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Trouble at the ECB?

The sudden resignation of German ECB board member Sabine Lautenschlaeger has raised all sorts of questions as to why she has suddenly decided to jump ship.

It is no secret that German central bankers have always been suspicious of too loose a monetary policy, after all she will be the third Bundesbank member to leave their role early in the last ten years, following in the footsteps of Jürgen Stark in 2011, and Axel Weber.

The European Central Bank has declined to give any reasons for her sudden resignation two years early, however it has given rise to all sorts of speculation that it was to do with the September decision to ease monetary policy further, particularly the restarting of the asset purchase program, which she, along with other ECB members was premature and unnecessary.

This seems a rather strange conclusion given that she will be leaving the same day as ECB President Mario Draghi, and can’t have been the first time that she’s disagreed with some of the moves on monetary policy over the last few years.

If she had disagreements with Draghi, the fact that he will be gone in the next few weeks would be an opportunity for her to help shape policy with the new incumbent Christine Lagarde when she arrives on November 1st.

While only Ms Lautenschlaeger knows the reasons for why she feels she can’t carry on, one of those reasons could well be the arrival of Ms Lagarde, a lawyer by trade, who is being parachuted in to do a job she has no experience of at all.

Furthermore her tenure at the IMF hasn’t exactly been a success story, as the experiences of Greece and Argentina can testify. The role of the IMF in becoming politically embroiled in creating the deepest recession ever recorded in Greece, which left a trail of human misery in its wake, despite widespread warnings that what it was asking was overly onerous and optimistic.  

The IMF also faces the prospect of incurring losses in regards to the $57bn loans to Argentina in return for huge budget cuts and fiscal austerity, which caused the economy to collapse. The Argentina loans may well get restructured in the short term, but given the unstable nature of politics in that country there is no guarantee that it will be a smooth ride.

Her tenure at the finance ministry in France, wasn’t exactly a success either, coming at a time when French deficits were very high, and well in excess of EU rules.

In fact in 2010 France was heavily criticised by both the IMF and the EU Commission for its plans to cut its deficit from 8% of GDP to 6%, on unrealistic growth forecasts of 2.5%, when Christine Lagarde was in charge of the finances. At the time she was also highly critical of the German growth model saying that Germany needed to do more to boost domestic consumption, which while a valid criticism, didn’ t go down well at a time when France was completely ignoring EU budget rules.  

Against this sort of background, as well as getting embroiled in a fraud scandal, Christine Lagarde’s parachuting into the position of ECB President is likely to be a cause for concern for those who still value fiscal prudence over fiscal largesse.

Combined with the fact that she isn’t remotely qualified for the role in terms of central bank experience it is likely that her elevation to such a high profile role could well rankle with central bankers who have worked hard to get into the positions they currently occupy.

Whatever Mario Draghi’s faults he has been the creative glue that has kept the euro together since that speech back in 2012, when he said the ECB would do whatever it takes to preserve the euro, and believe me it will be enough.

That will be Draghi’s legacy, what will Christine Lagarde’s be?

Judging by her track record the omens don’t look positive, and maybe that is why Lautenschlaeger decided to jump ship, a lack of confidence in Draghi’s replacement, at a time when the European economy needs skill and expertise in navigating an economic minefield.

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