Lagarde Exit Chatter Sparks Succession Race & Heighten Politicisation Concerns

Reports overnight suggested that ECB President Christine Lagarde is set to leave her role prior to the expiry of her 8-year term next October. This raises a number of considerations, despite the ECB having pushed back on this chatter.

Worrying Precedent

Firstly, Lagarde’s decision to jump ship early, if the FT’s sources reporting proves correct, sets a worrying precedent for those who may follow her at the helm of the ECB. This is because, per their reporting, Lagarde’s decision to leave prematurely is not for any sort of personal reasons, but instead to allow outgoing French President Macron, who is unable to stand in elections next April, to play a role in choosing her successor.

This is, quite clearly, a glaring politicisation of the central bank, with Lagarde seeking to enable a political ally (Macron) to choose her replacement, likely seeking to block Marine Le Pen, the RN’s potential presidential candidate and front-runner in current polling, from playing a role in the process. At a time when Lagarde has, correctly, made protestations against the erosion of monetary policy independence in the US, it is ironic that she is also politicising the institution that she is mandated to keep above the fray.

More worryingly, though, is not just the current situation, but what this may mean in a few years. Say, for instance, that Lagarde’s successor also takes a dim view of the political environment at some stage during their term; an early resignation would set a precedent that it is ok for the ECB President to time their career plans around the political environment. The idea of an 8-year term stemmed from a desire to insulate the institution from political concerns, while Lagarde’s potential actions pose the risk that the very opposite may now prove to be the case. I suppose, when EU leaders decided to appoint a politician to run the central bank, they should’ve known that they were asking for trouble!

Potential Successors

Returning to current events, with this being the second time in a year that rumours of an early departure have surfaced, speculation as to who may succeed Lagarde at the helm of the ECB will run riot once more.

Here, it’s easiest to start with who is unlikely to be President. With Vujcic having recently been appointed Vice President, replacing de Guindos, an eastern European candidate is unlikely to be in serious contention. The same goes for a French candidate, with two of the four Presidents to date having come from France. A German candidate also faces hurdles, with current Exec Board Member Schnabel not able to be elevated to the top job, and in any case Ursula von der Leyen’s Commission presidency also complicates matters.

This, then, rather shrinks the pool of potential successors. Former Spanish central bank chief, and current BIS General Manager Pablo Hernandez de Cos is a name that is often floated in these discussions, though he has been in his current role for less than a year, which many will likely see as too soon to move back to the ECB, even if de Cos is a widely respected academic and policymaker.

The other name that continues to do the rounds is that of former Dutch central bank Governor Klaas Knot. In my view, Knot is by far and away the most likely candidate to get the gig, given that none of the other names in the fray can combine market credibility, institutional experience, and academic strength as well as he can. Furthermore, Knot not only has extensive experience of monetary policymaking, after 14 years running the Dutch central bank, but also in the realm of financial stability, having previously been Chair and Vice Chair of the FSB. Knot’s candidacy would likely, and importantly, be supported by Germany, though current Exec Board Member Elderson would probably need to leave, in order for Knot to become President, as two Dutch nationals on the Exec Board seems highly unlikely.

Of course, other potential candidates could emerge, including Finland’s Rehn, as well as Germany’s Nagel or Buch. Recall, of course, that Lagarde herself was never seriously mooted as a candidate for the top job until very late in the process back in 2019, when Macron proposed her as a ‘compromise’ candidate in order to resolve roadblocks surrounding other EU ‘top job’ appointments at the time.

Market Implications

Near-term, the implications of a change in the Presidency are very limited indeed. While the kicking-off of a formal succession race would lead to some degree of uncertainty, that in turn could pose a headwind to the EUR and EGBs, any such downside would likely prove relatively short-lived.

In the longer-run, while it is distinctly possible that Lagarde’s successor comes from a much more hawkish school of monetary policy, especially if Knot were to get the gig, it seems unlikely that this would cause any material shifts in the policy outlook for the time being, not least when one considers that inflation is likely to undershoot the 2% target both this year, and next.