Christine Lagarde in her office at the ECB's Frankfurt headquarters

Christine Lagarde in her office at the ECB's Frankfurt headquarters

Foto:

Martin Schoeller / DER SPIEGEL

One Wrong Word Can Cost Billions A Day with ECB President Christine Lagarde

Europe is threatened by recession, war and a deep economic crisis. Christine Lagarde, the head of the European Central Bank, is fighting a steep increase in prices as the continent experiences its worst inflation since the introduction of the common currency. Can she pull it off?

It's exactly five minutes past seven when Christine Lagarde's spokesperson receives the message that she will pull up at any moment at the agreed to meeting point, a brightly lit Aral gas station in her neighborhood. He had suggested getting there a little bit earlier than absolutely necessary because of the many traffic lights in the area. You never know. He ordered a cab with plenty of time to spare, leaving him with a 20-minute wait at the gas station. It's still dark outside, and nobody pulls in to fill up.

DER SPIEGEL 45/2022

The article you are reading originally appeared in German in issue 45/2022 (November 4th, 2022) of DER SPIEGEL.

SPIEGEL International

Another two minutes pass before the silver Mercedes rounds the corner, Christine Lagarde's official car. The meeting had initially been scheduled for her apartment, but her staff, responsible as they are for her safety, found the idea a bit heedless. It would have made it clear where she lived.

For the past three years, Christine Lagarde has been the first female president of the European Central Bank (ECB), making her one of the most powerful women in the world. With the key interest rates it announces, the ECB can create or destroy wealth, it can move markets, stock prices and exchange rates. One wrong word from Lagarde can cost billions.

"Good morning," Christine Lagarde says. "Welcome to the car."

She is sitting in the back seat of her Mercedes, behind the passenger seat, her blouse still over her waistband. "What time did you get up this morning?" she wants to know as the car pulls out of the gas station, a question that naturally provokes a question in response. Without uttering a word, Lagarde raises her left hand, bending her thumb so that only four fingers are visible.

At 4 a.m.? Really?!

She nods.

Ahead of her lies one of the most important days in the ECB president's schedule, a "high pressure day," as she puts it. It's the day the Governing Council meets, the ECB's top body that decides on interest rates in Europe every six weeks. The Council membership includes two women and 23 men. In addition to Lagarde, there are five other ECB Executive Board members and the central bank heads of all 19 EU countries that have thus far adopted the euro. She usually takes time to do a few relaxation exercises before heading into the office, Lagarde says, Ashtanga yoga, breathe and hold. But on this particular morning, she had files to study. Four-and-a-half pages. Her chief economist Philip Lane's argument for another 0.75 percent rate hike.

This Thursday, October 27, 2022, will mark the third consecutive time the ECB has raised its key policy rate – this time, from 1.25 percent to 2 percent – after keeping it unchanged at zero percent for more than six years until last July. It's their attempt to stop rising prices. Most recently, the inflation rate in the eurozone stood at 9.9 percent. Nothing worries Europeans more at the moment than rising prices. For the ECB, the stakes are higher than they have been for quite some time.

Christine Lagarde stands next to a model of the euro at ECB headquarters in Frankfurt.

Christine Lagarde stands next to a model of the euro at ECB headquarters in Frankfurt.

Foto:

Martin Schoeller / DER SPIEGEL

Lagarde says that not everyone at the ECB thought it was a good idea to be accompanied by a journalist, certainly not on such an important day. But she thinks the opposite is the right approach: The more important the day is, the greater impact her actions have on people's everyday lives, the more important it is, she believes, that the public learns about how things work.

The ECB is an organization with more than 3,500 employees that is responsible for the stability of the world's second-most-important reserve currency after the dollar. It is also the only major central bank responsible for an entire currency area and not just a single country.

It is an organization that, with the exception of experts, few people understand.

As her official car pulls up at the forecourt of the ECB, Lagarde remembers that she's about to be photographed.

But she hasn't yet tucked in her blouse.

It's the only indulgence that the president of the ECB allows herself everyone morning, a little luxury of comfort before she starts work. "When I'm in the car," Lagarde says, "that's when I'm still relaxed, when I can still wear my blouse over my pants."

For a moment, sitting in the car, she considers fixing the wardrobe, with a journalist sitting next to her. The blouse is just a small detail, but small details, she has learned as ECB president, can have great meaning. "I should fix myself up," she admonishes herself. But then it's just too complicated for her, so she gets out as she is.

It takes her five minutes to get through the still darkened, deserted lobby, then on past a security gate, held up for her by a security guard, to take the elevator to the 40th floor of the South Tower, where finally, behind two more security doors and at the end of a very long hallway, her receptionist is waiting.

She greets her warmly and then enters her office, disappearing for another brief moment into a dressing room behind her desk. When she comes out, the blouse has been neatly tucked in.

She has about a half hour now to continue studying the files. Then the Governing Council will meet to set the key interest rate, the rate at which commercial banks can borrow money from the ECB.

The key interest rate isn't the ECB's only instrument for fighting inflation, but it is its most important one. The higher the key interest rate, the more expensive it is for commercial banks to borrow money from the ECB. Commercial banks then try to pass on the increased borrowing costs to their customers. Which means that those interested in taking out a loan to buy property, for example, must pay more to do so. They can't buy as much, which depresses prices, or at least makes them rise more slowly than before.

Lagarde leaves her office at 10 minutes to eight. The Governing Council's meeting room is located on the 41st floor, one floor above her office; no one has a desk any higher in the South Tower. "My blouse is tucked in now," Lagarde says. "We're no longer in 'relaxed mode' now."

President Lagarde in her office

President Lagarde in her office

Foto: Martin Schoeller / DER SPIEGEL

The fact that the ECB would raise the key interest rate by 0.75 percentage points this Thursday had already been expected by most experts. An interest rate decision is never made suddenly, because it is always dangerous when central banks do something unexpected. In the past, central banks have triggered massive economic crises, such as the debt crisis in Latin America in the early 1980s, the real estate and stock market crisis in Japan in the late 1980s and the crises in Mexico and Asia a few years later. Investors are prone to overreaction and have a herd mentality. This Thursday meeting is thus about more than just the 0.75 percentage point rate increase. It could provide a glimpse into what the ECB plans to do next. What will the Council decide when it meets again in six weeks?

Lagarde can't say too much, but she also can't say too little. An interest rate decision must be a masterpiece of communication.

She takes the stairs to the 41st floor. The Council members stand together in groups outside the meeting room and drink coffee.

Lagarde already met everyone the previous morning for a "loose exchange of ideas" on various topics, and then again in the afternoon for two 15-minute presentations, each followed by a discussion on financial market developments and the macroeconomic situation. Finally, in the evening, came the "Governor's Dinner" in the dining room of the ECB's North Tower, where they talked about this and that. What they didn't discuss, though, is the exact amount of the interest rate.

That requires an official proposal from the ECB's chief economist, which he has been working on over several days in consultation with the ECB president and finalized on Wednesday night. "He likes to work at night," Lagarde says of Philip Lane, her chief economist. "I'm an early bird." By the time she gets up on Thursdays, Lane has always delivered.

That's another reason that she likes to go to bed early on Wednesdays.

She says she was already asleep by 11 p.m. She left the "Governor's Dinner" earlier than the others, she says, sparing herself the cigar and the bit of cognac that some central bank presidents still allow themselves. Then, at 4:30 a.m., half an hour after she got up, she was sitting in front of the proposal Lane had sent her – and was once again glad she hadn't joined the others for a cigar.

Christine Lagarde in the meeting room of the ECB Governing Council

Christine Lagarde in the meeting room of the ECB Governing Council

Foto: Martin Schoeller / DER SPIEGEL

There are advantages to not always wanting to belong.

"I have been an outsider all my life," Lagarde says.

She has always been at the top, but almost always alone – as the very first, and usually as the only, woman.

Christine Madeleine Odette Lagarde, born on January 1, 1956, in Paris, is the eldest of four siblings and the only girl among them. She grew up in Le Havre, the port city in northern France. Her father was a university professor and her mother a teacher, who attached great importance to good manners and was convinced that she was of aristocratic origin. She did genealogical research and had a noble ring minted with the coat of arms of her family. In her eyes, her sons were future counts and Christine a future countess.

Accordingly, the expectations for her were always high, and she often fulfilled them.

When she was 17, she attended the private girls' school Holton Arms in Bethesda near Washington, before going on to study at the best schools in France. She was also a member of the French national synchronized swimming team. But time and again, she would rebel against the strict rules, the ban on smoking at the girl's school in the United States, the recommendation to drink a soft drink only once a week, her mother's aversion to jeans.

For six years, she served as head of the U.S. law firm Baker & McKenzie, then as French agriculture minister, then as economics and finance minister and later, for eight years, as the first woman ever to head the International Monetary Fund in Washington. "As a French woman, I was the head of an American law firm," says Lagarde. "I was a politician with zero political background or party affiliation, I was surrounded by Ph.D. economists as French economics and finance minister and as director of the IMF without having a Ph.D. in economics myself and, finally, I came to the ECB as a central banker with no history in central banking. That is my life. That is the way it has always been."

But she doesn't seem to have any trouble finding her way in those situations.

"If people don't expect you to know what they know, if they think you don't speak their language, but you actually do, you can turn that to your advantage. Then you have the advantage of being able to surprise them."

She is not reserved, no matter who she is dealing with, but she always keeps her distance. She's confident without being overbearing and well-mannered but not precious. She can dole it out without losing her composure. And she never forgets to smile.

She approaches the standing tables with the central bank heads of the 19 eurozone countries, 19 people with serious expressions. At first, they don't notice her. Lagarde then lays her arm on the shoulder of one. "You have to behave," Lagarde says.

It apparently wasn't clear to them that they would have a journalist among them today.

They look at Lagarde, their faces brighten and they start to joke. This prompts one gentleman to immediately utter a reminder that we're in the middle of "times of serious inflation." "We can't be seen laughing," he says. And that makes everyone laugh even harder.

By this point, Lagarde has already long since moved on to the next group.

When she took over from her predecessor Mario Draghi three years ago, many complained about the bad mood in the Council. The Council was split between the hawks, who tended to favor higher interest rates, and the doves, who advocated lower rates.

Mario Draghi was a dove, a champion of low interest rates, and he stayed true to his low interest rate policy until the end of his term in October 2019. He wasn't swayed by the misgivings that many held at the time. He made allies with a few key people and trusted that the rest of the Council would follow him. The hawks, including the president of Germany's central bank, the Bundesbank, felt left out, and the mood in the Council grew increasingly hostile.

Monetary policy is a complex business. There isn't just one, economically correct way, but different interests of the 19 eurozone member states that clash in the ECB Governing Council. The ECB must deal with 19 independent governments that conduct their own fiscal policies. Thus, some incur more debt and others less, which is why a lower interest rate is more favorable for countries like Italy and Portugal, which have high levels of government debt, than for countries like Germany with comparatively less debt.

In the end, can there even be one way that everyone thinks is right?

Lagarde has stated from the very beginning that she doesn't want to be pigeonholed into either camp. She has said that she is neither a hawk nor a dove, and she has invented her own category for herself – the owl, a symbol of cleverness. Indeed, her office is full of plush owls she has received as gifts.

At 8 a.m. on the dot, Lagarde takes her place in the meeting room of the Governing Council, with its panoramic view over Frankfurt. Behind her, the office towers of downtown Frankfurt are visible, and above her, the "Europa ceiling," a stylized map of Europe like the one found on euro banknotes. She sits down on her beige leather chair in front of the circular table, where the other Council members are already seated, and opens the meeting.

She only needs three sentences.

She wishes everyone a good morning.

She welcomes an online participant.

Then she passes the floor to her Chief Economist Philip Lane.

What is discussed for the next three and a half hours remains secret. All those who aren't part of the group must leave the room.

There is a lot of discussion in monetary policy about what is right and what is wrong, but it can take months, sometimes more than a year, to really know whether a measure is working as desired. Key interest rates are an especially slow-acting medicine. It takes time for them to develop their full force, for higher interest rates to become lower consumer prices. And sometimes, decisions must be made about increasing the dosage without knowing of the previous dose may already have been too large.

The critique of Lagarde is that she should have raised rates sooner than July, when she made her first rate move from zero to 0.5 percent. Some economists claim that she underestimated the consequences of the Ukraine war, the sudden rise in energy prices, and now had to raise interest rates all the more vigorously. The risk of overdosing the economy may be higher now.

At the same time, it is questionable how much Lagarde can achieve with a higher key interest rate today. Because, unlike the U.S., where prices are rising primarily due to higher demand, higher energy costs are the main driver of inflation in Europe. But higher interest rates can no longer help against higher energy costs.

After a lunch break spent in her office, she meets with her closest aides, including Philip Lane, to discuss the upcoming press conference.

She can't just speak freely – every word can move prices in the markets.

"The highlight is the press conference," says Lagarde. "That is the moment when you are expected to send a specific message. If you move it just slightly, it can have momentous consequences."

That has already happened once during her term, when she declared it was not the ECB's job to lower the risk premiums of Italian versus German government bonds. That's actually a given, but investors thought it indicated a change of course by the ECB and sold Italian government bonds. The value of Italian bonds fell until Lagarde clarified her position in an interview. She learned from the experience.

The press conference is held in a room accessed directly from the lobby. It is equipped like a TV studio, with modern cameras, lighting and staging.

Lagarde has arrived a few minutes early, and the producer stops her in front of the glass door, behind which the journalists are waiting.

"Three minutes left," says the producer.

Lagarde wants to know which camera she has to look to when the questions come not from the room, but from journalists connected online. She wants to know which part of her face can be seen where. She seems tense.

"You'll do great as you always do," says the producer.

"Thank you," says Lagarde. "More of that, more of that!"

Then she asks for water.

"One minute," says the producer.

Lagarde takes a deep breath.

Her yoga moment.

"That's the moment you breathe in," she says.

"If people don't understand what I'm saying, how can they trust me?"

"If people don't understand what I'm saying, how can they trust me?"

Foto:

Martin Schoeller / DER SPIEGEL

Of particular interest this Thursday is a sentence with which the ECB sets the framework for the interest rate hike that has just been decided." It goes: "The Governing Council … expects to raise interest rates further." It's not a surprising sentence in and of itself. But, and this is crucial, in its last "Monetary Policy Decisions" in September, when the ECB already raised the key interest rate once by 0.75 percentage points, it said: "Over the next several meetings, the Governing Council expects to raise interest rates further." The "over the next several meetings" has been omitted in the current text. For the uninitiated, there doesn't seem to be any significant difference. But for the markets, it's cause for speculation. Is the ECB saying that there will be fewer interest rate hikes than had been planned in September?

Lagarde stands behind her lectern in front of a blue wall, flanked by her spokesperson and her vice president, welcoming journalists to the press conference. She is supposed to read the "Monetary Policy Statement" now, the document prepared by her chief economist. She takes a breath; every word has to be right. It's at this moment that she realizes that the teleprompter isn't working.

Later, when it's all over, she recounts that moment, staring at the blank teleprompter. If she hadn't put the manuscript on top of her folder just in case, would she have had to say, sorry, the press conference must be postponed because the teleprompter isn't working? She doesn't even want to think about what would have happened then.

But she somehow manages to maintain her composure. You don't even notice that she suddenly has to read from the page, and after a few minutes the teleprompter starts up again. The first part is done. All that remains now are the journalists' questions, a final test of credibility. Can she also talk about monetary policy spontaneously?

She has watched appearances by her predecessor, Mario Draghi, who, whenever he was asked questions, would pick up his manuscript and say he wanted to read it again. And then Draghi would read out entire paragraphs, word for word. And no one seemed to mind.

During her first press conferences, Lagarde did as Draghi did, picking up her manuscript and reading from it, repeating important passages. But when it was then implied that she could only answer questions by looking at her manuscript because she lacked the confidence to speak freely about monetary policy, she refrained from looking at her prepared speech text and answered freely.

But some claim that she's still only reading her answers.

She spends an hour answering journalists' questions. She has a firm grasp of her words, she speaks freely, and always on message.

Further interest rate steps.

Significant progress.

Further interest rate steps.

With each question, it all starts over again.

Then, it's over. She returns to the 40th floor, where she briefly meets with the other directors, who congratulate her on the press conference and study the price developments on their mobile phones. Prices have remained stable, the euro has weakened somewhat against the dollar, but there have been no major swings, no disasters, and that's already something.

She briefly greets her partner Xavier Giocanti, who had been in Marseille with his son the night before to watch Eintracht Frankfurt's Champions League match against Olympique Marseille. Then she heads back to her office.

"The measures we have decided to take today will not have a direct impact on prices in the coming months," says Lagarde. "It will probably take 18 months for them to take full effect. We have to explain that, or people won't understand why we're raising the rates at a time when we may be moving into a recession."

Especially for Lagarde, who is often accused of being less confident about the facts than others because she lacks years of experience as a central banker, it is risky to explain facts in simple terms, without resorting to technical vocabulary.

Critics are quick to jump in and claim that she's speaking kindergarten language.

But she can relate well to other people, she's adaptable and willing to learn. She used to smoke unfiltered Gitanes, but now she prefers to smoke a cigar. But she never becomes a member of the club. She plays along without really belonging.

That's not to some people's taste. They want a central bank president who fits in with their image of that role, into their jargon. When an interview appeared in Madame Figaro magazine in August in which Lagarde told her interviewer that she had just started reading James Joyce's novel "Ulysses" for a second time, an editorial appeared a short time later in the German business daily Handelsblatt criticizing her not only for speaking to a magazine that doesn't deal primarily with economic issues, but also for her interest in a novel. "She is reading James Joyce's exceedingly complex Ulysses' for the second time," the editorial read. "Anyone who does that must have a very strong interest in literature – and time on their hands."

It's not easy to break out of this world that clings to its technical terms and sees comprehensibility as an unnecessary risk, especially now, in such tumultuous economic times. Analysts don't like it when she speaks a different, simpler language than the one spoken in the markets, with its set codes that provide them with certainty. But Lagarde feels she has to try anyway. She says there is no other way to create trust in an institution that has become so important to people's everyday lives. "If people don't understand what I'm saying, how can they trust me?" asks Lagarde. "After all, today people don’t trust someone only because the person expresses herself or himself in a complicated way."

She has one last meeting to take care of and then she is flying off to Dublin, where she will visit the finance minister and the central bank president and appear on a talk show. It will be a completely different audience to whom you have to explain things differently. But she's had plenty of practice at that, going all the way back to when she worked as a lawyer. She always recited her pleas to her children as a test of how understandable she was.

Is she also able to explain the ECB's mission to children?

She takes a moment to think on her sofa in Frankfurt and then answers: "I would probably ask children to take a banknote out of their wallet, if they have one, and then ask them what they see in the top left corner. That's where my signature is or that of my predecessor. And I would say: We are the custodians of the euro, and our mission is to ensure that prices remain stable, that the euro is available and recognized in all member countries. And that children can travel from Italy to France and from Germany to Ireland and always pay with the same currency because we're all in the same club that's respected and appreciated around the world."

She stands up.

Perhaps such an explanation isn't just a good one for children. In any case, it's a decent attempt.

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