After long negotiations, the European Council has named Christine Lagarde as president of the European Central Bank (ECB) beginning in November. She will succeed Mario Draghi, who led the ECB in the aftermath of the Great Financial Crisis and played a key role in managing the sovereign debt crisis in Europe and preserving the single currency.
Although Lagarde has broad public policy experience and has headed the law firm Baker & McKenzie, she is not an economist by training. She was Minister of the Economy, Finance and Industry in France between 2007 and 2011, playing a leading role in the management of the Great Financial Crisis. Since 2011, she has headed the International Monetary Fund (IMF) and played a key role in solving the sovereign debt crisis. She will be advised at the ECB by a highly regarded staff of experts and the Board of Governors, which will be a plus in terms of expertise but will require all her political experience to reach consensus.
Lagarde has more of a political profile than a reputation as an economist. It is not clear whether she will be hawkish or dovish in her new role. However, if Europe had wanted to turn the page on Draghi's pro-growth monetary policy, it would have opted for a German candidate, who likely would adopt a hawkish policy stance. With below-target inflation and soft economic growth in Europe, it is unlikely that Lagarde will take a position different from that of Draghi. In addition, she may even put increased pressure on EU governments to enact the next round of structural reforms.
Except for an unexpected return of inflation, which could come from a rise in oil prices or a change in the functioning of the labor market, the ECB likely will maintain a low interest rate policy for the foreseeable future. There are some questions about the unconventional tools that the ECB could put in place in the event of a recession in Europe, knowing that rates are already at the bottom. Lagarde will probably have less creativity in this scenario and could follow the lead of the U.S. Federal Reserve.
However, Lagarde’s appointment confirms the current ECB monetary policy of no rise in rates and further monetary support for the Euro Area economy should that be necessary, which is positive for real estate’s high and attractive income returns relative to the risk-free rate.
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