Christine Lagarde is leaving the ECB early, and Europe's economic future could look very different: What the region stands to lose — and gain

Christine Lagarde’s resignation from her post at the European Central Bank (ECB) before her term comes to an end marks a new era for the continent’s most influential financial organisation amidst a tough economic period for Europe. Lagarde will resign on February 7, 2027, thus retiring earlier than she had initially intended.

Her term would have ended in October 2027, and the recent announcement puts an end to speculation that has surrounded her future role and enables EU leaders to appoint her successor before next year’s French presidential elections.

The timing is crucial.


Europe is facing threats of resurging inflation due to high energy costs, pressures on the cost of government borrowing, and doubts about its competitiveness in comparison with the US and China.

The ECB should find a way out of this situation without compromising its confidence in the euro currency and in the institution tasked with maintaining its purchasing power.

Lagarde’s exit from office provides an opportunity for a new leadership style.

However, it also poses questions about continuity and political considerations, as well as about the possibility of preserving the balance she managed to achieve between policymakers with different economic preferences.

Europe's next central banker inherits a difficult economic balancing act

However, Lagarde's successor will step into his role in times when policymakers are experiencing conflicting pressures.

The increase in oil prices due to the tensions involving Iran has reignited fears regarding inflation, while higher bond yields have increased the costs of borrowing for countries, companies, and individuals.

France, in particular, is a cause for concern.

Its finances have faced criticism, and rising borrowing costs may only worsen the situation of the country, which already experiences budgetary and political uncertainties.

The problem for the ECB is how to avoid inflation due to higher energy prices from spreading to wages and other costs without causing economic growth to suffer.

Interest rate hikes are able to control the inflation problem, but they also make mortgages and business loans more expensive. On the other hand, low-interest rates may boost economic growth, but they may lead to higher inflation.

The incoming president will not be able to unilaterally determine the policy.

The interest rate is set collectively by the Governing Council of the European Central Bank. However, the president still carries out a significant function of influencing the decision-making process and delivering the decision to the market.

This means that the decision on who will be the successor carries a lot of significance since an inflationist might give higher priority to price moderation, while another personality might behave differently during conflicts between stability and growth of the economy.

The ECB could gain a fresh start — but lose a consensus-builder

Lagarde came to the ECB in November 2019 without having the usual background of a professional central banker since she had been a member of the French government as finance minister and IMF as its managing director.

Her term was characterised by exceptional challenges that included the outbreak of the coronavirus pandemic and the invasion of Russia into Ukraine, which led to increased prices for energy and higher inflation rates.

The ECB used emergency bond buying program during the coronavirus pandemic to make sure that there is no financial strain affecting the eurozone.

Later, the institution increased interest rates in order to tame inflation; the actions of the bank were criticised at various stages, among other things, due to its reaction to the inflation problem.

The leadership style of Lagarde also set her apart from other leaders who preceded her, as she attached great importance to communication and building consensus at a central bank where its policymakers do not always agree on the most appropriate way of reacting to economic shocks.

The new leader would bring a different angle of thought and may need to relook at certain elements of the ECB’s strategies.

This may be helpful if there are changes in the economy and there is a need for a change in strategy.

On the other hand, a change in leadership also poses risks since the market should know how the new leader would react during economic shocks and how the policymakers would work together despite their differences in economic thought.

Why the succession battle matters beyond Frankfurt

Timing the resignation prior to the French presidential elections brings about a political angle to the succession process. The EU authorities will have more time to reach an agreement prior to the elections, which might change France's attitude towards the European Union project.

The independence of the ECB is crucial for its reputation.

The leadership of the ECB has to be able to make decisions regarding the mandate of the ECB to ensure price stability despite any political pressure from the elected authorities.

This independence does not mean that politics will not play a role in the appointment process. The negotiation process between the European countries has always played an important role in filling the key positions in the institutions according to their national representation and different economic doctrines.

Two other prominent candidates include former Dutch central bank governor Klaas Knot and former Spanish central bank governor Pablo Hernández de Cos. The selected candidate will shape the direction of the institution’s leadership and may affect how the organization’s agenda is set out, although monetary policy will be made collectively.

The next step for Lagarde is being eagerly awaited, with speculation about her move to the World Economic Forum as one option among others. Nevertheless, the fact of her leaving her position at the ECB does not mean per se what her next post will be.

What Europe needs now is not only Lagarde’s replacement.

It is whether the next president of the ECB will be able to garner enough confidence while managing inflation, a precarious fiscal situation and a politically divided Europe.

The ECB faces a serious challenge from the legacy of the past crises under Lagarde’s management. Her successor will have the same challenges, but without having a well-established relationship with the players in this game.