October 24, 2019 / 4:10 PM / 19 days ago

Breakingviews - Mario Draghi’s tacit advice to Christine Lagarde

European Central Bank (ECB) President Mario Draghi attends a news conference on the outcome of the meeting of the Governing Council, in Frankfurt, Germany, October 24, 2019.

LONDON (Reuters Breakingviews) - A full debrief and some advice can be useful when taking up a new job. Outgoing European Central Bank President Mario Draghi said on Thursday his successor, Christine Lagarde, already knew better than anyone what to do and say. Yet the Italian’s last scheduled big news conference contained some tacit guidance if she wanted any.

First, never give up. Asked about his proudest achievement, Draghi answered that it was the ECB’s indefatigable pursuit of its price stability mandate. Lagarde will need the same tenacity given the euro zone economy is weakening and price pressures are muted.

A purchasing managers’ survey earlier on Thursday showed that euro zone business activity barely expanded in October. Manufacturing is contracting and there are signs that weakness is seeping through to the dominant service sector. And the German economy, Europe’s biggest, may have slipped into recession in the third quarter, the country’s central bank said on Monday.

Second, move on from the infighting that erupted after the ECB eased monetary policy in September. Draghi hinted the atmosphere in the rate-setting governing council was already less febrile. According to his account, one dissenter had this month said bygones were bygones, while another issued a general call for unity. That’s a good foundation on which Lagarde can build.

Next, be wary of the risks that ultra-easy monetary policy may bring. Draghi pointed out prime commercial real estate, and high-yield leveraged debt as some of the segments of markets where valuations might be stretched. True, it is up to macroprudential and regulatory policies to deal with any specific problems. But the ECB – and Lagarde - will probably be blamed if anything blows up.

Draghi’s equanimity in the face of criticism, especially in Germany, contains the last lesson for Lagarde. Expect brickbats, whatever you do, but carry on regardless. Granted, the outgoing ECB chief has done all the hard work on monetary policy. But his replacement will oversee a review of the central bank’s policy framework, which could encompass a debate on how to define price stability. There’s plenty of room for more carping.

Breakingviews

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