The economy was languishing when Christine Lagarde took the lead of the European Central Bank in late 2019. Inflation in Europe was too low, growth was slowing and interest rates were negative. There were problems, but none were flashing red.
Then the first crisis arrived within about three months — the Covid-19 pandemic. From there, Ms. Lagarde has steered Europe’s economy through the energy shock after Russia’s 2022 invasion of Ukraine, the turmoil raised by President Trump’s global tariffs last year and another energy shock from the war in the Middle East.
After more than seven years of putting out fires, Ms. Lagarde will hand over the reins in February, she announced this week. The process to choose her successor has already begun.
“Given the fact that we went from one crisis to the other, the central bank needs to be pragmatic and flexible,” said Frederik Ducrozet, head of strategy and macro research at Pictet Wealth Management. “And this has been the story of the E.C.B.”
Economists warn that the world is likely to face more acute shocks, which policymakers around the globe will have to grapple with alongside seismic changes from climate change and artificial intelligence. Through it all, the main job of the head of the central bank sounds deceptively simple: Keep prices stable. For the most part, that means ensuring that inflation is about 2 percent.
At the European Central Bank, the task is more difficult because it aims to keep inflation steady across 21 countries. Among European institutions, the bank is rare for its truly Pan-European focus. Policies are set by the six members of the bank’s executive board, which includes the president, and the governor from the central bank of each euro country. But they target average inflation across the eurozone, not in their individual home countries.
Ms. Lagarde has been credited with building a more collegial environment in the bank’s large governing council. Her time leading the International Monetary Fund may have prepared her for that, said Ngozi Okonjo-Iweala, the director general of the World Trade Organization.
Ms. Lagarde “has those consensus-building skills,” Dr. Okonjo-Iweala said. “She honed them at the I.M.F. She brought them to the E.C.B., and I think it’s served her well.”
Ms. Lagarde’s more political background contrasted sharply with that of her predecessor, Mario Draghi, who already had experience as a central banker.
The next leader will need to be “a bit of everything” combining economic knowledge and political acumen, Mr. Ducrozet said.
The leading candidates to replace Ms. Lagarde are Klaas Knot, a former governor of the Dutch central bank, and Pablo Hernández de Cos, a former governor of Spain’s central bank and currently general manager of the Bank for International Settlements, which functions as a bank for the world’s central banks. Both have more traditional central banking backgrounds.
The head of the E.C.B. is chosen by national leaders, many of whom push for their preferred candidates for the bank’s top jobs. There has been some criticism of Ms. Lagarde’s early departure because of the timing around the French presidential elections, which will take place next spring. By leaving in February, Ms. Lagarde, a French national, will allow her successor to be chosen while President Emmanuel Macron is still in office. Marine Le Pen, the far-right front-runner in the vote next year, has hostile views toward European institutions.
Though some have seen this as unnecessarily politicizing the institution, others regard it as protecting the central bank’s independence.
Ms. Lagarde is “demonstrating a high degree of responsibility towards Europe, and in particular towards the European Central Bank, by stepping down,” said Marcel Fratzscher, the president of the German Institute for Economic Research. She “is giving European governments and institutions the opportunity to appoint a successor who will uphold Europe’s values.”
The political uncertainty in France is already stirring up a challenge for the central bank. In recent weeks, investors have shunned French debt, sending the government’s borrowing costs soaring higher. The country has felt like it is edging toward a crisis as investors do not see any credible plan to reduce the debt burden from the current government or by front-runners in the presidential election.
The speed of the sell-off in French bonds has led some to ask whether the E.C.B. would intervene to quell the market volatility. Right now, the answer seems to be no. The troubles in the French bond market have been generated by French politics, an area the central bank is supposed to avoid.
But the central bank has said it can intervene in markets if there is so much volatility that it is having broader effects that interfere with how markets function. If the woes of the French bond market ripple across Europe, it becomes a much more difficult question for the central bank. The bank would be compelled to stop a broad debt crisis, but it could also face accusations of tamping down borrowing costs and allowing governments to instigate fiscal policies that investors would otherwise reject. This question is likely to await the bank’s next president.
At some point, there could be more pressure on the E.C.B. to step in, said Gita Gopinath, a Harvard professor and former I.M.F. deputy managing director. She added that the bank’s president must be ready to make hard decisions about when to intervene in markets — and when not to.
“It’s important to have a person at the helm who is able to take, along with their committee, these very independent decisions,” Ms Gopinath said.
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