Is the personality trait of flexibility apparent in Lagarde’s management style, AND could her leadership style in the ECB be viewed as creative decision making?
What Christine Lagarde Brings
to the ECB: Flexibility
The career of the next European Central Bank chief
shows the institution is getting a diplomat and
negotiator, not a technocrat or economist
By Josh Zumbrun and Bojan Pancevski
July 18, 2019 11:22 am ET
For seven hours, European finance ministers in a windowless room argued over
how to keep a government-debt crisis from infecting eurozone economies, and
the meeting threatened to fall into disarray.
Then Christine Lagarde stood up to speak.
She read a proposed solution from notes she had jotted while the others were
debating, said Thomas Wieser, a senior European civil servant who was there.
“A group of ministers alternating between screaming and mumbling, some of
them not necessarily well-informed, gradually went quiet.”
The ministers, said Mr. Wieser and other participants, rallied to Ms. Lagarde’s
side.
That was May 2010 in Brussels, when Ms. Lagarde was French finance minister.
The topic was how to prevent Greece’s financial crisis from threatening the
eurozone’s survival. The brand of political compromise Ms. Lagarde displayed
there would play out during her tenure as the International Monetary Fund’s head
from June 2011. This month, it helped her become the person tapped by
European leaders to helm the European Central Bank, the most influential
monetary-policy maker after the U.S. Federal Reserve.
A review of her career offers hints at what kind of ECB chief she would be. On
numerous occasions, she has shown a politician’s pragmatism to the point of
pivoting sharply away from some of her own initial policy positions. In 2018, Ms.
Lagarde, who once said Greek debt was “totally unsustainable,” shifted her
longstanding stance to cut a deal with European creditors that ignored the IMF
demand to restructure Athens’s enormous obligations.
The ECB, unlike the IMF, has always been run by a leading economist or central
banker. Instead, the ECB is getting a political operator—a diplomat and
negotiator, not a technocrat.
She is likely to need that pragmatism when she succeeds ECB President Mario
Draghi in November. The goal of European integration is under strain. It will
depend heavily on the central bank’s contribution to bolstering the region’s
wobbly economic expansion—including further quantitative easing—in an era
when many populists want the world’s high financial institutions to do less, not
more.
“It’s a fiction to think that the ECB can be completely outside politics,” said
Giorgos Papakonstantinou, who was Greek finance minister at the height of the
crisis and worked closely with Ms. Lagarde. “The fact that market reaction to her
appointment was positive is telling: The markets are welcoming someone with a
pragmatic stance and political agility.”
Share prices in Europe and the U.S. rallied following Ms. Lagarde’s nomination
as ECB president, while borrowing costs dipped across the eurozone in
expectation of continuity and renewed stimulus.
Her approach doesn’t always succeed. Compromises she helped broker between
the IMF, ECB and European Union helped prevent the eurozone from breaking
up but left Greece’s economy still struggling today and the broader eurozone
expansion still sluggish .
Ms. Lagarde’s reputation suffered when she supported a much-criticized decision
in the 2013 bailout of Cyprus, said Nicolas Véron, a senior fellow with the
Peterson Institute for International Economics in Washington, a think tank. She
and EU officials agreed to a plan by the Cypriot government to inflict losses on
bank depositors, effectively reneging on a deposit guarantee. The nation’s
parliament soon overturned the decision. “It was an inglorious episode in an
otherwise admirable career,” Mr. Véron said.
While many applaud her persuasive skills, some worry about giving the ECB
helm to someone who appears likely to continue Mr. Draghi’s expansive
“whatever-it-takes” approach to policy—including a willingness to experiment and
push through controversial change for the sake of holding the 19-member
currency bloc together. His critics, particularly in Germany, say such efforts have
hurt private banks and savers and could fuel financial instability.
‘Subtle manner’
Those who know Ms. Lagarde, 63, say she can take control of a room and
influence those in her circle—usually technocratic men, as she has noted—with
personal charm. “Ms. Lagarde’s subtle manner,” Mr. Wieser said, “proved
effective in dealing with older men who often tried to assert themselves
personally instead of looking at the bigger picture.”
A picture of the leadership style Ms. Lagarde brings to the ECB emerges from
interviews with finance ministers, a former premier, top civil servants, central
bankers, government advisers, and IMF staff and leadership. She declined to be
interviewed.
Born in Paris and educated as a lawyer, Ms. Lagarde rose through the
international law firm Baker McKenzie, working on labor, antitrust, and mergers
and acquisitions—areas involving contentious negotiations. In 1999, she became
the first female chairman of its global executive committee. In 2005, she joined
the French government, rising to finance minister at the dawn of the global
financial crisis.
The euro crisis began when Greece lost access to bond markets after a collapse
of fiscal discipline, triggering investor stampedes out of eurozone countries with
financial imbalances and shaking investors’ faith Europe’s common currency
would hold together. Germany had initially brought the IMF into the matter to
press debtor countries to overhaul their economies.
Ms. Lagarde was the first finance minister to openly propose a bailout for Greece
in 2010, a move until then opposed by countries including Germany. Later, she
and Poul Thomsen, head of the IMF’s European department, pressured
European creditors to restructure bailout loans to Greece with easier repayment
terms and debt relief.
Ms. Lagarde won the affection of Wolfgang Schäuble, the cantankerous German
finance minister at the time. Ms. Lagarde is known in Berlin as one of the few
with whom Mr. Schäuble, a French speaker, uses the familiar form of address
that exists in German and French.
The warm relationship continued after Ms. Lagarde took the IMF helm and led it
in rethinking its tough bailout approach. She commissioned critical internal
reviews of how the IMF became involved in the initial Greek bailout that was
failing. Creditors’ demands for budget austerity including spending cuts and tax
increases had caused an economic contraction so severe it made debt
repayment less likely and fueled the rise of populist politicians.
Berlin grew increasingly irritated by the IMF’s pressure on European creditors to
restructure Greece’s debt. But she and Mr. Schäuble maintained cordial
relations.
German Chancellor Angela Merkel took an immediate liking to Ms. Lagarde’s
straightforward manner early in their acquaintance, said a person familiar with
the relationship, and was impressed at how Ms. Lagarde established herself in
the male-dominated top echelons of politics.
In 2015, when Greece’s new left-wing government tried to overthrow creditors’
austerity measures, Ms. Merkel worked closely with Ms. Lagarde to avoid a
Greek exit from the eurozone. They met at a crucial meeting in Berlin in June,
along with presidents of France, the ECB and the European Commission, to
hammer out the basis of a bailout plan that proved acceptable to Germany and
allowed Greece to muddle through.
Ms. Lagarde figured out the key to changing IMF economic policies was
identifying topics that, in IMF jargon, have “macro-criticality”—ones that can bring
broader overall economic results. She is widely known for speeches on topics of
gender inclusion, economic inequality, climate change and fighting corruption.
Less known is that she successfully built the case that these topics bring broader
results and must be incorporated into bailout programs and the IMF’s economic
reviews.
While it was IMF economists who calculated that excluding women from the labor
market reduced potential GDP as much as 30% in some countries, it was Ms.
Lagarde who spoke out against these practices as an “insidious conspiracy” and
successfully pushed the IMF to formally integrate metrics such as women’s labor-
force participation into economic reviews.
She may not have come up with the data or idea for a policy, but she recognized
its importance, said Sean Hagan, former IMF general counsel. “It’s always the
case with effective leaders that they’re not always the ones that do the initial
calculation,” he said, “but they’re the ones who understand that this particular
strand of thinking can be given priority. She was able to do it very effectively.”
She used her network like a politician. She answered to the IMF executive board,
representatives of 189 member countries. But if someone on the board was
skeptical of her initiatives, say former directors, she had the relationships to go
over their heads and speak to finance ministers or heads of state.
Gerry Rice, the IMF’s communications director, acknowledged that Ms. Largarde
had relationships with top politicians, but said she preferred to make the case on
its merits and find common ground.
And Ms. Lagarde proved adept at operating in rooms of besuited men. When the
IMF’s executive board first interviewed her for the top job eight years ago, the
only female director on the 24-person board was absent, leaving her in front of
23 men. In group photos at G-20 summits and IMF meetings, it is often Ms.
Lagarde standing out in a dark sea of suits.
“There is a lot that is attributable to personality and part of my personality, of
course, is being a woman,” she told The Wall Street Journal in 2015. “It may be,
because people tend to be territorial, men tend to be a little more territorial, so to
the extent that I’m not really a physical threat, because men don’t have to show
off to me, because a man-woman relationship is of a different nature, that helps.”
She honed the art of taming unruly groups. When she chaired meetings, she
tended not to cut people off. To keep meetings moving on the IMF’s board, she
allotted each director four minutes to speak. Once they went over time, said
former board members, Ms. Lagarde began gradually tapping her microphone
until they stopped, rather than interrupting.
German sensitivities
German sensitivities will likely remain Ms. Lagarde’s greatest challenge.
Germany is the eurozone’s largest economy. Its political establishment and
public have been largely hostile to eurozone bailouts and stimulus policies under
Mr. Draghi. Jens Weidmann, the German Bundesbank president, has often voted
against Mr. Draghi’s policies. Ms. Merkel’s designated successor, Annegret
Kramp-Karrenbauer, said in June that ECB policies were hurting German savers.
Alexander Stubb, Finland’s former premier and its finance minister during the
eurozone crisis, said the balancing act between German sensitivities and the
eurozone’s demands is where Ms. Lagarde’s political astuteness will prove more
relevant than central-banking experience.
Ms. Lagarde may depart further from the traditional view that the ECB should
pursue monetary policy independently of European political leaders who manage
tax, budget, labor and other economic policies, said Olli Rehn, Finland’s central-
bank governor, who sits on the ECB board.
“But independence doesn’t mean loneliness. We need both fiscal policy and
structural reforms to support stronger growth and job-creation.”
Jörg Asmussen, deputy to Germany’s Mr. Schäuble during the euro crisis and
now senior executive with New York bank Lazard Ltd., agreed. “She may not be
a monetary economist, but she is a monetary diplomat,” he said. “She is
extremely charming and that is part of her style of politics. She would hand out
French pralines at 3 a.m. during frantic ministerial meetings.”
A senior EU official said there were concerns that, in putting a politician in charge
of the continent’s monetary policy, technocratic consensus could be replaced
with political calculus. The official noted the ECB’s new vice president, Spain’s
Luis de Guindos, was also a politician.
One hint of how Ms. Lagarde may defuse such concern comes from how she
drew on her own technocratic deputies during her IMF tenure. Mr. Thomsen, the
IMF’s Europe director and an economist, represented her in key European
meetings that required detailed technical expertise.
Officials at the IMF, the ECB and in several European capitals said that in her
new job she will likely rely on Philip Lane, the ECB chief economist, as she relied
on Mr. Thomsen.
Mr. Asmussen, who served on the ECB executive board, said Ms. Lagarde will
be able to fall back on Mr. Lane for technical expertise. The ability to provide
continuity with Mr. Draghi’s policies—he publicly vowed to do “whatever it
takes”—was key, he added.
“The question whether the new ECB chief would do whatever it takes is now
answered,” he said. “Yes, she will.”
—Marcus Walker, Tom Fairless and Ian Talley contributed to this article.