Christine Lagarde will step down as ECB chief early

European Central Bank President Christine Lagarde will step down early next year, the central bank announced. Her term was due to end in October 2027, Bloomberg notes, adding that the decision intensifies the contest to replace one of the world’s most powerful monetary policymakers.

Lagarde will leave on February 7, although her term was not due to expire until October 2027. She took over from Mario Draghi in 2019, becoming the ECB’s fourth president and the second from France.

Lagarde told the ECB’s Governing Council that she was leaving to be able to engage more actively in matters such as developments in France, according to Bloomberg sources. She has not officially announced her next move, the Wall Street Journal notes. She previously discussed taking over as chair of the World Economic Forum.

Her departure comes at a particularly difficult moment for the central bank. Against a backdrop of geopolitical instability, bond-market turmoil, and massive European spending on defense and infrastructure, the ECB is battling elevated inflation fueled by the war in the Middle East.

Markets nevertheless took the announcement in stride: Europe’s Stoxx 600 stock index rose 0.6% on Thursday. German government bonds edged higher in price, with the 10-year Bund yield falling around one basis point to 3.36%. The yield premium of the French 10-year sovereign held steady at 154 basis points. The euro weakened slightly in the day’s trading.

Lagarde’s departure sets in motion one of Europe’s most consequential leadership contests: Her successor will oversee interest rates for the euro zone’s 21 member countries and their combined population of more than 350 million. European Council President António Costa has already thanked Lagarde for her dedication and said the bloc would immediately begin the process of choosing her replacement.

The possibility of an early exit had been discussed in central-banking circles for months. In October, Bloomberg surveyed economists about potential candidates to lead the ECB. The favorite was former Bank of Spain Governor Pablo Hernández de Cos, who now heads the Bank for International Settlements. Former Dutch central bank Governor Klaas Knot is also vying for the job.

Although Lagarde’s early departure was no great surprise, the key question for markets, particularly the euro, is now how hawkish or dovish the next ECB president will be and whether Europe’s current monetary policy course will continue, Bloomberg Intelligence Chief FX Strategist Audrey Childe-Freeman noted. Lagarde’s decision comes amid a tightening cycle: The ECB raised rates in June and September, and markets expect borrowing costs to rise further, Bloomberg writes. Lagarde herself has said projections point to inflation returning to target around the end of 2027.

Bond-market jitters add to the challenge. Government bond yields have surged worldwide, with investors particularly concerned about French debt. The premium they demand to hold French versus German 10-year sovereign debt recently reached its highest level since 2011. That has fueled speculation about possible ECB intervention.

Lagarde’s early departure also risks drawing accusations of political interference with the ECB’s independence, Bloomberg notes: French President Emmanuel Macron will now have time to help choose her successor before his presidential term ends. Earlier this year, the Bank of France’s governor also resigned early, and Macron appointed his chief of staff, Emmanuel Moulin, to the post.

The process of choosing an ECB president is highly politicized, the WSJ says. Lagarde herself emerged as a surprise candidate: Her appointment was agreed to at the last minute as part of a deal that made Germany’s Ursula von der Leyen president of the European Commission. Unlike her predecessor, Italian central banker Mario Draghi, Lagarde is not a trained economist. She did, however, have years of practical experience as head of the International Monetary Fund and French finance minister.

Critics argue that Lagarde’s lack of central-banking experience led to missteps early in her tenure, blaming her comments for a market meltdown at the height of the pandemic. Investors interpreted her remarks at the time as a signal that the ECB would not intervene to support Italy’s plunging bond market. The selloff was ultimately halted after the ECB launched a new emergency bond-buying program.