The European Central Bank (ECB) is one of the most powerful central banks in the world. It controls the monetary policy for the 19 European Union countries which have adopted the euro. Together, these countries have a combined GDP of over $11 US trillion. The ECB’s primary task is to maintain “price stability in the euro” area and so preserve the purchasing power of the single currency.
The current ECB president, Mario Draghi, is Italian and he will leave his position in November 2019. He is credited for getting the European economy back in order since 2011. Many believe that the next head of the ECB could come from Germany. The latest poll suggests that there is an 84 percent probability that Jens Weidmann, the head of the Bundesbank, Germany’s central bank, will ultimately take Draghi’s place. In fact this is what the world is expecting and what the currency markets have priced in at the moment.
As head of the Bundesbank, Weidmann is in charge of possibly Germany’s most renowned institution. As the French politician and former head of the European Commission Jacques Delors once said in 1992, “not all Germans believe in God, but they all believe in the Bundesbank.” He may be popular in northern European countries. But Weidmann has had very public disagreements with Draghi in the past over economic policies. As someone who is more hawkish, Weidmann might prefer to tighten monetary policy more quickly. His opposition to the ECB’s quantitative-easing program and, earlier, to Draghi’s pledge to do “whatever it takes” to preserve the Euro currency thought to provoke unease in southern Euro zone countries.
But no decisions have been set in stone yet. There are still other candidates for the next ECB president. For the time being Weidmann contents himself with offering satisfactory praise for Draghi’s hard work. But at the same time he also cautions that the ECB shouldn’t do too much to bail out weaker members of the eurozone. “The ECB [is] certainly an institution that functions well,” Weidmann claims, “But this cannot be an argument for us to take over the role… of governments.”
With so many different nations involved in the decision, there are a lot of moving parts. By August we should have a more definitive understanding of the ECB’s future. One question mark is how rising interest rates in the United States will affect the European economy. If the financial markets do anything to shake up the global economy then the ECB may replace Draghi with a more dovish leader than Weidmann. The European Central Bank has already reduced its net quantitative easing from €60 billion to €30 billion last month. The intent for now is to cut new QE measures completely later this fall around September.
For a medium term trade, it might be worth going long on the euro. If Weidmann becomes the next president then he will have a huge influence on the European economy and will probably try to push for higher interest rates right away. This will have a tendency to increase the value of the euro. All we know for sure by looking at the facts is that the Central Banks around the world are slowly tightening their policies. But they have have to tread very lightly, especially in Europe. Even though individual countries should be in charge of their individual banking environment, the ECB still has a higher governing authority over them. One wrong move and it could trigger a financial crisis. Right now the euro is trading at roughly $1.23 US. Let’s revisit the markets again later this year when there’s a clearer picture for the future of the ECB.