March 19, 2020 / 3:25 PM / 16 days ago

Breakingviews - Christine Lagarde proves a worthy heir to Draghi

FILE PHOTO: European Central Bank President Christine Lagarde looks on during a debate on the 2018 annual report of the ECB, at the European Parliament in Strasbourg, France, February 11, 2020.

LONDON (Reuters Breakingviews) - Christine Lagarde is building her legacy early and quickly. Less than five months after taking charge, the European Central Bank boss unveiled plans to buy assets worth 750 billion euros. That fixes some of the problems plaguing the euro zone. It also shores up her claim to be Mario Draghi’s worthy heir.

An emergency ECB meeting late on Wednesday conjured up the Pandemic Emergency Purchase Programme to counter the dramatic economic slowdown caused by the coronavirus outbreak and to ease market ructions which were threatening the transmission of monetary policy. Add purchases already in the works and the ECB is set to spend almost 1.1 trillion euros on financial assets this year. That’s equivalent to roughly 9% of the euro zone’s gross domestic product and will add almost 40% to the stock of bonds the central bank owned at the end of February.

Lagarde’s package was put together even more quickly than the policies Draghi devised in 2012 to back up his promise to do “whatever it takes” to save the single currency. The Italian laid much of the groundwork, but his French successor’s plan is also more flexible. 

First, the ECB may diverge from a self-imposed rule that requires it to buy government bonds in proportion to each country’s shareholding in the central bank. That gives it scope to focus on bond markets where stresses are most pronounced, such as Italian government debt. Second, it will buy Greek government bonds, even though they aren’t investment grade and were therefore not previously eligible for ECB purchases. That sets a useful precedent if other countries get into deeper trouble. Third, the central bank added non-financial commercial paper to the list of assets it would buy, following similar moves by the U.S. Federal Reserve and Bank of England. That will soothe companies struggling to issue the short-term debt they use to meet everyday needs.

Moreover, Lagarde achieved all this without going out on a limb on her own, as Draghi often did. Her collegial style probably helped speed the decision. Granted, the ECB didn’t say the decision was unanimous, something it usually stresses when there are no objectors. And Lagarde made her job harder last week with a gaffe that pushed up southern European bond yields. Even so, the speedy decision burnishes her claim to be a strong leader in her own right.

Breakingviews

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