© REUTERS/Fabrizio Bensch

Isabel Schnabel is no dove. Germany’s nominee for the European Central Bank’s executive board is eloquent and persuasive; she holds strong opinions, and she knows how to make her views heard in a field still dominated by men. As an economist, Schnabel has often sharply criticized the ECB’s policies, especially its controversial asset purchasing program.

Yet the 48-year-old, who is a member of the influential German Council of Economic Experts, doesn’t represent German monetary orthodoxy. She may disagree with specific aspects of the ECB’s loose monetary policy, but she doesn’t oppose low interest rates on principle. Ideologically, she is probably much closer to the bank’s new president, Christine Lagarde, than previous German central bankers have been.

In addition, Schnabel takes a different view on fiscal policy from many mainstream economists in Germany. In the latest annual report of the Council of Economic Experts, which was published in early November, she gave a dissenting opinion on two key issues of budgetary policy: first, she argued that Germany should lower some taxes and increase public investment to support the lagging economy.

Schnabel’s second dissenting opinion concerned the Schuldenbremse or debt brake that sets strict limits on public deficits in Germany. In the longer term, Schnabel said, this debt brake should be reformed to allow for more public investment.

End of the Balanced Budget?

Such views are increasingly popular in Berlin, where the economic slowdown means that tax income is not increasing as quickly as in earlier years. Chancellor Angela Merkel’s coalition of conservative Christian Democrats and Social Democrats (if it survives, which is an open question) will find it much more difficult than in the past to spend its way out of internal disagreements. The days of a balanced budget seem numbered.

This makes Schnabel a very interesting choice for the German government—and a very different one from earlier appointments to monetary top jobs, Jens Weidmann, president of the Bundesbank and as such a member of the ECB’s governing council, and Sabine Lautenschläger, Schnabel’s predecessor on the bank’s executive board.

Weidmann is the ECB’s most outspoken critic of extremely low interest rates. He served as Merkel’s economic adviser before being appointed to the Bundesbank at the height of the euro crisis in 2011.

At that time, Germans—Merkel’s conservative bloc in particular—were deeply worried about the bailout programs that had been set up to save the eurozone. Risking German taxpayers’ money in order to keep spendthrift countries afloat was extremely unpopular. In that context, a Bundesbank president with strict views on monetary and fiscal discipline seemed like a last line of defense.

Lautenschläger joined the ECB’s executive board three years later, in 2014, when Spain and Portugal had already managed to exit the bailout programs, but Greece and Cyprus were still regarded as vulnerable. Again, Berlin chose a proponent of monetary and fiscal conservatism.

During her time at the ECB, Lautenschläger was as fiercely opposed as Weidmann to continuing the bank’s policy of easy money. While both did have some allies on the governing council, notably the central bank presidents of the Netherlands and Finland, the majority of southern European countries generally backed outgoing president Mario Draghi’s policies.

A Constructive Influence

Lautenschläger stepped down at the end of September, three years before the end of her term, following an ECB announcement that it would lower interest rates even further and resume its controversial asset purchase program. Draghi had pushed through those decisions just six weeks before the end of his mandate, causing an outcry in Germany.

At the time, Schnabel was still a professor at Bonn University, albeit a specialist on eurozone reform and banking regulation, and had no inkling that she might be asked to join the ECB in the near future. Yet in an interview with the business daily, Handelsblatt, she strongly defended the central bank.

“Of course, you can disagree about specific measures,” Schnabel said. “But if politicians, journalists and bankers reinforce the narrative that the ECB is stealing German savers’ money—that’s dangerous. It will come back to haunt us one day.” Schnabel pointed to Britain, where the EU was used as a scapegoat for many years. This was now leading to Brexit, she said. “In Germany, the ECB is constantly being made into a scapegoat.”

Such opinions certainly won’t hurt Schnabel in her new job. More importantly, her differentiated approach toward the ECB’s monetary policy may gain her more influence than Weidmann and Lautenschläger had. Schnabel is a good communicator, and it helps that she is an economist while both Lautenschläger and Lagarde are lawyers by training. If she teams up with Lagarde, the only other woman on the bank’s executive board, both could benefit.

“The ECB’s Executive Board is running out of economic skills,” ING analyst Carsten Brzeski wrote in late October. “With Schnabel, Germany would have an excellent economist on the board, who has been rather supportive of the ECB’s monetary policy decisions of the last years (…) Schnabel could also emerge as a Lagarde whisperer, giving Germany a much better and much more constructive influence on ECB decisions than the traditional nein.”

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Artwork © Dominik Herrmann

Christine Lagarde is not making any public statements at the moment. She doesn’t want to risk any controversies in the run up to the EU summit in October, at which she is to be finally appointed president of the European Central Bank. Every word would be scrutinized and also interfere with the work of the current ECB president, Mario Draghi, who remains in office until the end of October.

Lagarde had been expected to attend the largest French economics conference in Aix-en-Provence shortly after the European heads of state and government agreed on nominating her at the beginning of July. She cancelled her conference appearance, though she still went to Aix-en-Provence but only to attend the opera, which she loves. Her younger brother Olivier, who is a well-known baritone, often accompanies her on such visits.

The 63-year-old Frenchwoman did, however, send a message to the disappointed conference organizers—it’s the only statement she has made since her appointment. Referring to the conference topic of “regaining trust,” she wrote: “With trust, the child takes its first steps, the lovers exchange rings, the entrepreneur invests, the banker gives credit, the citizen gets involved. I am convinced that your conference theme is the first condition for the world to meet the challenges it faces.”

At the ECB, too, her first task will be to build trust—in her own leadership and in the ability of the central bank to set the right framework conditions for the economy and thus prepare the European Monetary Union for the future.

Expectations are especially high in Germany, where there is the most hostility to the ECB’ low interest rate policy. The opening of the monetary policy floodgates was met with harsh criticism here because it harms savers, burdens banks, and thus triggers the feeling that Germans are paying for others. Can the former managing director of the International Monetary Fund (IMF) smooth the troubled relationship and successfully guide the ECB through the next eight years, years that may become turbulent?

A Well-Liked Dove

Lagarde is certainly well liked among the main players of the financial markets. Experts like to divide central bankers into “doves,” advocates of a loose monetary policy, and “hawks,” advocates of a restrictive monetary strategy. While Jens Weidmann, for example, the president of the Bundesbank and defeated candidate for the ECB job, is seen as a hawk, Lagarde is regarded as a dove. “She’s probably even more of a dove than Draghi,” bond manager Ben Lord of the British finance company M&G Investments told the Financial Times. While that may not be the consensus view on the financial markets, many do see Lagarde as at least being in line with Draghi.

Lagarde expressly welcomed the ECB president’s announcement in July 2012 that he would defend the euro with “whatever it takes,” thus creating a protective wall around the common currency. As a result of this guarantee, the ECB massively bought up government bonds issued by European governments. Lagarde was even “an early supporter” of this “quantitative easing,” says Andrew Benito of Goldman Sachs.

The ECB hopes that this will bring the stubbornly low inflation rate in Europe closer to the prescribed target of “close to two percent.” The glut of money is therefore likely to continue under Lagarde for some time. She recently warned that the global economy was entering rough waters and recommended that the central banks maintain their loose monetary policy. On the day of her nomination in early July, European government and corporate bond prices jumped. Investors continue to expect high prices for the bonds which implies low interest rates.

A Keynesian Worldview

Lagarde’s time at the helm of the IMF would seem to indicate that she is not an “ultra-liberal,” the derogatory term used in her native France to describe economic liberals. Traditionally, the fund has dealt with topics such as currency issues, imbalances in international trade, and major macroeconomic indicators such as public debt and growth. Lagarde expanded the spectrum to include social inequality, gender discrimination, climate change, energy policy, anti-corruption, and financial stability.

As a result the IMF no longer has shed some of its image as a hard-hearted neo-liberal institution. There has always been a range of thinking among the well over 1,000 IMF economists, but under Lagarde the focus changed: countries with fiscal leeway were advised more strongly than before to increase public investment. Savings programs should not be too harsh, capital market controls, which had previously been taboo, became socially acceptable, while privatization was no longer regarded as a panacea. Under Lagarde, the Keynesian worldview has to some extent become the norm at the IMF.

While the anti-Keynesians at the fund may blame her for this change, overall there is no doubt about her popularity with the staff there. Lagarde is considered capable of compromise and a team player. She includes rather than excludes. “Building consensus is one of her outstanding skills. She listens to the opinions of everyone involved, even a young economist who joined the IMF just six months ago,” Bruno Silvestre, who worked for many years as her spokesman in Paris and Washington, told the Frankfurter Allgemeine Zeitung.

Team Player with Charisma

She gained respect because she increased the fund’s financial resources and thus its firepower. This also reflects her negotiating skills with the 189 governments represented in the IMF. Her charm has also been good for the IMF. Lagarde, who loves jewelry and is always elegantly dressed, has a winning charisma that is effective. The fact that she is also known to be “as tough as nails” doesn’t have to be a contradiction.

The network that she has built up over the years plays a central role here. During the financial crisis, she often exchanged ideas with Henry (“Hank”) Paulson, the then US treasury secretary, whom she knew from their Goldman Sachs days. She was and is personally known to numerous important CEOs because she advised them as a star lawyer. Since her time as French finance minister, she has also got on very well with her former German counterpart Wolfgang Schäuble.

This helped her when in 2010, against German resistance, she called for Greece to be helped out of its existential economic crisis. Later, she advocated a restructuring of Greece’s debt with easier conditions for the government in Athens. The relationship with Schäuble was not damaged. The same applies to her rapport with Angela Merkel. There’s a mutual respect there marked by the fact both have succeeded in what is still a male-dominated world.

The Spiral of Cheap Money

But does the ECB need someone quite so political at its helm at a time when the independence of central banks around the world is threatened? In the United States, President Donald Trump is putting pressure on the Federal Reserve, in Europe the ECB has fallen into a spiral of cheap money, which spares countries with lax financial management like Italy the necessary reforms. So far, the ECB has not been able to escape this spiral, because abandoning this policy could endanger the entire monetary union. The ECB has thus made itself vulnerable to blackmail.

Can Lagarde stand up to governments in this context? Some doubt it. Yet as IMF chief she proved her independence from the German government when she and the IMF withdrew from the third rescue package for Greece in 2017 against Berlin’s wishes. Behind the scenes, she fought fierce battles with Greek Prime Minister Alexis Tsipras over austerity programs and credit conditions. Recently, she also warned of the debt mountains piling up around the world.

Then again, she still has to prove her independence from the French government. Yet she is less embedded in the French establishment than it might first appear. Even as a young woman, Lagarde was more attracted to America. She failed the entrance test to get into the classical elite school, the ENA. Instead, she made her career with the American law firm Baker McKenzie, one of the largest in the world, where she stayed for 25 years.

She later joined the French government, appointed by French President Nicolas Sarkozy as finance minister. However, she has never been a politician who sought a popular mandate from the electorate, being more attracted to the wider world.

An episode as French finance minister also left a bitter aftertaste: an affair involving French entrepreneur Bernard Tapie. On her watch, the French state paid more than €400 million as compensation to Tapie in connection with the opaque sale of Adidas in the 1990s. It’s still not clear exactly who gave the instructions for the payment of such a huge sum; a French court found her guilty of “neglecting” her official duties, but imposed no punishment.

The Eternal First

Throughout her life she’s been something of a pioneer—in terms of her gender, her nationality, and her education. She was the first woman and the first non-American to head Baker McKenzie, as well as the first woman to serve as French finance minister, head of the IMF, and now president of the ECB. All of that demands a lot of assertiveness.

As the eldest of four siblings, she grew up with her three brothers in a middle-class family in the port city of Le Havre. Her father was a professor of English, her mother a teacher. Politics was always present in her family; her parents knew leading politicians like Pierre Mendès France or the later President of the EU Commission, Jacques Delors, who were visitors to the family home.

When she was 12 years old, she took up synchronized swimming. Three years later she was on the national team and a silver medal winner in her age category. She has displayed both discipline and the ability to integrate ever since. But when she was 16, her father suddenly died. The family had less money and Lagarde had to go to work as well as attend school.

When she was 18, she spent a year in the US on a scholarship, attending a high school in Maryland, and she also interned on Capitol Hill as a parliamentary assistant to William S. Cohen, later secretary of defense in the Bill Clinton administration.

Christine Lagarde, the eternal first. She will also be the first ECB president not to have a degree in economics. Her economic background had already been an issue when she was at the IMF. “I can understand what  people talk about,” she told The Guardian in 2012, “I have enough common sense for that, and I’ve studied a bit of economics, but I am not a super-duper economist.” At the ECB, of course, this could become a problem, because the job is more technically challenging than at the IMF.

Fishing in a Larger Pond

In times of crisis, central bankers often have to react quickly. They  need not only the right instinct, but also the technical knowledge. At the same time, Lagarde is not a novice. Anyone who headed the IMF for eight years and was French finance minister for four years has enough knowledge of the economic context. Nevertheless, many observers believe that Lagarde must draw on the ECB’s expertise more than her predecessors. The top expert there will be Philip Lane, the bank’s chief economist, who comes from Ireland.

Decision-making at the ECB should in any case have a broader basis. Draghi took decisions with a small group of his closest confidants or even alone. Lagarde is likely to fish in a larger pond and at the same time change the ECB’s external image. Her proven communication skills, which Draghi lacks, are one of her greatest assets.

After spending the last eight years in Washington, the first lady of the financial world is returning to Europe. When it comes to her private life, the move to Frankfurt will be far more convenient: She can now see her partner, a French entrepreneur from Marseille, and her two adult sons living in France without needing to take a transatlantic flight.  

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