Monday 10 December 2018

North European hawks circle the ECB presidency

Bundesbank chief Jens Weidmann. Photo: REUTERS
Bundesbank chief Jens Weidmann. Photo: REUTERS

Craig Stirling

Northern Europe's claim for a turn at leading euro-area monetary policy in the era after Mario Draghi advanced over the weekend as two contenders dropped hints that they're waiting to be asked.

German Bundesbank chief Jens Weidmann and outgoing Finnish Central Bank Governor Erkki Liikanen are the most explicit so far in the race to succeed the Italian president of the European Central Bank. The winner will take on an eight-year term from November 2019.Germany and Finland are seen as relative hawks - favouring less accommodative monetary policies than Italy or Spain.

Securing key ECB jobs has long been seen by governments, who will make the decision, as a prize worth winning, and that has often made the process a fraught one. France's insistence on Jean-Claude Trichet for the presidency was a sticking point at the birth of the single currency, and it took the resignation of Mr Weidmann's predecessor at the German central bank, Axel Weber, to clear the way for Mr Draghi.

Economic divergences since the region's sovereign-debt crisis further complicate the deliberations. While all ECB officials are required to disregard national interest, governments are acutely aware that Mr Draghi's expansive measures stoked popular discontent in northern countries such as Germany. Weaker southern economies fret that they'll suffer should demands for tighter policy be pushed through.

The ECB's independence can't shield it from being dragged into national politics. That's been highlighted in recent days in Mr Draghi's home country, where bond markets were unsettled by coalition negotiations between Italian populist parties. The talks featured a possible request, ultimately dropped, for a €250bn ECB debt writeoff, as well as budget-busting spending plans.

"The political situation in Italy at the moment threatens to spark a fresh eurozone debt and banking crisis - Germany won't want another bailout on its hands or a situation where the ECB has to keep expanding its balance sheet, thus threatening financial stability," said VTB Capital global macro strategist Neil MacKinnon. "The choice of ECB presidency is crucial."

Outgoing Finnish Central Bank Governor Erkki Liikanen. Photo: AFP/Getty Images
Outgoing Finnish Central Bank Governor Erkki Liikanen. Photo: AFP/Getty Images

Mr Weidmann has long railed against the extent of the ECB's expansive stance, including doubting the need for the €2.6trn bond-buying programme. He's seen as the frontrunner by many, in part because Germany has never held the presidency despite being the region's largest economy.

His comments to can at least give German Chancellor Angela Merkel some assurance that, should she lobby for him, she won't face the sort of climbdown as last time when former Bundesbank chief Weber removed himself from the race to replace Mr Trichet.

"I believe that every member of the governing council should have the willingness to contribute to monetary policy also in a different role," Mr Weidmann said, adding that the discussion has started "much too early".

Mr Liikanen, who leaves his central bank this summer, told Finnish television that he wouldn't campaign for the top job but there might be "situations where you get asked: 'will you do your duty?' and then one must consider".

He also outlined his views on monetary policy, saying the key is to be decisive.

"When inflation accelerates to more than 2pc, which is our target, then I demand raising interest rates," said Mr Liikanen, who will be replaced by former European Commissioner Olli Rehn. "When it remains considerably below that level, we must stimulate."

Mr Draghi's successor probably won't be determined until next year.

However, the selection of a Spanish vice-president for the ECB - Luis de Guindos, who prevailed over Ireland's nominee Philip Lane - may have already laid the groundwork for a northern European president as a counterbalance.

Governments will take that into account, as well as a host of big roles coming up, including the president of the European Commission. (Bloomberg)

Irish Independent

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