International Monetary Fund Managing Director Christine Lagarde - Photo by IMF

JAKARTA (TheInsiderStories) – European Union (EU) leaders on Tuesday (07/2) agreed to nominate International Monetary Fund (IMF) Managing Director Christine Lagarde as the next president of the European Central Bank (ECB) when Mario Draghi’s eight-year tenure comes to an end in October.

Lagarde’s nomination was announced in a tweet by European Council president Donald Tusk following a meeting between leaders that has lasted since Sunday. While her appointment still needs to be confirmed by the European Parliament’s vote, from the heads of European states, is the first step—the nomination sets her up to be the first female head of European monetary policy.

“I am honored to have been nominated for the presidency of the European Central Bank,” Lagarde said in a statement Tuesday. She went on to say that she will temporarily suspend her activity at the IMF while the nomination process unfolds:

“In light of this, and in consultation with the ethics committee of the IMF Executive Board, I have decided to temporarily relinquish my responsibilities as managing director of the IMF during the nomination period.”

Then, the Executive Board of IMF issued the following statement today:

“We, the Executive Board of the IMF, take note of the nomination of IMF Managing Director Christine Lagarde as President of the European Central Bank.

“We accept Ms. Lagarde’s decision to relinquish her IMF responsibilities temporarily during the nomination period. We have full confidence in First Deputy Managing Director David Lipton as Acting Managing Director of the IMF.”

Lagarde would succeed current ECB president Mario Draghi, who has held the role since 2011 and whose term ends on October 31. Draghi leaves the position amid uncertainty for the Euro and European monetary policy, he has signaled interest rate cuts and a quantitative easing program despite the lowest unemployment levels in a decade and inflation running at barely half the ECB’s goal of 2 percent.

As the managing director of the IMF— its first female head—Lagarde sits at the helm of an organization of 189 countries that works to ensure the stability of the global monetary system, promote international trade and economic growth, and reduce poverty. It possesses US$1 trillion in lending power for its members—money Lagarde has used to oversee bailouts of countries like Greece and Argentina.

Investors will likely bet that as a seasoned crisis-fighter, Lagarde will share Draghi’s taste for aggressive and innovative monetary policy, especially as her appointment means the more hawkish Bundesbank President Jens Weidmann misses out.

Financial markets are already pricing in an ECB rate cut by September, in line with predictions by ECB watchers at Bloomberg Economics and Goldman Sachs Group Inc. Morgan Stanley said the choice of Lagarde increases their “conviction” that the ECB will eventually resume buying bonds.

Lagarde last week described the world economy as hitting a “rough patch” and advised central banks to continue to adjust their policies in response. In June 2014, she said she would “certainly hope” the ECB would conduct QE if inflation stayed sluggish – months before it announced it would do so.

She also praised Draghi’s 2012 commitment to do “whatever it takes” to save the euro and recently echoed his call for governments to do more to battle future downturns. In March, she linked the need to fortify the euro area to the words of playwright Moliere: “The trees that are slow to grow to bear the best fruit.”

Just last September, Lagarde dismissed speculation she could take over the ECB, telling the media she was a ” bit annoyed and fed up” with the suggestion. Only one economist surveyed last month predicted she would get the job, with Weidmann seen as the most likely winner in a race dominated by men.

France has now twice secured the presidency of the two-decade-old ECB. Draghi, an Italian, was preceded by Frenchman Jean-Claude Trichet, who replaced Dutchman Wim Duisenberg.

In common with Trichet, whose appointment was held up by a trial involving the bailout of Credit Lyonnais, Lagarde brings a history of legal wrangles. They culminated in a conviction of negligence in 2016 over her handling of a multi-million euro dispute linked to the same bank.

Lagarde’s appointment also means the ECB and the United States Federal Reserve will be headed by former lawyers, a shift from the era when central banks were run by academic economists such as Ben Bernanke. That opens her up to criticism that she lacks the knowledge to set monetary policy and could boost the influence of Philip Lane, the ECB’s new chief economist.

She does though boast political nous, which will be needed to unite fellow ECB officials when setting policy – especially if they run low on monetary ammunition and need to nudge governments to step up support of the economy.

Lagarde, 63, would become the first ECB president who’s not a professional economist and the second French national to lead the Frankfurt-based institution. Before joining the IMF, she was the finance minister of France.

Written by Lexy Nantu, Email: lexy@theinsiderstories.com