FRANKFURT — The race to replace Christine Lagarde has reached fever pitch after she officially announced her intention to depart the European Central Bank in February next year.

The two leading contenders are familiar figures from the eurozone’s central banking circuit: Spain’s Pablo Hernández de Cos, a measured economist with a reputation for quiet authority, and Dutchman Klaas Knot, a former hawk whose years on the ECB’s governing council left a more complicated legacy.

A recent Bloomberg survey of economists gives de Cos a slender lead: 12 respondents picked him, against nine for Knot. The survey offers a snapshot of expert preferences, not a forecast of the outcome. EU leaders will make the appointment, with national claims and other ECB vacancies likely to shape negotiations.

The choices will also be influenced by horse trading over what will likely be a package deal with the opportunity to fill the two executive board seats that will be vacant in January and May.

Softly spoken de Cos

An economist with a Ph.D. from the University of Madrid, de Cos joined the Bank of Spain in 1997, moved to Frankfurt in 2004 to be an adviser to the ECB’s executive board, before returning to the Spanish central bank. He rose through the ranks to become governor, serving from 2018 to 2024. In this role he restored the Bank of Spain’s reputation after a series of missteps before and during the financial crisis.

His achievement was implicitly acknowledged by his appointment to two terms as chair of the Basel Committee for Banking Supervision, the global standard-setter for bank regulation. He now runs the Bank for International Settlements, the institution often described as the central bankers’ central bank.

His style is low-key: a modest dove, meaning that he is more attentive than hawks to growth and employment alongside inflation. Still, when inflation surged in 2022, de Cos backed the ECB’s shift toward higher rates. Equally, he has little time for governments that put off essential pension system reforms, having published a sharp critique of the Pedro Sanchez government while at the Bank of Spain. 

His case

De Cos has long been groomed by Lagarde’s predecessor Mario Draghi, whose voice continues to carry a heavy weight in European economic debates and may influence the preference of some countries as they mull who to place at the top of the Frankfurt institution.

As France faces mounting debt pressures, de Cos’ experience as a senior Bank of Spain economist during the eurozone crisis could convince EU governments that he is the best fit. Galo Nuño, vice dean and professor of economics at IE University and a former alternate member of the ECB governing council, called it “a huge advantage.”

His challenges

The political arithmetic, however, could work against the Spaniard. France is keen to secure the role of the ECB chief economist, which becomes vacant in May 2027. Some officials may want to avoid pairing the ECB presidency and chief economist roles with candidates from highly indebted countries.

With inflation above target and the eurozone having lived through a severe inflation shock in 2022, some leaders may prefer a candidate with a more clearly hawkish record.

Enter: Klaas Knot.  

Knot: Hawk turned pragmatist

Knot also has a strong economic background, boasting a Ph.D. from the University of Groningen. After early positions at the Dutch central bank, De Nederlandsche Bank, and the International Monetary Fund, he moved into senior roles at the Dutch Finance Ministry and returned to the DNB, which he led from 2011 to 2025. He has also chaired the Financial Stability Board, the global body tasked with monitoring risks to the financial system.

For much of Draghi’s presidency, Knot was a staunch hawk who publicly challenged the ECB’s stimulus measures. In September 2019, he called the package “disproportionate.”

His relationship with the ECB’s leadership was more harmonious under Lagarde. He supported both her pandemic crisis response package, PEPP, as well as the Transmission Protection Mechanism — a potentially more radical tool than any brought in under Draghi which allows the ECB to buy up unlimited debt of a single EU member country.

Knot remained an early advocate of raising rates when inflation took off but came to be described as a pragmatic hawk and team player.

His case

Supporters argue that a hawkish president could help the ECB support Southern European economies during a debt crisis while reassuring consumers and investors that the bank remains committed to price stability.

Knot’s former role as chair of the G20’s Financial Stability Board could also boost his case. Berenberg chief economist Holger Schmieding argued that “the question who may be best placed to deal with potential financial turbulences will likely play a key role in the choice of new ECB leaders.” This role was also Draghi’s springboard.

His challenges

Germany’s ambitions could be a stumbling block, as Northern European hawks will have had their turn with Knot. EFG Bank chief economist Stefan Gerlach said: “If Knot is appointed, then Germany can hardly argue that it is its turn to appoint the president after him.”

Some veteran governors still view Knot’s public break with Draghi as disloyal.

What happens now?

German Chancellor Friedrich Merz said a decision would be taken by year-end, with eurozone ministers set to gather under the banner of the European Council in mid-December.

When it comes who will win the race, the history could cut both ways.

Nuño, who has seen both candidates in action, said each brings monetary-policy expertise and the political pragmatism needed to manage the challenges ahead.

The choice, then, will turn on which mix of policy temperament and political arithmetic EU leaders want at the top.

Christine Lagarde said she will step down as president of the European Central Bank on Feb. 7, creating a vacancy at the top of one of Europe’s most powerful institutions and fueling further speculation about a possible return to French politics.

An official familiar with Lagarde’s thinking, granted anonymity to discuss a sensitive matter, said she made her move now, almost a full year before the end of her term, to have “greater freedom to express her views and to engage in non-monetary matters, because she cannot remain neutral when she sees the developments taking place in her own country and in the world.”

The ECB said in a statement only that Lagarde had informed European Council President António Costa of the decision earlier on Thursday.

The announcement clears the way for a package deal among EU capitals over at least three appointments to the ECB’s six-strong Executive Board. Isabel Schnabel, head of the Bank’s markets department, is due to leave in January to take a senior role at the International Monetary Fund, while Philip Lane is due to depart the influential chief economist’s position in May.

Negotiations over the appointments are likely to be intense, given the ECB’s vital influence in international markets, and the never-ending pressure on European government finances. Former Dutch central bank chief Klaas Knot and Spain’s Pablo Hernández de Cos, who heads the Bank for International Settlements, are seen as the two frontrunners in the race for the top job.  German Chancellor Friedrich Merz said a decision would be taken by year-end.

The timing of the announcement means that President Emmanuel Macron will have a say in choosing Lagarde’s successor before he himself leaves office next spring. Marine Le Pen, the National Rally leader and a longtime critic of the EU, is currently well ahead in the polls to win the French presidency, and may take a radically different view about who should lead the ECB. 

“The EU is trying to guard at least somewhat against the risk that right-wing Marine Le Pen may win the French presidential election,” said Berenberg Bank’s head of research Holger Schmieding. 

Jean-Luc Mélenchon, leader of the hard-left France Unbowed party, protested that Macron had already engineered a similar situation at the Bank of France, where François Villeroy de Galhau’s early departure “allowed Macron to install his assistant,” Emmanuel Moulin, as governor.

Speculation has long swirled that Lagarde, formerly finance minister under President Nicolas Sarkozy, may throw herself back into French politics. She has stressed the need for “a pro-European voice” in the French elections, while still being consistently coy about running herself. Thursday’s announcement comes at a time when candidates from mainstream camps in France are all losing ground to Mélenchon, who wants the ECB to “set fire” to its French debt holdings. None looks likely to make the final round of the presidential election in May.

Whoever follows her as ECB president will inherit an increasingly tense situation in Europe’s bond markets, where borrowing costs are hitting their highest level in years due to a cocktail of war-fueled inflation, demographics and competition from capital from Big Tech companies chasing AI-related riches. 

The problems are particularly acute in France, the eurozone’s second-largest economy, which faces a political impasse and mounting pressure over its public debt.  

Lagarde succeeded Mario Draghi at the ECB in 2019, after leading the International Monetary Fund and, in her time in office, has been a stalwart of the centrist mainstream that is now being squeezed by both wings of the political spectrum across Europe. 

“Christine Lagarde has led the European Central Bank through difficult times,” German finance minister Lars Klingbeil said in a statement.  “Under her leadership, the ECB has kept the euro stable even during crises: when the coronavirus pandemic hit Europe hard, when Russia invaded Ukraine, and most recently in the face of the economic shocks caused by the war in Iran.”

“Christine Lagarde’s tenure at the helm of the ECB has only strengthened the confidence in the European single currency,” Eurogroup President Kyriakos Pierrakakis said in a statement, promising to give the council a “swift” recommendation on the succession to heads of government.

The ECB gave no  details about Lagarde’s plans after leaving Frankfurt. However, she has talked to the World Economic Forum about taking over as chair, according to its founder Klaus Schwab. Reuters reported that the organizer of Davos could announce her appointment as early as this month.  

“I leave this institution with a sense of good work done, and an ECB that is fit for the future,” Lagarde said in a video post on LinkedIn.

This story has been updated. Giorgio Leali contributed reporting.

France has become the new sick man of Europe just in time for its next presidential election.

After two weekends that saw hundreds of thousands of protesters hit the streets demanding the government increase teacher salaries, fix run-down schools and help subsidize the rapidly rising cost of living, the European Union’s second-biggest economy is being dragged into a vicious cycle of twin fiscal and social crises that are fueling each other.

“France is on the brink of a financial crisis,” former Prime Minister Michel Barnier told POLITICO. “We need to send a signal to the markets.”

Authorities were able to prevent the type of rioting and looting this past weekend that marked the first round of demonstrations Oct. 17-18, but financial markets are spooked. Even before the demonstrations began, investors were dumping French debt or demanding historically high returns because of the government’s failure to significantly cut a stubbornly high budget deficit, bring down €3.5 trillion of debt, jumpstart growth and reform an unsustainable pension system.

The prospect of a presidential runoff next spring featuring far-right front-runner Marine Le Pen and her far-left rival Jean-Luc Mélenchon, who is in the mix for second place according to most polls, is further scaring investors. Both candidates want to spend billions to lower the retirement age.

The rioting, for now, is estimated to have cost tens of millions of euros, much of which will be covered by insurance. But the chaos is pouring fuel on an already explosive situation by sending worrying signals to investors, especially if the civil unrest continues. The Yellow Vest protests of 2018 to 2020, which came early in President Emmanuel Macron’s tenure, cost the French economy 0.1% of gross domestic product, with shops reporting losses of €2 billion.

“It is clear that protests have an impact on markets,” Eric Lombard, who served as economy and finance minister last year, told POLITICO.

Given that current Prime Minister Sébastien Lecornu’s proposed budget for 2027 already includes €43 billion in savings, leaving little room for more cuts, the government is faced with an impossible choice: Borrow more money and saddle the next generation with billions of euros in interest payments, or hope the protests die out on their own.

“We have a knife to our throats, and we can feel the drops of blood on our jugular,” said a government minister who was granted anonymity to discuss the current situation.

“We need to show that we’ve heard the outrage. But we have little margin for maneuver given the market situation.”

Playing with fire

Mario Monti, who faced a similar situation as Italian prime minister and managed to avert a financial crisis in 2011 with spending cuts and a pension reform, told POLITICO that “things can go very fast.”

Back then, the spread between Italian and German 10-year bonds — an indicator that measures how risky one country’s debt is compared to historically safe Germany — shot up from around 150 basis points to more than 500 within a few months, Monti recalled. The spread between French and German debt was 169 basis points when markets closed on Friday, while the yield on France’s benchmark 10-year bond hit 5.14% the previous day, the highest level since 2002.

France has long been seen as the EU’s “spoiled child,” Monti said, taking advantage of its political and economic weight to bend or break the bloc’s fiscal rules. But few had thought a country that big and powerful would end up on the front line of a European debt crisis.

While the ability of the European Central Bank to buy government bonds on the secondary market under certain conditions gives it a powerful tool to avert a eurozone crisis, Monti says French voters must recognize that a sovereign debt crisis in their country is no longer the stuff of fiction.

“The major problem is that the public is not concerned enough with this risk,” Monti said. “France is not psychologically ready to view itself as the target of a crisis or even as the starting point of a crisis that could spread.”

That malaise isn’t just economic: Many indicators show France has lost confidence in itself.

According to a poll last month, 9 out of 10 French people are pessimistic about the future and believe their children will be worse off than themselves. A pan-European study conducted earlier this year found that only half of French respondents feel pride in the democratic system, compared to two-thirds of Germans and close to 70 percent of Britons.

That pessimism has pushed voters toward more extreme candidates like Le Pen — whose economic platform has been panned by some economists as unrealistic and unserious — and Mélenchon, who wants to set French debt “on fire.” According to POLITICO’s Poll of Polls from earlier this month, Le Pen enjoys the support of 34% of voters while Mélenchon has 15% — meaning nearly 50% of the electorate intends to vote for an anti-establishment figure. Center-right candidate Edouard Philippe, arguably the best-placed mainstream figure to take on Le Pen, has tried to sell himself to voters as a candidate of fiscal discipline who is unafraid to address tough truths. But his campaign has struggled to find its footing.

Doom loop

The officials, lawmakers and diplomats POLITICO spoke with all agreed that France was not at risk of a Greece-like scenario forcing the government to stop paying officials and creditors. But it could very well experience a crisis similar to the one in Italy when Monti replaced Silvio Berlusconi in 2011.

“We are not yet a banana republic which risks filing for bankruptcy,” said veteran centrist lawmaker and budget expert Charles de Courson.

But during rioting earlier this month, in front of the shattered window of an already ransacked supermarket in Paris’ hipster 11th arrondissement, a man with no apparent connection to the shop was encouraging passers-by to go in and steal what they needed. A few meters away, the owner of a Chinese restaurant locked the door behind each client to make sure the rioters couldn’t get in.

These are scenes one would expect in a country on the verge of a sovereign debt crisis, not a member of the G7. Watching from Brussels, Washington or New York, diplomats and economists recognize that Paris will likely fail to bring its budget deficit down to 3% of GDP by 2029 as it previously promised to the EU.

De Courson said France has “lost all credibility” with its European partners when it comes to fiscal issues. Lombard, the former economy minister, said “we failed to honor our commitments,” but held out hope that things could change.

“On behalf of the French people, we made commitments to get the finances back on track, but we didn’t keep them. I was very much in favor of honoring my commitments. But collectively, we didn’t do that,” Lombard said. “So we put ourselves in a position of weakness.”

ORLEANS, France  — Far-right leader Marine Le Pen shed her anti-establishment radicalism on Sunday to portray herself as the guardian of France in her first presidential campaign rally in Orléans, south of Paris.

With polls showing her as the front-runner ahead of the scheduled April 2027 presidential election, Le Pen sought to reassure voters by promising to safeguard France as the country seethes with social unrest and stares down a looming debt crisis.

“Even if today the words that spring to mind are ruin, decline … riots and even chaos … we believe in our people and in France,” she said.

In a speech lasting over an hour, Le Pen told thousands of supporters that she was not aiming for a “revolution” but rather “a real change in power” that would spark a new “Renaissance” in the country.

“We’re not saying: It was better before,” she said. “We say: It was good before and it will be better tomorrow.”

Le Pen also played her usual refrains, promising to restore public order in France, strengthen the country’s borders and expel undocumented migrants if she came to power.

Le Pen and her allies have spent days pushing back against accusations by rivals that the far-right National Rally has helped deepen divisions in France amid the turmoil and disorder sparked by recent student protests. In her address, the four-time presidential candidate refrained from attacking political opponents and pitched her party as the one offering French citizens a brighter future.

“My protective vision will benefit all,” she said.

The eurozone’s second-largest economy is facing a cocktail of crises including cost-of-living protests, difficulties adopting a state budget and a spiraling debt and deficit. The dire situation has spooked the markets, with France’s borrowing costs climbing above 5% last week for the first time since 2002.

According to a senior National Rally official, Le Pen wanted to use her speech to cast herself in a presidential role and to reassure voters hesitant about supporting her. “People mostly agree with our ideas, but some still think it’s a gamble to vote for us,” the official said.

Tensions overflowing

Le Pen’s rally was also a show of force, with over 8,500 supporters gathering in a conference hall in Orléans, many carrying French flags and chanting “Marine, présidente!”

According to POLITICO’s most recent Poll of Polls from mid-October, if the election were held today Le Pen would get 34% of the vote compared to 16% for center-right candidate Edouard Philippe and 15% for Jean-Luc Mélenchon, representing the far left. Most polls have Le Pen winning in a run-off round if no candidate wins a majority in the first round.

Leaders of the far-right party staged a two-day conference in Orléans over the weekend under high security, with heightened police checks and body searches. On Saturday thousands of left-wing demonstrators gathered to oppose the rise of the far right in the center of Paris, while across the country protests attracted hundreds of thousands of people, a week after looting and riots marred rallies across France.

“France is plunging into real violence, which will become out of control if the state doesn’t take control,” said National Rally President Jordan Bardella, addressing the crowd before Le Pen’s speech.

“The National Rally appears to be the only solution to allow the return of order and return of authority.”

France was already reeling after a man randomly opened fire on passers-by in the Paris suburb of Trappes on Friday, killing one person and injuring five, including a girl of 12. French President Emmanuel Macron deplored the incident as “a racist terrorist attack.”

Socialist Party leader Olivier Faure said on Sunday that the National Rally carried “a heavy responsibility” for the Trappes attack because it had created “a mood … suggesting that we are being invaded, that there’s a sort of great replacement.”

The National Rally pushed back on the charges, and instead accused the far left of encouraging the violence.

Sarah Paillou contributed reporting.