There is an end to everything: Mario Draghi will leave the European Central Bank (ECB) after eight years in charge of the institution that changed the way monetary policy is conducted in the euro zone.
Christine Lagarde, the incoming president, will find her hands pretty much tied by Draghi’s last big policy package. After the Governing Council passed a comprehensive and highly controversial easing package at its 12 September meeting, the acceptations are ECB policy to be on hold for the remainder of the year and for much if 2020
A divided ECB with a new president could maintain its current stance until 2021.
The ECB’s credibility is at risk as inflation, despite all the extraordinary measures, is not moving back to the bank’s target. Market-based inflation expectations are close to record lows.
The euro area economy is also in a fragile state: PMI data has signaled that the manufacturing sector is quickly contracting and that this weakness has started to infect the much larger services sector too.
Much depends on how the trade issue between the U.S. and China plays out and what Brexit will look like in the end.
The ECB will enter a new era under Lagarde. There is currently much infighting regarding the recent policy decisions, and moving passed this would be crucial for her. Lagarde’s most pressing job will be to bridge the divisions and ask all Governing Council members to focus on jointly explaining the decision to the public rather than emphasizing the differences.
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