The silk noose

If Mark Carney is ever hanged (by the government at least), it will be with a silk rope.

This exemption from hemp rope is not a job benefit that comes with running the Bank of England. It’s an esoteric privilege granted by the City of London Corporation – effectively the council of the ‘Square Mile’ banking district – to those deemed worthy of being a ‘freeman’ of the City of London.

We do not practice capital punishment in this country (not at the moment anyway), but the honour of freeman does come with other privileges: freemen are allowed to carry an unsheathed sword around the City without fear of arrest.

I like to imagine that if Carney needed to devalue the pound in an emergency, that he’d simply wander around the city with a sword without any explanation to give the impression that he’d gone nuts. After the emergency had passed, such an event could be explained away by some other archaic event in the Square Mile. An ‘unconventional’ form of monetary policy to be sure – but with little room to cut interest rates, unconventional is now the name of the game…

But the central banker with silk around their throat, and a saber to swing is not Mark Carney: it’s Christine Lagarde, the European Central Bank president to be.

Lagarde’s gambit

Officially, Lagarde is chairwoman of the International Monetary Fund. Unofficially, she is a high profile brand ambassador for Hermès silk scarves. But above all, she is a political operator.

Her nomination to the ECB by the European Council was received by some market observers as peculiar. She’s a lawyer after all, not an economist, and has no experience working within a central bank, let alone running one.

But Lagarde has not been nominated for her monetary policy expertise (if any such expertise exists). In fact, her job in dictating monetary policy objective from here on in is very easy: run the printing press to buy every Eurozone government bond up for sale, and maybe some equities too (the exact figure for how many euros must be printed can be performed by her underlings).

Her real task as ECB president – the reason she’s been nominated – is much more difficult.

Mario Draghi has highlighted during his tenure as ECB president that he was doing all the heavy lifting in keeping the Eurozone together, and that governments haven’t been pulling their weight. While he was doing all he could to keep the Euro afloat, claiming that the ECB would do ‘whatever it takes’, governments in the Eurozone weren’t working to create the ‘ever closer union’ the European project idealises.

Fiscal union – ramming all the treasury departments of the Eurozone together, national sovereignty be damned – is required for the project to survive. This will involve debt mutualisation, where the responsibility national debt burdens are shared between all the Eurozone countries. It will also involve the creation of Eurozone bonds – debts issued on behalf of all the Eurozone countries, to be divvied up by a Eurozone Treasury department.

Lagarde’s role is to force this to occur – ever closer union, like it or not. Bringing the national leaders around the table and convincing them this is a great idea is no task for an economics PhD fresh from the ivory towers of academia. But a lawyer and politico with a talent for persuasion? That’s more like it.

Lagarde need not only rely on her charm however – for she has a saber to swing too. In an environment where the central bank is required to keep government borrowing costs down, she will be able to exert serious power over the finances of each Eurozone nation.

That a lawyer is being put in charge of one of the world’s major currencies is a telling indicator of just how many pressing that currency’s problems are.

Actually, let me change that:

That a convicted criminal is being put in charge of one of the world’s major currencies is a telling indicator of just how many pressing that currency’s problems are.

Let’s not forget, Lagarde was convicted of negligence in late 2016 for rubber stamping what was effectively a political bribe when she was French finance minister.

Even Freemen of the City of London aren’t exempt from that. But IMF chiefs are apparently, and Lagarde got off scot-free, claiming all her actions were taken in ‘the public interest’.

A willingness to venture to the dark side in pursuit of political objectives will no doubt aid her in her new job – the role requires somebody who’ll do ‘whatever it takes’, after all…

All the best,

Boaz Shoshan
Editor, Capital & Conflict

Category: Market updates