The Coming Regime of the ECB: Radical Centrism

The Coming Regime of the ECB: Radical Centrism by  for Mises

There is a changing of the guard at the European Central Bank this year with two important new appointments. Philip Lane, the governor of the Irish central bank, was appointed chief economist of the ECB back in June. And and the current head of the IMF, Christine Lagarde, was recently nominated to succeed Mario Draghi as president of the ECB in November. By all accounts, she is a shoo-in: she is the ultimate insider, having served as French minister of finance before becoming director of the IMF, and she has cultivated excellent relations with the main players in European politics. She’s a favorite of the French and the Germans, seemingly well-liked by many of the smaller European governments. Even Yanis Varoufakis, the former finance minister of Greece who clashed with her over so-called austerity for Greece, testifies to great admiration for the future president of the ECB.

Since we can expect Ms. Lagarde to be appointed with a minimum of opposition, the question arises: what does this mean for future European monetary policy? The announcement of her appointment was greeted with euphoria on financial markets, as it is believed that the ECB will turn even more dovish under her leadership. There can be little doubt that she will follow in the footsteps of her immediate predecessor and “do whatever it takes” to keep the ECB going and European financial markets — and governments — afloat. Nor is there any doubt that she possesses the skill-set to navigate the institutional and international politics required of her new job, as a recent article in the Wall Street Journal makes clear. This does not answer the key question, however. Even the most mundane technocrat is always guided by an ideology, a worldview or set of ideas that shape how she thinks about what is possible and what is not. What we really need to know is: what ideas will guide Ms. Lagarde when she becomes chief of the ECB in November?

Her own background offers little clue, beyond the fact that she is obviously aligned with the mainstream of European politics. But she is a centrist through and through, ready to cover for corruption and shady dealings when finance minister in France. And as head of the IMF, she played a key role in helping the German creditors secure their loans to the Greek government.

The Push for Digital Cash

More evidence about the trend of Ms. Lagarde’s thinking about monetary policy can be gleaned from the research of the scholars who worked under her at the IMF, and the ideas she publicly endorsed as director of the Fund. Consider for instance the speech she gave in November of 2018 at the Singapore Fintech Festival. Here she advocated for the issuance of digital cash by central banks. The ostensible reasons she gave for this innovation are pretty absurd if one considers them for more than five seconds. For example, who can really take seriously Lagarde’s claim digital cash will enhance privacy if the central bank issues digital currency? We are told the details of how we use the central-bank’s digital cash will only be revealed to the state if required by law, or if the transactions in question seem suspicious. In other words, the veil of anonymity that can be lifted whenever the state decrees it. That’s not exactly a great privacy-protection scheme.

The underlying reason that central banks might wish to enforce some sort of digital currency emerges if we consider the IMF publication Ms. Lagarde cites in her speech. Authored by a bevy of IMF economists, “Casting Light on Central Bank Digital Currencies” is a long, boring document detailing the pros and cons of digital cash. It emerges in the report that the crucial issue for a central bank when considering digital cash is the ability to lower interest rates when faced with an economic crisis. Digital cash is one way to overcome the zero lower bound and push interest rates into negative territory. The IMF is a long-standing advocate of this position, both on its blog and in working papers authored and published under its auspices with titles such as “Enabling Deep Negative Interest Rates to Fight Recessions  and “Breaking Through the Zero Lower Bound.

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