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ECB After Draghi: Does Germany's Weidmann Have What It Takes?

By (Geoffrey Smith/ OverviewMay 29, 2019 03:50AM ET
ECB After Draghi: Does Germany's Weidmann Have What It Takes?
By (Geoffrey Smith/   |  May 29, 2019 03:50AM ET
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The starting gun to replace Mario Draghi at the head of the European Central Bank (ECB) when his term ends on October 31, has officially been fired. And it appears that Germany’s Jens Weidmann is the first out of the gate.

As European Union leaders sat down together on Tuesday to discuss doling out the bloc’s top jobs in the wake of the weekend's EU elections, the ‘economic council’ of Germany’s ruling Christian Democrats—a talking shop that coordinates policy with the party’s business backers—loudly endorsed Weidmann. Its president, Werner Bahlsen, blasted the ECB’s current policy as an indirect subsidy for Italy, saying it’s “absolutely necessary that interest rate policy performs an about-turn.”

Although Chancellor Angela Merkel’s name was nowhere near the endorsement, it left little doubt that the eurozone’s biggest country intends to fight to have a German in charge of Germany’s currency—the euro—again, 20 years after giving up the Deutsche mark.

To many, that will not come as welcome news. It’s hardly exaggerating to say that if the eurozone had been run according to Weidmann’s professed policy choices over the last eight years, there wouldn’t be an ECB presidency to apply for. The single currency project would have exploded as the refusal to effectively underwrite Italy’s debts forced it to default and re-introduce the lira.

Instead, then-president Mario Draghi promised to do “whatever it takes to defend the euro,” and went on to deliver on that promise with a series of unconventional policies that staved off deflationary disaster across the region.

Weidmann has never reversed his opposition to the bond-buying mechanism that Draghi created to stem that crisis, the so-called “Outright Monetary Transactions.” He also resisted the quantitative easing that Draghi and his Belgian chief economist Peter Praet finally convinced the ECB to adopt in 2015, which provided the eurozone economy a respectable rate of growth until last year’s slowdown.

All of that appears to put the Deutsche Bundesbank president on the wrong side of history, and to make him a hard sell to the rest of the eurozone. And not just because the policies he opposed worked over a seven-year period, which has to be counted as more than just a short-term fix. Moreso, it suggests an ingrained conservatism and inflexibility that the next ECB president will not be able to afford.

As Lucrezia Reichlin, a former director of research at the ECB, wrote in a recent column for Project Syndicate:

“In the event of another slowdown, limited fiscal capacity in some countries, combined with the absence of common stabilization tools, suggests that the ECB will have to push the boundary of unconventional policies even further than it has.”

As the trade war between the U.S. and China intensifies, there is a growing risk that the ECB will head into the next slowdown with its key interest rate already at 0% (and its deposit rate at -0.4%), leaving it little space to support the economy with monetary policy. Trying to cut rates further will risk generating more strain than a weak banking system can handle. Likewise, a resumption of QE would soon run into the ECB’s limits on buying up government debt.

Among the taboos that may need to be broken are the ECB’s current inflation target of “below, but close to, 2%,” which Reichlin argues needs to lose its downward bias.

That wording was only adopted in the 1990s to reassure Germans that the ECB would be as tough on inflation as the Bundesbank, but it has led the central bank to spend half its life guarding against the wrong danger, while trends such as automation, digitization and China’s integration into the world economy have generated intense and sustained downward pressure on prices.

Paradoxically, the need for more radicalism could be the very reason that makes Weidmann the best choice for the job. It’s as good as certain that the next slowdown will force the ECB to do things that will be highly unpopular in Germany, so who better than a German to sell those policies?

Moreover, the very presence of a German in the top job could help to pre-empt the biggest visible risk to the euro’s stability – a confrontation with Italy over its budget deficits and debt levels. Matteo Salvini, Italy's Deputy Prime Minister and its Minister of the Interior, on Tuesday declared his intention to make the ECB guarantee public debts. He's likely to get short shrift from a double-team of Weidmann and Luis de Guindos, the formerly Spain's finance minister who is currently the ECB's Vice President. He had he thankless task of implementing an austerity program in his previous position.

Other than the nomination process needing to be completed by the time Draghi's contract expires, nothing about the nomination process is certain. Whoever gets the job will inherit the duty of guaranteeing the euro’s survival. Thanks to Draghi’s inventiveness, the fourth ECB president will have more tools available to deal with potential shocks than any of his predecessors. He or she will be needing them all—and, as like as not, a few more along the way.

Other possible candidates who might succeed Mario Draghi include:

1. Francois Villeroy de Galhau, Bank of France President

Pro: relevant experience

Con: France has already had an ECB President (Jean-Claude Trichet, tenure: 2003-2011)

2. Benoit Coeure, ECB Board Member

Pro: very highly regarded globally for his work running the ECB’s markets division

Con: French, and his eight-year term is not renewable

3. Sylvie Goulard, Bank of France, Deputy Governor

Pro: experience of central banking and EU institutions, having been a senior member of the parliament’s economic and monetary affairs committee; female

Con: French; behind Villeroy in the domestic pecking order; President Macron may prioritize installing ally Margrethe Vestager as European Commission president

4. Olli Rehn, Bank of Finland Governor

Pro: Experience of eurozone crises as Commissioner for Economic and Monetary Affairs; recent proposal to rethink the ECB’s policy framework shows an understanding of future challenges

Con: Shared responsibility for poor policy choices and presentation during the post-crisis bailouts, most obviously in refusing to acknowledge Greece’s bankruptcy

4. Erkki Liikanen, former Bank of Finland Governor

Pro: Experience as both ECB member and European Commissioner; deep understanding of Europe’s banking sector

Con: Age (68)

5. Claudia Buch, Deutsche Bundesbank Vice President

Pro: nationality (she would give northern European balance to the ECB top management, given that vice-president De Guindos is Spanish); gender

Con: lack of top-level management or political experience

ECB After Draghi: Does Germany's Weidmann Have What It Takes?

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ECB After Draghi: Does Germany's Weidmann Have What It Takes?

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Comments (1)
Brad Smith
Brad Smith May 29, 2019 9:44PM ET
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Geoffrey, thank you for your insights into Weidmann's current policy stances.
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