Open Letter to Christine Lagarde, Incoming President of the ECB

Open Letter to Christine Lagarde (President-Elect ECB), Ursula von der Leyen (President-Elect EU Commission), Roberto Gualtieri (Chair of EP Economic and Monetary Affairs Committee), Christoph Schmidt (Chair of the German Council of Economic Experts).


Dear President-Elect Madame Lagarde,

You will soon be taking up your new post as President of the ECB. At the Global Policy Institute (GPI) we would like to wish you well in tackling your new responsibilities. The GPI – – is an academic think-tank, established in 2006, specialising in global political and economic issues, with a special focus on federal governance issues.

We are sure that you will follow on strongly along the positive path started by your predecessor Mario Draghi. You take over at a crucial time, particularly in relation to the unusual state of European bond markets, the potential pursuance of even more unconventional monetary policies, and the global trade problems.

We also appreciate the external pressures on you from other European Union actors. Noting the challenges of monetary and fiscal policies within the Eurozone, we are publishing this letter as an open letter, copied also to some of those actors indicated above.

In 2018 we published Federal Central Banks. A Comparison of the US Federal Reserve and the European Central Bank (London: Forum Press), which analysed the establishment and impact of these banks within a federal (US) and confederal (Eurozone/EU) context. As you will gather from a perusal of the executive summary of the enclosed book, we interpreted our brief widely, but arrive at three critical areas of recommendation and policy observation.

Institutional Development

Notwithstanding apparent German concerns, and because establishing a full Eurozone fiscal union would be premature, it is, nonetheless, essential to establish an accountable fiscal authority at Eurozone level. This authority would best be personalised in the form of a Eurozone Finance Minister, appointed for five years. It is suggested that the European Stability Mechanism (ESM) should be replaced by a European Monetary Fund (EMF) to be disbursed by the new fiscal authority in order to assist with the rectification of trade imbalances within the Eurozone. Contributions to the EMF would be equal and not proportionate to individual GDP levels. The EMF could be seen as an embryonic federal Eurozone ‘budget’.

The Eurozone Finance Minister should be installed as the Chair of a more formalised Eurozone finance ministers group – including publication of full minutes of meetings –  and would be formally subject to regular democratic accountability by the European Parliament, in the same manner as you are as President of the Central Bank.

The European System of Central Banks has, in general, coped well with the burdens placed on it by the monetary policy operations of the ECB in dealing with the aftermath of the global financial crisis and internal Eurozone pressures within the Euro area. However, in a federal context, at some point in the future, consideration will need to be given to the independent Eurozone national central banks moving to a position of becoming ‘regional’ banks as is the case with the participating banks in the Federal Reserve System in the United States. Though this change is not a specific recommendation in our report, it follows from the comparison made in our book of the central bank systems in the US and the Eurozone. We do not suggest that such a move should be imminent, but internal ECB research on how this change might be achieved in the future should be considered.

Operational Practices

A further concern expressed in our book concerns the apparent abandonment of the Keynesian macroeconomic view that the primary determinant of investment is aggregate demand, in favour of the Wicksellian view that investment and savings are brought into equilibrium by the operation of the (unobservable) natural/neutral rate of interest; effectively a ‘loanable funds’ approach to the determination of investment. Hence, the policy followed by the ECB (see reference in our book, pp. 56-59, to a speech by Mario Draghi).

This, we argue, erroneous position has, to an extent, been obscured by the depression of the actual interest rate necessary to avoid further recessionary pressures in the aftermath of the global financial crisis, combined with credit and quantitative easing. A recent IMF paper (Ruchir Agarwal and Miles S. Kimball, April 2019), sets out a case for continuous depression of interest rates, well into negative territory, to stimulate economic growth, in preference to either further quantitative easing or an expansionist fiscal policy. In fact, the rejection of fiscal policy action rests, in the paper, on political not economic policy arguments.

It is not clear exactly why this shift in perception and monetary policy direction has occurred. Partly it may be due to the excessive burden placed on monetary policy in respect of the management of aggregate demand and Eurozone governments’ concomitant avoidance of the deployment of an activist fiscal policy, based partly on fears of increasing levels of public debt in some Eurozone countries.

Further research on this issue is required, followed by political discussion in the European Parliament.

Political Imperatives

The current confederal nature of the Eurozone, though with the ECB as a federal institution, clearly necessitates greater democratic accountability and control over the operations of the ECB and the informal fiscal policy provided by the Eurogroup and its secretariat. The US federal constitutional structure, though itself imperfect (as we argue in our book), offers some pointers to how the Eurozone/EU structures might evolve.

It is imperative, we believe, that steps be taken to ensure that the regional and social impacts of centrally imposed Eurozone monetary and fiscal policies are subject, as far as technically possible, to prior and subsequent analysis and agreement by the relevant EU democratic institutions.

We are aware of the regular appearances of the President of the ECB before the European Parliament Economic and Monetary Affairs Committee. However, the permitted scrutiny of, and potential challenges to, the policy positions of the ECB are weak. We appreciate this may partly be justified by potential impacts on financial markets of specific actions. However, it cannot be correct that overall policy positions of the ECB (and of the Eurogroup) in terms of their regional impacts on the social and regional well-being of the citizens of the Eurozone, and the EU non-members of the Eurozone, particularly when they are likely to be adverse, should be outweighed by the protection of financial market players. The political arguments against a continuation of low, or even below zero, interest rates are the damaging impact on the life courses of ordinary citizens unless counter-balanced by other policies.

There is a requirement for an increase of the weight given to democratic accountability and control as against the technocratic and financial market influence over monetary (and fiscal) policy decision-making.


This letter is necessarily brief. GPI would be delighted to meet with you to discuss the issues raised, and, if the occasion arises, for you to speak at one of our GPI events in the City.

The suggestions we have made impinge on the immediate and the future operational practices, institutional role, and democratic accountability of the ECB, set in the developing Eurozone confederal and federal monetary and fiscal structures in which your institution is situated.

We will be revising and further developing our analysis in the next edition of our book, which will be published early next year. We hope that we may be able to benefit from contact with yourself and your officials during the next three months.

Your sincerely,

Professor Chris Dixon, Director of Global Policy Institute

and the authors of Federal Central Banks:

Dr Andrew Black

Ms Viara Bojkova

Dr Michael Lloyd

Professor Sam Whimster

About the GPI

The Global Policy Institute is a research institute on international affairs. It is based in the City of London, and draws on both a rich pool of international thinkers, academics as well as policy and business professionals. The Institute gives non-partisan guidance to policymakers and decision takers in business, government, and NGOs.