Gathered in a German mountain castle last November for an evening retreat that ended with a whiskey-tasting, rebel European Central Bank policymakers and Christine Lagarde, their newly confirmed president, made a pact.
Lagarde pledged to spend more time listening, and not to front-run decisions before policymakers had weighed in, as her predecessor Mario Draghi was often accused of doing.
In return, she asked for discipline from the Governing Council, the ECB’s top policymaking body, which comprises national central bank chiefs from the 19 euro zone countries and six Executive Board members, including Lagarde herself.
Governors had to stop trashing policy decisions once taken and keep internal disputes out of the media, presenting a common external front, 11 sources — both critics and supporters of the ECB’s last, controversial stimulus package — told Reuters.
A look at her first three months in office suggests Lagarde is using the entente of Schlosshotel Kronberg to make subtle but significant changes at Europe’s most powerful institution.
“The change is cultural but quite profound,” one of the sources, who asked not to be named, told Reuters. “Culture drives how we make decisions so it impacts policy.”
A greater emphasis on consensus has boosted the Governing Council’s role and given more voice to critics like Germany whose support may be vital whenever the next downturn comes, most of the sources, all with direct knowledge of the inner workings of the ECB, said.
But Lagarde has also made clear that Draghi’s disputed September stimulus package will not be revisited, and has kept on his key aides, architects of the plan.
In Europe, the role of ECB president is uniquely powerful: backed by the Governing Council, she or he is the face and voice of the institution, carrying its message to businesses and households and to world leaders.
The ECB and Lagarde declined to comment. Draghi did not respond to a request for comment.
Meetings now start several hours earlier, leaving more time for deliberation and giving policymakers time to speak. Lagarde mostly presides over the debate, many of sources said, talking relatively little herself and keeping her own views quiet to foster open debate.
“When governors talk, she listens. That doesn’t sound like a big deal but Mario was often on his phone or iPad,” a second source said. “Madame Lagarde tells people to put their phones away.”
Meeting proposals are now handed to governors up to a week in advance, some of the sources added, not just hours before for fear of leaks.
These changes have shifted power away from the close circle of advisers that Draghi relied on and given Governing Council members more capacity to shape the debate, reducing the need to bring disagreements into the open.
All of the sources said they consider Draghi — known as ‘the man who saved the euro’ — a superb central banker. But his willingness to forego consensus — as in September, when he pushed through the new stimulus package despite strong opposition — annoyed some policymakers, prompting open dissent.
In another sign the peace is holding, Governing Council members have largely accepted Lagarde’s request not to publicly discuss the substance of the ECB’s wide-ranging policy review.
Colleagues said Lagarde’s charm and approachability contrasted with the more aloof Draghi. She takes the staff elevators inside the ECB tower, asks people’s names and happily chats to colleagues.
But the former French finance minister is a ruthless timekeeper, keeping meetings on schedule and often reminding people to keep their messages short and to the point.
“In one (European Systemic Risk Board) meeting, when a speaker ran out of time and pleaded for leniency, she said sorry, we need to move on, and that was it,” a third source said.
What didn’t change is also significant.
ECB Chief Economist Philip Lane continues to lead policy discussions, given the necessary space by Lagarde, a former International Monetary Fund chief and a lawyer by training who lacks the monetary policy expertise of her predecessors.
“Christine knows her limitations on monetary policy and knows that she needs to preside over the debate and not dominate it,” a fourth source said. “She is more presidential.”
Former colleagues at the IMF describe her as a tough negotiator whose strength was consensus-building.
Regarded as more politically adept than Draghi, Lagarde is said to be on cordial terms with European Commission chief Ursula von der Leyen and German Chancellor Angela Merkel. Their support could be vital as the ECB’s depleted policy arsenal puts the onus on governments to drive growth.
In her first speech in charge, Lagarde praised German ex-finance minister Wolfgang Schaeuble, a stern ECB critic.
“They listened to Draghi during the crisis but not so much when things were going well,” a fifth source said. “She’s on friendly terms with von der Leyen and essentially has an open line to her. Mario never had this with (former Commission chiefs) Barosso or Juncker.”
“The number of phone calls did not suddenly increase” between Lagarde and Merkel, a separate source in Berlin said, although the two have known each other for over a decade and have their conservative politics in common.
The strategic review Lagarde launched last month could be transformational for the ECB, bringing tweaks to the “below but close to 2%” inflation target and more tolerance for deviation, although at the risk of irritating the hawkish Germans.
But her desire for the ECB to take a bigger role in fighting climate change could bring early challenges to Lagarde, who joked in a meeting last year that Draghi “left big shoes to fill … but I have high heels”.