Competency, rather than the traditional horse-trading that occurs between the European Union's member states, should decide the next president of the European Central Bank, according to Olli Rehn, governor of the central bank of Finland Suomen Pankki and a candidate for the role.
The choice of which eurozone central bank governor will succeed Mario Draghi after the Italian steps down in October will be treated by the market as a signal of future policy direction, particularly the possibility of restarting the ECB's €2.5 trillion quantitative easing program. As a result, political leaders are keen to see the ECB reflect their own monetary ideology, with northern European countries typically favoring hawks, and southern European members such as Italy, preferring looser monetary policy.
Speaking at an event hosted by Reuters on May 29, Rehn declined to commit to his own desire to take the role, but stressed the decision "should be based on competence," rather than politics. "Nationality should not play a role," he said.
Following European parliamentary elections on May 26, political focus has centered on who will succeed Jean-Claude Juncker as president of the European Commission, European Council President Donald Tusk, ECB President Mario Draghi and High Representative for Foreign Affairs and Security Policy Federica Mogherini.
Germany Chancellor Angela Merkel has been vocal in her backing of Manfred Weber, leader of the European People's party, or EPP, for Juncker's European Commission role. The center right political block he heads won the most votes in the EU elections.
Typically, the EC president is selected under this lead candidate or spitzenkandidat system, but France's president, Emanuel Macron, is resistant, instead pushing for French candidates, most notably Michel Barnier who headed up negotiations with the U.K. over the terms of withdrawal from the EU.
Clash with Italy
Merkel's support for Weber suggests she is less committed to securing the top banking job for Jens Weidmann, the hawkish president of the Deutsche Bundesbank, because a single country is highly unlikely to secure two of the top jobs.
Weidmann would be a controversial choice. He was alone among the ECB's governing council to oppose Draghi's pledge to do "whatever it takes" to support the euro in July 2012, and has been a critic of quantitative easing. His selection would likely cause consternation in southern Europe in particular, with Italy's Deputy Prime Minister Matteo Salvini, repeatedly calling for the ECB to step up its asset purchases.
The success of Salvini's right wing League party could escalate the acrimony between Rome and Brussels. Salvini has called for the ECB to buy more Italian debt to alleviate the cost of capital, which rose sharply following the formation of the coalition government between the League and the anti-establishment 5SM in 2018. Yields on Italian 10-year sovereign debt — known as BTPs — were 126 basis points above their German equivalents on May 4, 2018, before the Italian election, and peaked at 333 basis points on Dec. 10, 2018. The spread was 279 basis points as of 2:55 p.m. in Frankfurt.
"It is no surprise that I'm not very fond of this idea," Rehn said, noting that the ECB singling out Italian debt to buy would be against the EU treaty.
The ECB's rules prohibit favoritism and use capital keys, a formula based on size of an economy and population, to determine how much debt it can buy from each member state. While the ECB ended its €2.5 trillion bond-buying program in 2018, the bank reinvests maturing debt also using the capital key formula.
Future role of the ECB
Rehn backs the ECB's policy to keep all tools on the table and to use them as and when the data suggests is necessary. The bank has pushed back the date at which it will look to begin raising rates in response to weaker economic data. Rehn noted that "the jury is still out" as to whether or not the downturn is a soft patch or will continue.
Rehn also addressed concern that persistent low interest rates are damaging banking profitability, arguing that while they are monitoring the situation, "the overall effect has been clearly positive for credit progress and thus the banking sector."
He said that instead the focus should be on completing the banking union. "There is a need for eurozone reform. We've done a lot to reform banks but there's still a lot to do," Rehn said.
Reform should also include the creation of eurozone safe assets, according to Rehn. "There is a strong case to do so," he said of the European Commission's proposal to create a benchmark asset for the euro following a recommendation from the European Systemic Risk Board.
The synthetic securities would be created by pooling sovereign bonds from all member states to create a "safe asset" for the market to go to in times of financial stress and capital flight.
"There is a very strong case to have a larger and more liquid capital market in the eurozone, particularly if the City of London leaves the eurozone," Rehn said. "It would also enhance the international role of the euro," Rehn said, noting that, while the ECB is not pushing to compete with the dollar, "there is a clear case why the euro should have a role as a reserve currency."