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Central Bankers Speak A Different Language

Ferdinando Giugliano

(Bloomberg Opinion) -- Christine Lagarde is famous for her lively and engaging speaking style. But when she holds her first press conference as president of the European Central Bank on Thursday, she would be wise to play it safe. It takes time to build a reputation as a central banker who can speak clearly and then deliver on her promises. A wrong foot this week could make that process unnecessarily harder.

When European leaders picked Lagarde as the new ECB chief last July, skeptics noted that she was not a trained economist and had never been a central banker. As a former managing director of the International Monetary Fund, the French lawyer has plenty of experience in talking to policy makers and the general public. But central banking is a different art, since it brings with it much greater scrutiny from investors who parse every word.

Lagarde acknowledged this difference in her first testimony as ECB chief before the European Parliament last week. “I’m also trying to learn central bank language,” she said. “So bear with me, show a little bit of patience, don’t over-interpret, if I may say,” she added.

Her task is made all the more difficult from the large shoes she has to fill. Her predecessor, Mario Draghi, is widely considered one of the best central bank communicators of all times. His promise to do “whatever it takes” to save the euro was instrumental in ending the sovereign debt crisis that threatened to break up the monetary union. Draghi regularly offered policy hints to the markets, through a policy also known as “forward guidance.” Investors learned to trust that he would follow through on his pledges, which in turn made it easier for the ECB to obtain the policy outcome it wanted.

So far, Lagarde has wisely stuck to the script she knows best: Politics and diplomacy. She has urged countries such as Germany and the Netherlands to loosen fiscal policy to help the euro region recover from a soft patch, and sought to mend divisions within the bitterly divided governing council she inherited. On monetary policy, she has opened the door to a review of the ECB’s monetary policy strategy, though she has preferred not to go into any details.

As Lagarde meets the press this week for the first time after a governing council meeting, it will be impossible to avoid getting into the specifics of monetary policy. The ECB faces very low inflation expectations, with investors doubting that the central bank will be able to reach its target of below, but close to 2%.

The ECB is not expected to act again, having just unveiled a major package of measures in September. However, Lagarde will no doubt be asked what her strategy is to revive inflation, and what she thinks of specific measures such as quantitative easing or negative interest rates. Lagarde’s best bet is to play it safe and avoid making promises she doesn’t know whether she can keep. It takes years to build a reputation in central banking – but only minutes to harm it.

Lagarde will have plenty of occasions to use her political charisma. The euro area needs to take several crucial steps to complete the monetary union, including a joint deposit guarantee scheme to protect savers, and some form of centralized fiscal capacity to help countries in need. Draghi advocated these measures repeatedly, but failed to make much progress. Lagarde’s diplomatic savvy could make her more successful.

On Thursday, however, boring is best. One less headline is better than starting with a bad one.

To contact the author of this story: Ferdinando Giugliano at fgiugliano@bloomberg.net

To contact the editor responsible for this story: Melissa Pozsgay at mpozsgay@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Ferdinando Giugliano writes columns on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.

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