Lagarde set to inherit Draghi’s counsellors at ECB

When Christine Lagarde arrives at the European Central Bank this autumn to take over from Mario Draghi, among those welcoming her will be some lesser-known members of his inner circle, whose expertise will prove crucial in helping her to settle in.

While Mr Draghi knew how to spot a market panic, he relied on others, such as his former chief economist Peter Praet, to sketch out much of the technical detail of his policy measures.

If Ms Lagarde’s nomination passes through the European Council successfully in October, Mr Praet’s successor Philip Lane is likely to be among her most important counsellors.

Mr Lane, an academic economist before becoming governor of the Central Bank of Ireland, is well regarded by Mr Draghi. Like the current ECB president, he holds an economics doctorate from a US university — in Mr Lane’s case, Harvard — and like both Mr Draghi and Ms Lagarde, he has pushed for greater economic and monetary union.

As central banks such as the Federal Reserve begin to reconsider their inflation targets and tool kits, Mr Lane could become the pre-eminent figure in reviewing the bank’s monetary policy framework.

He could end up playing a similar role to that of Otmar Issing, the ECB’s chief economist between 1998 and 2006, who was instrumental in shaping the bank’s policies in its early years.

Ms Lagarde will also need to hope for a good replacement for Benoît Cœuré. Mr Cœuré, the ECB director responsible for markets, is one of the executive board’s biggest brains and is set to depart at the turn of the year.

Along with Mr Praet, he has been one of the most important members of the ECB’s top brass in steering the policy response to the crisis. He has an excellent relationship with many of the ECB watchers who help transmit the bank’s words and deeds through markets. So well regarded was he that he was the preferred candidate of many of these market participants.

Mr Cœuré’s seat is likely to go to a new Italian representative on the board.

Despite its populist character, the government in Rome is not expected to nominate a radical candidate, who would probably be blocked by the region’s finance ministers or the European Parliament — this appointments system acts as an important check on populism infiltrating the central bank.

Instead, the Italian government is likely to nominate an experienced economist or someone with considerable central banking experience, such as Fabio Panetta, now a top official at Banca d’Italia.

Meanwhile, Ms Lagarde is set to inherit some experienced aides behind the scenes. Figures such as Massimo Rostagno and Frank Smets are likely to prove important.

Mr Rostagno, who heads the directorate general for monetary policy, has been at the ECB since it was founded in 1998 and before that had a spell at the IMF’s European department.

Mr Smets was Mr Draghi’s counsellor during the worst of the crisis years and has gone on to head the economics division.

Both men are little known outside central banking circles, but are seen by many economists as having been vital in shaping the bank’s response to the financial crisis and its €2.6tn quantitative easing programme of bond buying.

“Much of the credit for the ECB’s amazing success during Mario Draghi’s term in office should go to the brains in the back room — Frank Smets and Massimo Rostagno — who have done the technical analysis and figured out the best paths for ECB monetary policy,” said Melvyn Krauss, senior fellow at the Hoover Institution at Stanford University.

Mr Draghi’s statement during the summer of 2012 that the ECB would do “whatever it takes” to save the eurozone from collapse was the crucial moment that pulled the bloc back from the brink — but it would have failed, had it not been for his inner circle. They helped him to design a programme of potentially unlimited bond buying that skilfully avoided breaking EU laws that prevent the central bank from financing governments.

“What followed the ‘whatever it takes’ statement . . . was certainly a joint effort,” says Panicos Demetriades, a professor at the University of Leicester who at the time was governor of the Central Bank of Cyprus. “Mr Draghi relied heavily on those around him — and Christine Lagarde can do the same.”

This article has been amended to correct the name of the former Central Bank of Cyprus governor. He is Panicos Demetriades, not Panicos Georgiades. Also, Mr Rostagno is responsible for ECB monetary policy and Mr Smets is responsible for economics.