same answer in which she cautioned against expecting unanimity going forward, Lagarde highlighted the aspects of the new framework most likely to raise hackles:

‘I think we should really not undermine or underrate those keywords that we have, which is this especially forceful or persistent reaction, the recognition of the constraint, this sort of gravitational force exercised by the effective lower bound that we have to resist, and the transitory period during which we recognise that our policies may imply a moderate deviation above target’, she said.

This was no non sequitur. When one also considers the remarkably convenient timing with which the strategy review came to a conclusion, things become clearer. For the Council doves, the new framework represents an opportunity to achieve the continued accommodation that, as the last meeting account made abundantly clear, had recently become considerably more difficult against the backdrop of a significantly better economic outlook.

Lagarde knows this, and while she might like to think that in supporting the outcome of the strategy review the Council hawks were implicitly expressing a willingness to go along with the current policy course for just a while longer, she has doubts that this is going to be the case.

The hawks having bent over backward to accommodate the doves for some time already, and having generally been good soldiers and not aired their grievances too stridently and publicly, from their perspective, invoking the new strategy to justify more of the same policy stance could be perceived as a low blow, especially when accompanied by constant barbed reminders of their putative support for the new framework.

Some of the hawks, and indeed some neutral observers, might understandably argue that in effect, ECB monetary policy has already been consistent with the new strategy for a while anyway. Seen thusly, the new strategy would require no significant policy adjustments beyond some tweaking of communication.

Either way, the extended period of relative unity appears poised to draw to a close, and rather than prolong it, the new strategy may hasten its end.