Analysis: the incoming leaders of these institutions face major challenges around economic performance, climate change and the growth of populism
At the end of October, Mario Draghi is stepping down as the President of the European Central Bank (ECB), after an eight-year term. Christine Lagarde, currently managing director of the International Monetary Fund (IMF) has been nominated as his replacement. But what do the ECB and the IMF actually do? What are the roles and responsibilities of their leaders? And why do these institutions matter to us?
The European Central Bank (ECB)
The ECB is now 21 years old. On January 1st 1999, the euro became the single currency for the initial 12 members and the ECB was given the responsibility for setting a single monetary policy for the euro area. Ireland was one of the original members.
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The president of the ECB chairs the Governing Council which meets every six weeks to decide on monetary policy for the euro area. Each of the governors of the national central banks sit on the Governing Council. Their decisions on monetary policy affect the cost and the availability of money for the 340 million people living in the 19 countries in the euro area.
The ECB and its president are custodians of the single currency, the euro and the euro area. As Mario Draghi said in 2012 "within their mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me it will be enough".
The Governing Council is responsible for setting monetary policy to achieve the mandate laid down in the Treaty on European Union (Maastricht Treaty). The primary objective of the ECB is price stability, which means keeping the rate at which prices are rising (price inflation) below but close to 2% over the medium term. Quarterly, the president appears in front of the European Parliament, which is elected by us, the citizens of Europe, to report and be questioned on the Bank's decisions. The president also upholds the independence of the ECB from political interference as laid down in the Treaty.
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The president has to recognise when new policies and instruments are needed to achieve its mandate. The usual monetary policy response to low inflation is to reduce interest rates, to encourage us to borrow more and spend more. This extra spending should help to increase prices. The standard instrument that the ECB uses is the interest rate at which it provides loans to banks in the euro area.
However, Draghi broadened the toolbox of the ECB to include more unconventional instruments in response to low inflation and the threat of falling prices and to stimulate lending in the euro area. These include: charging banks for depositing money with them; providing long term loans to banks and buying government bonds with ECB money (quantitative easing).
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The president clearly has to have considerable leadership and diplomatic skills to obtain agreement across the Governing Council on changes in instruments and policy.
Finally what the president says matters. After each meeting, the ECB president reads the monetary policy statement to the press and takes questions. Financial analysts watch closely for any changes in statements, speeches and interviews and any unexpected changes in wording can have an immediate impact on financial markets.
The International Monetary Fund (IMF)
The IMF has a much longer history than the ECB. It was founded 75 years ago and is a global organisation with 189 member countries, with Ireland becoming a member in 1957. Its origins go back to the end of the Second World War and was established to facilitate consultation and collaboration between member countries on international monetary problems, to encourage international trade, promote high employment and economic growth and provide funds to member countries that needed them.
Probably what the IMF is best known for is crisis resolution
Its primary objective today is to ensure the stability of the international monetary system. Since the global financial crisis, it has extended its remit to include all macroeconomic and financial issues that affect global stability. The managing director of the IMF presides over its executive board, which is responsible for the day to day business of the IMF. The executive board comprises 24 directors elected by the member countries.
The IMF acts a global watchdog. It not only monitors the economic and financial policies of its 189 members (bilateral surveillance) but also the overall global economy (multilateral surveillance). Each year the IMF reviews the economic policies of member countries, identifies potential risks and makes suggestions which are forwarded to the relevant government. This is referred to as the Article IV consultation.
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They also produce a wide range of global reports that focus on the interconnectedness between countries and how economic risks spread across countries e.g. in the World Economic Outlook (April 2019), they call for greater multilateral cooperation to resolve trade conflicts, to address climate change and risks from cybersecurity and to improve the effectiveness of international taxation.
The IMF managing director uses the opportunity in discussions with individual countries, at multilateral meetings and in discussions with the World Bank, OECD etc. to highlight sources of risk, the global challenges and what can be done.
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Probably what the IMF is best known for is crisis resolution. Member countries who are finding it difficult to borrow on international markets, pay for imports or deal with their insolvent banks can request a loan from the IMF. The money for these loans comes from the funds (quotas) that members give to the IMF and other temporary borrowings arranged by the IMF from member countries.
While these funds benefit these countries giving them time to "get their house in order" they also come with conditions which have received a lot of criticism as they can have initial negative effects on the people in the country concerned.
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The new leaders of both of these institutions are facing major challenges. The new president of the ECB will have to find ways to tackle the lacklustre economic performance of the euro area and get agreement from the Governing Council and work with European governments (while retaining its independence) on what needs to be done.
The views expressed here are those of the author and do not represent or reflect the views of RTÉ