International Monetary Fund Managing Director Christine Lagarde has emerged as the choice to replace Mario Draghi as President of the European Central Bank President later this year, following two days of tense negotiations in Brussels that saw European leaders divvy up the top jobs for the region's Executive.
Lagarde, a lawyer by trade who has no direct monetary policy experience, has served as France's Finance Minister from 2007 until 2011, when she took over as IMF Managing Director following the resignation of her French countryman, Dominque Strauss-Kahn, who left the post in Washington after being accused of sexual assault during a visit to New York.
The European Council, a collective of European leaders, the European Commission President and the European Council President, will take a formal decision on Lagarde's appointment after consulting the newly-convened European Parliament and the ECB's Governing Council, the rate-setting committee of the central bank.
"I am honored to have been nominated for the Presidency of the European Central Bank," Lagarde said in a statement Tuesday. "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."
The 63-year old Lagarde has on many occasions dismissed suggestions she could replace Draghi, whose eight-year term in Frankfurt expires at the end of October, telling the Financial Times "no, no, no no, no no" when asked last year if she would leave the IMF before her term expired in 2021.
Lagarde faces and immense challenge, however, when she takes over from Draghi in a few months' time, given both the region's moribund growth prospects, its stubbornly-low inflation rate and the nearly-depleted ECB toolkit that has spent more than €2.6 trillion in government, agency and corporate bond purchases and only once managed to lift the region's consumer price index into the Bank's 'just below 2%' target.
The ECB's benchmark lending rate sits at a record-low of 0%, and its deposit facility charges regional lenders -0.40% to park money with the central bank on an overnight basis.
This negative interest rate, as well as the ECB's myriad liquidity programs, have been blamed for holding back bank profits and driving government borrowing costs sharply lower as investors retreat to risk-free assets instead of investments into the real economy.
Italy's benchmark 10-year government bonds, for example, traded at 1.875% earlier Tuesday, despite the country having a triple-B credit rating and the world's third largest debt pile. Thrice-rescued Greece, meanwhile, has 10-year notes in the market that trade at 2.15%, despite the fact it was nearly turfed out of the European project in 2015 and has lost nearly a third of its economic value of the past 10 years.
Lagarde will need to both manage market expectations for further monetary easing, which have been widely signaled by Draghi and his colleagues over the past few weeks, while simultaneously warding-off likely attacks on two key ECB policies put in place during Draghi's eight year term: quantitative easing and the Outright Monetary Transactions program.
The first is likely difficult, if not impossible, to rescind, given both its size and influence on the European government bond market. The latter, however, is far more problematic.
The OMT, as its known, is the direct result of Draghi's pledge to do "whatever it takes" to save the European currency during the peak of the region's debt crisis in 2012. The program gives the Bank to buy unlimited quantities of debt from a struggling member state in order to allow it to survive a co-ordinated market attack -- such as the kind the lifted Italian bond yields past 7% just prior to its unveiling seven years ago.
However, opposition to the OMT runs deep, particularly in Germany, where lawmakers -- and the Bundesbank -- took the ECB to Europe's highest court, arguing the OMT runs afoul of European Treaty rules that prohibit the monetary financing of member states.
Should Italy -- or any other member state -- face a similar crisis under Lagarde's term, she will need to either deploy the OMT, risking the ire of German leaders and some members of her own Governing Council of central bankers, or shelving it altogether, risking a 2012-like debt crisis where the sum totals are now many trillions larger and the risks much greater.