She wants to speak freely about the upcoming presidential election in France. Or she may have a tempting offer from the World Economic Forum or some other global body. Christine Lagarde will no doubt be able to come up with a plausible explanation for her decision to step down early as President of the European Central Bank. And yet there is also no escaping an awkward fact. She is also quitting a sinking ship – and at the worst possible time.
If the central bank does have to step in with some form of rescue package for France, it would probably be best, to put it politely, if the person in charge was Dutch, Irish, Spanish or even German
There has been speculation for months that Lagarde will leave the ECB, the central bank for the Eurozone, before her term officially ends next autumn. But on Thursday she formally confirmed her decision. She will step down in February.
Officially, the line is that she wants to be able to discuss global issues without the constraints that come with running the world’s second largest central bank. She may even have a role to play in France, perhaps teaming up with the centrist candidate Edouard Philippe in the race to succeed Emmanuel Macron. Well, perhaps. The less charitable exploration is that she is getting out just in time.
A simmering crisis in the French bond markets threatens to explode at any time. Over the last month, the amount that France has to pay on its massive debts has been rising relentlessly. France now has to pay more to borrow money than Greece or even Italy. The “spread” over German debt, the key measure of risk, has risen to levels not seen since the height of the Eurozone crisis in 2012. On the prediction markets there is now a 9 percent chance of France defaulting on its debts by the end of 2027. If so, it will blow up the single currency. France is too big to fail. And yet it may also be too big to rescue.
That puts Lagarde in an awkward position. To start with, she is partly responsible for the crisis. By printing money on a vast scale, and by capping yields on Italian debt to keep its debts manageable, she enabled her friend President Macron to borrow on a vast scale. Without the ECB’s intervention the markets would have stopped France from borrowing so much in the first place. Next, she is French. If the central bank does have to step in with some form of rescue package for France, it would probably be best, to put it politely, if the person in charge was Dutch, Irish, Spanish or even German. A French led bailout of France may be too much for the other members of the zone. The ECB is starting to look like a sinking ship. Lagarde may well be getting out just in time – but she won’t do her reputation any good by leaving just as it is about to go down.
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