Nomination of Lagarde as President of the ECB – A Testimonium Paupertatis

Open letter to the European Council

Dear leaders of Europe and fellow Europeans,

as a longtime proponent of Europe, European integration and the institutions of the European Community, I write this open letter to convey my thoughts on the nomination of Christine Lagarde as next President of the European Central Bank (ECB) by the European Council, and to voice my discontent with this nomination. In short I cannot help but think: what a political testimonium paupertatis.

Please allow me to explain for there are good reasons in support of this qualification. Regardless of our opinions in this matter, I am sure we can all agree Europe simply is too important. Committed to a shared European spirit, I write this open letter.

First of all, my objection to Ms Lagarde her nomination to become President of the ECB has nothing to do with her as a person nor do I have any doubts of her great intellect, her legal expertise or analytical set of talents. Her David Dimbleby speech in 2014 even breaths an intellectualism that I am a fan of; in-between-the-lines and joyful reminders included. Moreover, the treaty on the functioning principles of the Eurosystem remain just the same. Before all, this is most important to me as a private European citizen. It tells me: even if someone is placed at the helm of the ECB who has no intimate knowledge of central banking, nor evidently is able to fully grasp the nuances and intricacies of modern banking and how central banking plays a role in this, there is sufficient expertise available within the ECB so that this candidate is prevented from screwing things up, if you pardon my language here. And of course, the governing council is a sufficient counterweight for any ECB President to prevent serious errors. And even in the unfortunate case this happens regardless, there always is article 11.4 (which can be found here if you scroll long enough, or simply opt for ctrl+f).

However, let us leave these aspects aside for the moment, and let us start by reviewing article 11.2 that specifically stipulates that board members of the ECB should meet the requirement of having professional experience and expertise in monetary or banking affairs. For starters, heading the IMF cannot be considered giving anyone an edge in understanding monetary policy considerations or affairs of cross-border banking. Let us be clear: the IMF is an institution of a past and failed international monetary framework. The IMF is no surrogate of a central bank. The role of the IMF – given the international non-system of today – is of a fire department that stands ready to come to the rescue if countries get into trouble. It is a Fund that was founded by political donors and whose policy-making is decided by ministers of finance of member nation-states. The IMF is not a Bank. It is a Fund whose operations are politically coordinated. Whatever we may think of the IMF’s evolved merits after it lost its original function after the collapse of Bretton Woods, I think this is sufficiently important to stress because article 11.2 clearly states that professional experience in monetary or banking affairs is a prerequisite before someone can be nominated. The professional experience of Ms Lagarde does not cover this, pure and simple. (I come back to this.) Article 11.2 highlights another question, and this concerns whether the governing council of the ECB was consulted before the European Council announced its nomination of Ms Lagarde? This is something only the ECB can sign off on (as well as the European Parliament) but surely this is intriguing because it makes one wonder: was the ECB consulted beforehand, or was this nomination a political fait accompli? Because if this was a fait accompli how then could ECB board members possibly object to her nomination after the fact without causing political turmoil; turmoil on financial markets included? (The answer is they cannot, or otherwise the price is a very costly one. To add: the lack of transparency, especially given this surprise announcement, leaves a dark cloud of very serious questions on government interference. Fundamentally: these are truly very serious questions!).

In spite of how this sequencing of events exactly happened, and no matter how this is spun afterwards, the more evidently troubling point remains: Only with a political stretch one could argue that Ms Lagarde sufficiently complies with the requirement of having proficient understanding of monetary and banking practices. But what can Ms Lagarde answer when asked before European Parliament what her position is in casu debt relief for nations in financial distress? For sake of context: while at the helm of the IMF she held the position that all holders of Greek government bonds had to accept a haircut, including the ECB. Yet, as President of the European Central Bank she could not possibly agree to accept such a short-sighted view because this would constitute to monetary financing of government debt, which is explicitly prohibited in article 21. And when we start talking about monetary financing, it should be noted here as common-knowledge with well-informed European citizens that the German Bundesverfassungsgericht in cross-reference with the European Court have stretched the interpretation of article 21 in both their Court rulings too, so that effectively the ECB has been enabled to buy accumulated European government deficits up to a threshold of 33% of a nation’s public debt stock nevertheless; but what could Ms Lagarde possibly answer given her vast experience in matters of law and politics? That answers can be stretched because when she was with the IMF, the answer was yes and she was for it. When at the ECB however, the answer is the exact opposite? If this answer is going to depend on political or otherwise fluid interpretations of mandates and according to the team’s hat one is wearing, what kind of institution will the ECB then become? This cannot mean anything good for the reputation of the ECB because the President of the ECB does not have a luxury of being able to flip-flop on these important and fundamental questions. Central banking does not allow room for doubts, nor political stretching of interpretations in these fundamental matters. It requires an acquired understanding of everything that constitutes to the sin of monetary financing as well as that a President of the ECB needs to remain unquestionably credible with a reputation that casts no doubts over his or her willingness of becoming politically complicit in committing this monetary sin anyway. And she has already committed the equivalent of this sin as minister of finance, which brings me to Ms Lagarde long political career in my beloved France. Can she say, she has left the French State’s finances in better conditions then when she took office as minister of finance (2007-2011)? How many billions were added to France’s public debt under her watch? If asked before European Parliament how could we expect Ms Lagarde to respond when asked: “In your understanding and expertise of managing government finances, how do you look at the issuance of government bonds by means of continued government balance sheet expansion?” Again for sake of context: as a minister of finance this never was any issue. This simply is part of how politicians and ministers of finance are running our public finances. They print bonds and so also Ms Lagarde printed public bonds to balance the French State’s budget needs with credit that falls to future generations to pay for. It was within her fiscal mandate. Nor was it considered a problem that French public finances have been in violation of the European Growth and Stability pact under her watch either. A political privilege, or is this some twisted European multilateral consensus of this being OK anyway? (I still don’t know). What will her position be as President of the ECB? As flexible as only politicians can be? What could Ms Lagarde answer when asked about the European Court ruling on the interpretation of article 21 of the EMU treaty? As Ms Lagarde is someone with a long political career does it not matter that her professional experience is limited to a politically mandated nomination to spend other people’s money, including money citizens do not have, yet collateralizing their future tax proceeds anyway? What then should European citizens think if she is given the mandate to utilize the seigniorage power of the Eurozone’s printing press and all of sudden becomes the guardian of the concept of our money? How will she be able to credibly perform the fiduciary duties protecting it? She was perfectly OK with lengthening the French state’s balance sheet as France’s finance minister, but now as newly appointed President of the ECB she is suddenly going to argue against fiscal profligacy, and refrain herself of committing the sin of its monetary equivalent, while having a past of having committed this sin under her fiscal mandate anyway?

How can these differing roles ever be reconciled with? Really: is this a matter of how one stretches this politically? Of course, these questions are still open for question and answer before European Parliament, but please do ask.

Let me share you another set of inconvenient numbers that highlight a fundamental problem in the Eurozone, and that ultimately underlies my sincere skepticism about this nomination. At risk of being too honest here, there is a simple way to show how technically insolvent our European financial system really is. Eurozone public aggregate debt was slightly under €10 trillion at the close of the calender year 2018 (Eurostat; 2019). To add to this – and to highlight something most Europeans are completely left in the dark about – total public unfunded Eurozone government liabilities have grown over decades to somewhere in the region between €15 and €21 trillion. Eurozone governments are in the hole for at least somewhere in the tune of €25 trillion. This basically means our Eurozone governments have created a negative equity of €25 trillion on our public balance sheet. And we European citizens somehow have to cover these huge burdens? This number is so fictionally absurd that understanding this to be a true fact of public life? These numbers are official and publicly available if you wondered (see Reimund Mink, economist at the ECB; BIS, 2008). And this huge number of unfunded liabilities of course depends on the discount rate used to calculate the net present value of what has been promised, predominantly in pensions, but for which European governments never reserved any funds for – instead, they banked on a growing working population at start, then resorted to capital controls, then more central planning, and then.. – but with a discount rate of 5% to arrive at €15 trillion, I am being really, really nice here! And the simple point of these big numbers concern the fiscal ramifications of funding the shortfall in reserved funds to cover these unfunded pension liabilities and this is a very real problem as it already is. Yet it is only getting more pressing due to the demographic dynamics driving it. That is, so long we do not address the defunct financial paradigm causing long-term pension insolvency. For this reason too, nominating an experienced politician to head the ECB for 8 years cannot possibly instill confidence with well-informed European citizens. There is a political need for pro-longed monetary easing to kick this unfunded can down the road until it can’t no longer? At what expense? For the past ten years, monetary policy has already accommodated banks and governments at the expense of savers and pensioners. Again, as a monetary purist one cannot help but think that monetary policy has indeed become primed to accommodate the needs of governments first? Got risk-free assets, anyone? Regulatory defined, or..? Ah. I digress.

If these numbers are taken for what they really mean – obviously politically very inconvenient to ever discuss, let alone that the European Council explains this to its European constituents – then anyone of us is able to understand that monetary policy has become a necessary political prerequisite to help politicians come up with one monetization scheme or another in order to provide the pension funding of what otherwise could never be delivered. Bubblenomics has become a political prerequisite to prolong what we do not have, yet exactly this bubblenomics leaves us in denial of what we do have. Exactly for this reason too, nominating a politician to head the ECB is very much suspect. Apparently, the European Council and heads of governments are not prepared to address and solve the problems they created themselves. And now they nominate a very experienced and undoubtedly a very intelligent politician to head the ECB because she somehow is the best candidate around? Who is best equipped in intellectual expertise and experience to serve all European citizens impartially with an unquestioned reputation of being a monetary guardian? Does Ms Lagarde fit these prerequisites being an expert in monetary or banking affairs? The answer is a simple no. She is a proponent of 21st century multilateralism to reinvent the international monetary framework; she proposes in spirit of Lord Keynes to reinvent it. I will stand at her side pleading for this as I have declared myself how to go at it (see here if you like), but that is all wonderful and well of course, but the ECB President especially should worry about only one thing and one thing only: price stability. That is, to act in a fiduciary capacity in honor of all European citizens equally, and – both in spirit and interventions – to live up to the conceptual principles that underlie the social contract that we Europeans have embraced as our currency: the euro. Wim Duisenberg explained this concept so well and given this nomination I truly wonder: have the members of the incumbent European Council not read this timeless explainer? Have then these so well thought-through foundations of the euro become meaningless already?

From my humble perspective, current financial affairs – with all the accumulated systemic risks from decades and decades of fiscal profligacy and ever laxer credit standards on end, riddled with opportunistic political concepts of risk-free assets so that government debt is traded under preferred benefits on financial markets across this globe – have everything to do with an international monetary and financial framework that essentially is a non-system. Nothing is ever settled: past spoils are accumulated in terms of negative equity on public balance sheets. (Or printed over otherwise). And the burdens are for the masses. There is no point in denying because however much people believe today’s financial system is rule-based – and Ms Lagarde somehow seems inclined to have this conviction along with her political zeal in search for solutions through multilateralism as she practiced this at the IMF – those who have studied monetary and financial history, or who are working within the realm of modern finance very well understand this simply is not the case. Rules do not apply equally to all. They are – here we go again – politically stretched in favor of special and privileged interests. Some of these privileges are so dominant on the world stage, really. Without going into this in too great detail, there is a very simple yet fundamental flaw in all of our financial systems indiscriminately: all arrangements of credit are based on collateralizing future income. This defunct paradigm gives rise to two fundamental problems. Firstly, there is no theoretical limit to how much debt can be created once future income becomes its collateral basis. Hence, the exponential growth trajectories in outstanding balances of credit ever since Bretton Woods collapsed. Secondly, we are running out of, or more precise – with all standards having been stretched already, and especially because since 2008 this has been accompanied with ultra easy monetary policies – by now we have ran out of future income that can safely be collateralized in order to add trillions more in credit. Monetary policy as practiced the past decade can only sustain old or help creating new financial bubbles. Monetary policy is however no panacea that solves anything at all. Likewise nominating a politician as President of the ECB does not solve anything either. Rather, it undermines the credibility of Europe working towards a solution. Please, let this sink in: this nomination undermines credibility.

For the past ten years, monetary policies around the world have been about prolonging a status-quo that essentially helps no one. One could conclude the exact opposite of what was advertised has happened: all efforts made since 2008 have undermined financial stability by means of deteriorating quality of balance sheets the world all over. With interest rates at the zero lower bound there is more and more debt, less and less positive equity on balance sheets, and across the board we see living standards under pressure, if not flat out deteriorating. Private and public balance sheets had to be lengthened no matter the consequences? This precarious situation coordinated through multilateral pragmatism so you like, with all the systemic risks attached to it, it is very much a result of a celebrated, media-cultivated cultural bias that favors short-term politics and stretching the rules repeatedly – at the expense of long-term sustainability and all-inclusive prosperity for all. I always thought Europe was about the latter. Or at least, so I was led to believe.

In Europe there are two institutions – the European Court of Justice and the European Central Bank – that have only one interest at heart and that is to protect the rights of European citizens equally under European Law. In spirit of a true trias politica and unlike and in contrast of our dysfunctional governments with their vast bureaucracies that have been red-taping every little aspect of our sorry mortal life – at costs that our societies are unable to bear and with opportunities becoming ever more limited to a happy few, unequally distributed among us all (if only we choose to go in debt ourselves, right?) – these two European institutions have not failed us. Europe is made by the strength of its institutions and especially these two institutions are supposed to remain unquestionably independent; ruled-based and unquestionably impartial to all; and last but not least, free from any and all executive and political interference. Yet even from this perspective of a functioning trias politica too, this political nomination by the European Council of Ms Lagarde as President of this most wonderful independent monetary institution: really?! How could this not be a slap in our face? This nomination is so very poorly thought-through. What is the idea here? The heck with a well-functioning trias politica? From now on, it is government first?

I can only speak for myself and so I speak out: this nomination is a blow to my confidence in Europe’s leadership. The nomination of Ms Lagarde by the European Council is wrong in so many ways. The ECB must at all times be operating independently from political interference. A President of the ECB should be of unquestionable reputation, both in experience of exercising a central bank mandate, as well as having material experience in sound banking. Ms Lagarde has neither. In contrast, she has all the experience a candidate should not have, namely that of an out-of-control borrower (under her fiscal mandate as minister) and a multilateral rescuer in chief (ready to stretch rules and the rescue conditions so long they are politically convenient). The relation of the ECB and Eurozone governments has already been stretched in ways never foreseen nor intended, and with trillions in monetary easing, yet once more European citizens are presented another example that Europe’s political leadership cannot be trusted to do what is right and sustainable long-term? It may be said, given international political dynamics and a smothering technical systemic insolvency – here in Europe, and pretty much everywhere else too (President Trump, are you reading with me here?) – the stakes are incredibly high. However much this may be the case, this does not excuse the nomination of Ms Lagarde to head the ECB to have some good-old fashioned political flexibility in charge of the Eurozone printing press. Sorry, but this is nothing short of a political testimonium paupertatis with all the shame and lack of integrity that ordinary citizens should associate for those democratically entrusted to make this decision in fair representation of all European citizens. Europeans deserve better: an ECB that does not accommodate the failures of Europe’s political leadership. Better leaders would be nice too, but please have it at least right on merit. Clearly, this cannot be the case here. The printing press simply is too dangerous to be left in the hands of politicians. Hence, the precise wording of article 11.2.

Do we really have to stretch this one too? For some ill-advised political sake? For the sake of Europe going forward in denial of financial realities?

If so, the heck with credibility.

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