On Tuesday, European officials nominated Christine Lagarde, the International Monetary Fund’s current leader, to succeed Mario Draghi as European Central Bank president. Here’s a primer on the institution Lagarde has been chosen to lead.
What is the European Central Bank?
The European Central Bank, which has its headquarters in Frankfurt, Germany, sets monetary policy and supervises banking for the 19 countries that use the common European currency, the euro. In many ways, it operates much like the Federal Reserve in the United States – printing money, setting benchmark interest rates and encouraging people to spend or save depending on the needs of the region’s economy. A key element of its job is to maintain price stability and keep inflation in check across a swath of Europe that stretches from the Nordic nations to the Mediterranean.
How big is the eurozone economy and which countries participate in it?
If the eurozone were a country, it would have the world’s second-largest economy after the United States. Its 19 member states account for 340 million people. Membership is open, meaning that, if other European Union countries wanted to join and met the relevant criteria, they could. The current members are Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain.
What was the central bank’s role in the eurozone debt crisis?
As an economic malaise in Greece and other European countries threatened the euro’s future in 2012, Draghi said he would do “whatever it takes” to save the currency. That pronouncement established the ECB’s commitment to preserving the euro, a significant moment for the bloc and for the global economy.
As part of its rescue effort, the central bank started pumping huge numbers of euros into the region’s economy in a program similar to the so-called quantitative easing employed by the Fed. By the end of 2018, European policymakers had spent €2-trillion, about $2.25-trillion, in such stimulus. Many people said the initiative, known as Outright Monetary Transactions, effectively saved the euro. Some of the region’s richer countries opposed, and mounted legal challenges to, the program over what they complained were backdoor subsidies, but the central bank persevered. As a result, it bolstered its status by establishing itself as a lender of last resort in the common-currency area.
How will the bank approach future financial challenges?
The ECB’s role as a supervisor of all eurozone banks will almost certainly be pivotal if the global financial system faces another crisis. The central bank will play an especially critical role should there be a downturn in the global or European economies that chips away at the value of the region’s banks’ assets and makes their own borrowing and lending more expensive.
Lagarde has deep experience managing a major multilateral lender. The International Monetary Fund, which she has led since 2011, advised countries on the handling of their banking sectors in the aftermath of the global financial and eurozone crises.
The ECB may have to come to the rescue, for instance, if Italy’s troubled economy, the eurozone’s third-largest, encounters more problems as its government continues to spend beyond its means and accumulate debt. Lagarde’s performance during the eurozone crisis, when the monetary fund teamed up with the ECB and the European Commission to bail out troubled countries, will come in handy. But it could also hamper her efforts, given that officials in some of those countries still resent the hawkish stance she took toward their struggles.