The decline of economists

Economists are losing out as governments, increasingly averse to independent-minded central bankers, are choosing to give the job to administrators instead

The term of the current President of the European Central Bank, Mario Draghi, is getting over on October 31, 2019. There was speculation on who would be nominated post-Draghi. The wait is over now. Donald Tusk, President of European Council tweeted on July 2 that the Council “nominates Christine Lagarde as candidate for the President of the European Central Bank.” Ms Lagarde is currently the chief of International Monetary Fund and has resigned from her position till the nomination period is over. 

Mr Tusk’s tweet had a few important messages. One, he chose to tweet about the nomination, showing the rising importance of the social media platform. Two, Ms Lagarde will be the first woman leader of a major central bank, which is in line (and welcome) with women increasingly getting appointed to top positions. Three, once again a French person will head the central bank, which is a coup of sorts. Fourth, the appointment marks governments preferring non-economists over economists, a trend seen in other central banks as well. This piece dwells on the third and fourth aspects of his message.

The structure of the ECB is such that its appointments are always embroiled in controversy. In a typical central bank where there is one government, there are battles over central bank appointments. The ECB, which is a central bank of several sovereign nations, this problem is likely to be even worse.  

The ECB was modelled on the German Bundesbank, which stood out for its inflation focus and the central bank's independence. Even today, the Bundesbank is considered as the gold standard in central banking despite giving up central banking tasks to the ECB. Given the German influence, it is highly ironic that no German has headed the ECB so far. We have had Wim Duisenberg (Dutch, 1998-03), Jean Claude Trichet (French, 2003-11), Mario Draghi (2011-19) and now Ms Lagarde, who is French. The French always envied Germany’s low inflation but somehow when it comes to ECB governance, they dominate. Ms Lagarde is a former finance minister of France, which makes the appointment even more interesting. 

European Central Bank President Mario Draghi

In fact, all this while the Europeans have feared a German at the helm, as the latter will run a tighter monetary policy. Each time the nomination for ECB president comes up for discussion, a German is in the fray, only to be rejected. Axel Weber was under contention when Trichet was to retire, but resigned from the Bundesbank in 2011, a year before his term was to end. Even this time, Jens Weidmann was under contention but was not considered. All these German central bankers including Jurgen Stark (who was chief economist) have protested against the easy monetary policy of the ECB, which explains the concerns of European members. They want Germany’s inflation but not Germans heading their central bank.

In order to convince Germany, some kind of compromise was evolved, where there will be a German on the executive board, but as chief economist of ECB. But even this was also not followed. Otmar Issing (1998-2006) and Jurgen Stark (2006-11) were chief economists, but there was no German until 2014 and then Sabine Lautenschlager was appointed (2014-22). She is a lawyer and was in charge of banking supervision. The chief economist role since 2011 has been performed by Peter Praet (Belgian, 2011-19), who has been recently replaced by Philip Lane (2019-28). In this roulette of ECB appointments, Germans have been on the losing side, despite their influence on the ECB’s foundation.  

We now move to the fourth part of Mr Tusk’s message. A few years ago, chiefs of quite a few central banks came from MIT's economics department, where they earned their PhDs: Ben Bernanke (US), Mario Draghi (ECB), Mervyn King (Bank of England), Stanley Fischer (Bank of Israel), etc. Even Raghuram Rajan, then Governor of the RBI, was from MIT’s Sloan School of Business. Other central bank chiefs — of Canada and Sweden, among others — held doctorates in economics as well.

When we fast-forward to today, we see this sentiment changing, with governments now preferring non-economists as heads of central banks. Whether it is the US, Japan, India or Europe, the chiefs of central bank come from a non-economics background. 

This change in government thinking reflects the changes in economic and political conditions in recent years. When economists were appointed, most of these economies were facing some crisis or the other and needed expertise to resolve them. Over time, the crises eased but large sections of the population continued to be jobless and under financial stress. This led people to elect nationalistic governments, which promised jobs and reduced inequalities. Elected governments in turn wanted easier monetary policies from central banks to convince their voters. This resulted in differences with independent-minded central bankers over matters such as high interest rates, stiff banking regulations and so on. Central bankers in some countries have even been threatened (discussed in my earlier article, “Who wants a Central Bank job?” May 16, 2019). 

These recent frictions, which have spread across the world, have led to a significant rise in concerns over central bank independence. Meanwhile, governments are choosing to appoint non-economists and administrators as central bankers, to diffuse tensions and manage relations. That having been said, there is no guarantee that governments will stop criticising these new appointments. This has been seen in the case of the US, where President Donald Trump openly criticises Jerome Powell, the chief of the Federal Reserve, who he himself appointed.

The writer teaches economics at Ahmedabad University and writes the blog Mostly Economics