FINANCE | 05.28.2020
Philip Lane, the Irish economist gaining prominence at the ECB thanks to the COVID-19 crisis
His arrival at the European Central Bank (ECB) came a little later than expected. The 50-year-old Dublin native ran for the vice presidency of the institution in 2018 but was bested by Spain’s Luis de Guindos despite having garnered support from the European Parliament with his long experience in monetary policy and objectivity.
It’s now been a year since he joined the ECB’s Executive Board as Chief Economist. At the time, the eurozone economy was already showing signs of a slowdown, though growth was still forecasted to be 1.4 percent in 2020. Now it’s predicted to shrink between 8 and 12 percent. Though Lane is not considered to hold a particularly high position in the organization’s hierarchy, the COVID-19 crisis has made his role especially relevant.
As featured in a recent article in The Economist, Lane is the technical mind behind the policies announced to tackle the pandemic. The ECB is battling the virus on two main fronts, collateral easing measures to improve access to liquidity and asset purchasing under the new Pandemic Emergency Purchase Program (PEPP) — a check for 750 billion euros made out to the real economy via the banking sector. According to MAPFRE Economics, the ECB’s job “(beyond the delivery of monetary support) is to be a catalytic and mitigating mechanism for each country’s sovereign policies, accommodating the uncoordinated fiscal expansion of each Member State and committing to do everything that is needed (expectations management).”
The new debt purchase program, which, unlike previous quantitative easing policies, is not governed by its impact on the GDP of each economy, has succeeded in flattening debt curves and reducing spreads. Increased risk premiums would be devastating at a time when governments must appeal to capital markets to fund the multimillion euro emergency plans that they have been announcing. Take Spain, for example, where debt-to-GDP ratio could soar to over 120 percent. A few weeks after President Christine Lagarde’s unfortunate statement that “we are not here to close spreads,” Lane spoke up about the ECB’s implicit work of flattening, though not eliminating spreads.
This makes Lane what many would consider a perfect complement to the more political voices of Lagarde and the Vice President, Luis de Guindos, which also serves to protect the independence of the institution. The Irishman graduated with honors in Economics from Trinity College in Dublin. Shortly thereafter, he moved to the US and earned a Master’s degree in Economics from Harvard University, where he went on to earn his doctorate in 1995 with a thesis on international macroeconomics. After receiving his Doctorate in Economics, he worked as an assistant professor at Columbia University in the US between 1995 and 1997, and later returned to Ireland to work as a professor at his alma mater. He was appointed Governor of the Bank of Ireland in November 2015, a position he held until he joined the ECB.
The relevance of his role owes not only to the technical aspects of the measures taken against COVID-19, but also to its importance in ensuring the ECB remains independent at this crucial moment, when the debt purchases made by Mario Draghi five years ago were declared partially unconstitutional by the German Constitutional Court. Some fear a legal challenge may now be in the works for the new program too. According to Gonzalo de Cadenas-Santiago, Director of Macroeconomics and Financial Analysis at MAPFRE Economics, “this [court] ruling may limit the role of the institution—led by Christine Lagarde—in purchasing bonds as part of its new stimulus program (PEPP), given that new court cases are likely to be filed to challenge it on the grounds that it may involve covert funding from some member states, which would reignite doubts about fiscal sustainability.”
Lane spoke about this topic in a recent interview with El País newspaper: “We are an independent central bank. The ECB is a unique institution, with 19 member countries. Sometimes, this can lead to headaches. But the fact that 19 countries are watching each other also helps to ensure that we are independent. At the same time, independence comes with accountability: toward the European Parliament, and, of course, we are subject to the jurisdiction of the European Court of Justice, which ruled in favor of our public sector purchase program.”
Lane has emerged as a key figure in a monetary policy now closely aligned with fiscal policy. They go hand in hand. His next trial by fire will be when the time comes to defend his words on “fulfilling the ECB’s mandate,” forcing him to raise interest rates, albeit not any time soon. And that’s when the clash with governments will resurface and Lagarde will have to take back the reins because at that point maintaining investor confidence (better handled by an economist) won’t be as necessary as it is now, while those in power will still have to be won over (better handled by a politician).