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The appointment of Germany’s Jens Weidmann as the European Central Bank’s next president would probably push the euro higher, according to Evercore ISI’s vice chairman Krishna Guha.
The Bundesbank president -- who has been outspoken against the ECB’s purchases of sovereign debt and has urged against lengthy delays of policy normalization -- would present “the clearest break” with policy laid out by Mario Draghi, Guha said in a note Wednesday.
“If Weidmann is nominated, the initial response from markets would likely be to trade euro higher than would otherwise be the case given weak data, with periphery spreads wider and eurozone risk assets lower, with longer range concerns about the potential impact on financial stability in eurozone sovereign debt markets,” he said.
The 51-year-old German “would need to address concerns about his approach to policy in general and the Outright Monetary Transactions in particular,” Guha said, referring to a program created at the height of the region’s sovereign debt crisis. Even if Weidmann were to embrace the tool, he “would need to earn dovish credibility.”
Bond spreads in the euro area’s weaker economies could end up narrowing in the long term if the perception of a weaker ECB backstop under Weidmann leads those countries’ governments to be more prudent in public finances, he added. Still, entering stressed times would more likely drive the gap higher in countries like Italy and Greece, as investors might view Weidmann as less prone to early deployment of stimulus like quantitative easing.