Central Bank boss ready for life in the fast Lane

Philip Lane

Ireland has finally secured a foothold at the summit of European central banking following the appointment of Central Bank governor Philip Lane to the six-member executive board of the ECB, as chief economist.

Mr Lane has served on the 23-person governing council of the bank since his appointment as Governor in 2015.

Mr Lane has built up a strong international reputation as an economist, having earned a doctorate from Harvard University and as an assistant professor in Columbia University in New York.

As governor of the Irish Central Bank, he has been a steady hand acting to restrain the growth in lending to home borrowers despite a degree of political pressure to ensure that the loan taps are turned on. He has been helped, in this regard, by a Finance Minister - Paschal Donohoe - who is instinctively cautious and by the collective memory of the banking excesses of the Noughties.

Cantor FitzGerald economist Alan McQuaid believes that Philip Lane has left a significant legacy in the area of economic analysis and reportage.

He points out that the development of a much more realistic measure of Irish national output, known as GNI* - taking into account the gyrations in recorded GDP resulting from activities such as aircraft leasing and tax-driven multinational firm profits – is in large part down to Mr Lane.

The GNI* measurement provides a much more sobering account of the true state of the country’s ongoing indebtedness, both public and private.

Philip Lane will be arriving to take up his full-time post in Frankfurt at a time when the European economy is slowing markedly.

Global growth has come off the boil and Germany, in particular, is faced with an export slowdown on a number of fronts as uncertainties around prospects for the Chinese growth engine abound.

Closer to home, there are real concerns in member states with violent street protests in France, mass separatist activity in Catalonia, populism and economic meltdown in Italy and the emergence of a series of nationalist leaders in Eastern Europe.

China is sniffing at Europe’s soft underbelly scenting opportunity. Deals under President Xi’s 'belt and road initiative' have been sealed with Serbia, Portugal and now Italy. The danger is that cash-hungry countries could be suckered into projects with the Chinese that increase their indebtedness.

However, it can also be argued that the China factor could give neglected Mediterranean countries badly-needed bargaining leverage with northern European countries otherwise inclined to wash their hands of their struggling neighbours.

China was prepared, for example, to invest in the Greek port of Piraeus at a time when few others would touch the Greeks with a barge pole.

That said, at a time when many euro area countries are faced with fiscal constraints and when key paymaster states remain reluctant to release the funding to back a common European set of fiscal arrangements , the role of the ECB as a primer of the economic pump continues to be critical.

The ongoing Brexit drama should not distract from the stark fact that the EU is facing into a period of potentially dramatic upheaval.

Following the elections to the European Parliament, we will be into a period when a new President of the European Commission is due to be appointed. In the Autumn, Mario Draghi, will also step down as president of the ECB.

During his term of office, he has pursued an aggressive policy of quantitative easing - a strategy aimed at boosting economic activity by, in effect, priming the monetary pump. Since his famous statement, in 2012, that he would "do what it takes" to preserve the eurozone, troubled periphery nations have been brought back from the brink.

The former German Finance Minister Wolfgang Schauble, a key figure in the eurozone crisis, has revealed that he favoured a temporary Greek exit from the eurozone, perhaps lasting ten years. This plan never came to pass - in large part because of Mr Draghi’s sure touch and resistance from Chancellor Merkel.

Six months ago, the eurozone was enjoying a modest recovery with Ireland leading the way. As recently as November, the ECB head talked of a wind down in quantitative easing, but since Christmas, the mood has changed markedly at the top of the ECB tower in Frankfurt.

The big question is whether Mr Draghi’s dovish approach will survive his departure. Mr Lane is seen as being in this camp and he may have to exert a greater influence in the organisation in support of that approach depending on who takes over.

Many in the financial markets appear to favour current executive board member, Benoit Coeure, for the job, but there are more conservative figures in the frame, including Germany’s Jens Weidmann- a hardliner – and the Finn, Erkki Liikanen.

Mr Weidmann was described, last year, by Foreign Policy magazine as "the most dangerous man in Europe" because of his uncompromising approach as head of the German Bundesbank.

Mr Lane’s own post as governor will also have to be filled. It is being suggested that the ECB acted to lever Mr Lane into the job, effectively vetoing moves to install a senior official from the Department of Finance. If the ECB were to intervene again, it could lean towards another highly experienced economist, Alan Ahearne at NUI Galway, with the Central Bank’s top regulator, Sharon Donnery also in the frame.

Mr Lane arrives at a time when key decisions over the future of central banking in Europe are required. The whole area of risk sharing across the eurozone remains a very live issue. The question of how to tweak quantitative easing to improve flows of funds to where they can be most effectively deployed comes up.

The London School of Economics economist Paul de Grauwe argues that an EU Government bond buying programme can be structured so as to ensure that the German taxpayer is not on the hook. He believes that political opposition to such activity – critical to ensuring that member state interest rate burdens are minimised – can be overcome.

There are flaws in the bank’s governance and the manner in which it can exercise its powers. The Maastricht Treaty ordained that maintaining price stability would be the ECB’s primary mandate. There is a secondary mandate to support economic activity but this needs boosting.

Many believe, at the same time, that the ECB is insufficiently accountable, given the power it has to impact on the political and economic fortunes of its members.

Thirty years ago, then Bundesbank head Karl Otto Pohl warned that "in a monetary union with irreversibly fixed exchange rates, the weak would become ever weaker and the strong ever stronger."

The obstacles remain considerable, in the form of restive populations attracted by nationalist populist rhetoric, not to mention legal objections.

In uncertain times, it is a source of some comfort, at least, that we will now have an Irishman seated at the very top table in the ECB with the intellectual capacity to consider many of the great questions of our time.

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