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ECB Resignation Exposes Eurozone's Growing North-South Rift

By Investing.com (Darrell Delamaide/Investing.com)Market OverviewOct 02, 2019 03:17AM ET
www.investing.com/analysis/ecb-resignation-exposes-eurozones-growing-northsouth-rift-200469756
ECB Resignation Exposes Eurozone's Growing North-South Rift
By Investing.com (Darrell Delamaide/Investing.com)   |  Oct 02, 2019 03:17AM ET
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Last week's surprise resignation of Germany’s Sabine Lautenschläger from the six-member executive board of the European Central Bank (ECB), more than two years before her eight-year term was scheduled to end, brought a simmering conflict within the ECB out into the open. The discord pits hawkish northern European members of the eurozone against dovish southern Europeans.

Unlike the earlier euro area conflict where Greece, Italy and Spain were debtors who had to follow the orders of their north European creditors, this time the southerners are winning the battle. After all, it was an Italian, outgoing President Mario Draghi, who pushed the ECB into quantitative easing and negative interest rates, unorthodox means to counter sluggish growth and limp inflation.

France straddles the north and south, but French President Emmanuel Macron is not going along with Germany’s reactionary economic and monetary policy. He blocked the appointment of Bundesbank President Jens Weidmann to succeed Draghi, and instead got the job for his compatriot, IMF Chair Christine Lagarde, bringing a dove to the helm of the central bank.

Draghi, for his part, doubled down on his strategy as he was headed out the door. In the ECB’s September policy meeting, he pushed through a reduction of the interest rate on bank deposits moving it further into negative territory. He also relaunched the bank’s asset-buying program.

The bond-buying program is what triggered Lautenschläger’s resignation, throwing a wrench into the delicate personnel dance to keep the ECB board balanced. As well it's caused a slump in the single currency, which has yet to recover.

EUR/USD 60 Minute Chart
EUR/USD 60 Minute Chart

Euro finance ministers had pretty well decided to replace Benoît Cœuré, whose term expires in December, with Fabio Panetta, senior deputy governor of the Banca d’Italia.

Thus France and Italy would maintain representation on the board. Germany, too, as the largest economy in the EU, feels entitled to representation, so Lautenschläger’s replacement will have to be German.

Given the ongoing gender disparity at the ECB—Lautenschläger is the only woman on the 25-member governing council, and Lagarde’s arrival hardly makes the case for parity—the preference would be for a German woman.

That choice will signal how willing EU leaders are to tamp down this brewing crisis. Germany has a chance to back down and nurse its wounds until it is in a stronger position again by appointing someone more dovish.

Of course, in Germany, that's a relative term. Claudia Buch, Vice President at the Bundesbank, would probably fall into the hawkish camp. She succeeded Lautenschläger in that position in 2014 when the latter went to the ECB and has worked side by side with uber-hawk Weidmann since then.

Buch had been a member of the German Council of Economic Experts (historically known as the Five Wise Men) for two years and was tipped as a possible candidate for the ECB board seat that eventually went to Lautenschläger.

Isabel Schnabel, a Bonn professor who joined the Council of Economic Experts as Buch was leaving, is also mentioned as a possible candidate. She might be somewhat more dovish than Buch, but she has also been critical of ECB monetary policy. A third potential female candidate is Elga Bartsch, who is currently head of macro research at Blackrock after a career at Morgan Stanley.

All three women have doctorates in economics and would bring a different perspective from Lautenschäger's to the ECB. Her background is in banking supervision (she headed the ECB’s Supervisory Board for years).

At the very least, their positions on monetary policy could be more nuanced. (For the record, potential male candidates include think tank director Marcel Fratzcher, finance ministry official Jörg Kukies, and Frankfurt professor Volker Wieland.)

The ECB’s new chief economist, former Central Bank of Ireland Governor Philip Lane, is considered more dovish than his Dutch predecessor Peter Praet while Italy's Panetta, as a southern European, is by definition on the dovish spectrum.

Dovish or not, the newly constituted executive board will have to deal with growing opposition in Germany—not only among monetary officials, but among bankers and even the public—to the ECB’s accommodative monetary policy. Lagarde will need all the diplomatic skills attributed to her to span this growing rift between the north and the south.

ECB Resignation Exposes Eurozone's Growing North-South Rift
 

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ECB Resignation Exposes Eurozone's Growing North-South Rift

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Comments (7)
James Smith
James Smith Oct 02, 2019 9:29AM ET
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Lagarde is not qualified to run a central bank, this is turning into a ****show.
Catastrophic Studios
Catastrophic Studios Oct 02, 2019 8:37AM ET
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Who writes this *******and why are we still regurgitating news from a week ago? This is the news not the ******history channel. It's like they're running out of negative things to mention. Start doing your job and write about recent events!
Err Ha
Err Ha Oct 02, 2019 8:08AM ET
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Germany has never and will never have a say in European monetary policy, which is not necessarily good for the EU, but short term good for the southerners..
Adigwe Utomi
Adigwe Utomi Oct 02, 2019 7:56AM ET
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hello
Onaivi Umozayi
Onaivi Umozayi Oct 02, 2019 7:54AM ET
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hello
Boudewijn Dereymaeker
Boudewijn Dereymaeker Oct 02, 2019 7:51AM ET
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The phrase "The ECB’s new chief economist, former Central Bank of Ireland Governor Philip Lane, is considered more dovish than his Dutch predecessor Peter Praet"  is WRONG  in that Mr. Peter Praet is a Belgian Citizen.   Thanks for rectifying.
Ajayi Soburdeen
Ajayi Soburdeen Oct 02, 2019 5:44AM ET
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Thanks Darrel for this information
 
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