MNI INTERVIEW: Lagarde Faces Struggle Vs Hawks - Ex CenBanker

By Luke Heighton

     FRANKFURT(MNI) - Christine Lagarde will face a tough job pushing through

additional monetary easing, including any extension of limits on the ECB's bond

purchases, when she takes over from Mario Draghi as European Central Bank

president at the end of the month, former Central Bank of Ireland

deputy-governor Stefan Gerlach told MNI.

     While Lagarde, a former head of the International Monetary Fund and French

finance minister, will be "very good" for the institution, her lack of monetary

policy experience may weigh against her as she faces entrenched opposition to

easier policy from countries like Germany and the Netherlands, Gerlach said in a

phone interview on Thursday.

     "Having never attended a meeting of the Governing Council before, not

knowing how it operates, and never having been a central banker before, it will

be difficult for someone who might not be familiar with the minute monetary

policy details to force it through," he said.

     The ECB will resume quantitative easing for an indefinite period at the

rate of E20 billion per month from Nov. 1, as part of a contentious Sept. 12

policy package that split opinions within both the ECB's Executive Board and the

Governing Council. Gerlach said he got the "general sense that Draghi was not

able to push what he wanted through; that there was a lot of scepticism," and

that the comparatively low level of new purchases was indicative of the degree

of disagreement.

     Gerlach also said he was "surprised" the ECB did not increase its

self-imposed limit on its holdings of any one country's sovereign bonds from 33%

to 50%, "because they will hit the limit in the case of Germany in about a

year's time, and you're going to have this residual uncertainty about what's

going to happen."

     "It will be much harder for Madame Lagarde to push through more easing and

to push up the issuer limits in the face of strong opposition," he said,

speaking a day after Bundesbank president Jens Weidmann said he would resist any

attempt to alter the existing threshold.

     "Of course," he continued, "she will be given the benefit of the doubt, but

some governors will say they're not sure this is really needed. Is she sure this

is really needed? Is she sure it will be effective?" Gerlach, now chief

economist at EFG Bank, described the current outlook for the eurozone economy as

"poor." "She will push very hard for fiscal expansion in Germany, and there are

an increasing number of people who support that," he said.

     Other factors might yet offset the effects of the continuing downturn. "I

do think the U.S. will make a trade deal with China, and that fiscal policy will

become more expansionary in the euro area," he said. "I suspect that Trump will

announce some agreement with China in the next couple of months, because if the

U.S. economy were to go into recession it would be extremely bad for his chances

of re-election. So he has very strong incentives to strike a deal with China."

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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