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Draghi's ECB successor will be judged on how they unwind stimulus

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Draghi's ECB successor will be judged on how they unwind stimulus

Mario Draghi's replacement as president of the European Central Bank will be charged with drawing to a close the biggest bond-buying program in the bank's history — and the successful candidate will be central to the pace at which that happens.

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Mario Draghi and a possible candidate to replace him, Christine Lagarde.

Source: Associated Press

Draghi's eight-year tenure ends Oct. 31, but will be forever marked by his 2012 commitment to do "whatever it takes" to support the embattled euro after the eurozone debt crisis that followed the financial crisis. Draghi turned on the financial gushers to support the euro with an unprecedented €2.56 trillion quantitative easing program of bond buying to stimulate the economy.

Though the bond buying officially ended in December 2018, in practice the stimulus program is far from over. The ECB under Draghi is determined that it will continue to pump money into the eurozone's sclerotic economy, where growth dropped to just 0.2% in the third quarter of 2018. Draghi said the ECB will continue to provide "a significant degree of monetary policy stimulus" and will reinvest the money from bonds that come due "for as long as necessary to maintain favorable liquidity conditions."

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Bundesbank chief Jens Weidmann.

Source: Associated Press

Sabine Lautenschläger, a member of the executive board of the ECB, made the point explicitly in a Jan. 7 interview with a German radio station: "We will continue to purchase maturing corporate bonds and then reinvest again."

Draghi's successor will become head of the six-strong executive board of the bank, whose members have permanent voting rights at the bank's monthly monetary policy committee meetings. The 19 national central bank governors on the ECB's governing council share voting rights on a rotational basis.

The new president will be appointed by the European Council, made up of the heads of state of EU members. So far the ECB presidents have been Dutch, French and Italian and, under the EU's endemic horse-trading on national rankings, this reduces the chances of a candidate from these countries being appointed this time around.

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Former Bank of Finland Governor Erkki Liikanen.

Source: Associated Press

Broadly, candidates from northern European countries are viewed as more likely to end bond buying more swiftly than those from southern European countries whose banks are more dependent on the steady drip of ECB money.

The calculation does not always hold true: Andrea Enria, the former head of the European Banking Authority, who now runs the ECB's supervisory arm, did not have the backing of the Italian government since Rome viewed him as unsympathetic to Italy's banks after his tenure at the EBA.

"If you leave aside nationality, and that is not the only thing that matters, then there is no one candidate who dominates the scene like Mario Draghi did eight years ago. I think it's pretty wide open," said Nicolas Veron, senior fellow at Bruegel, the Brussels-based think tank.

"Personally, I would back [former governor of the Bank of Finland] Erkki Liikanen. I think he is the embodiment of a good compromise candidate: He's from a small country, personally he's very experienced, I don't think he's too old, he's has a northern European attitude to monetary policy but he's not a superhawk like the German hardline camp."

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Former euro tsar Olli Rehn.

Source: Associated Press

Liikanen is a veteran of the EU as a former European commissioner and strong proponent of QE. This might make him an ideal compromise candidate to balance out demands from Germany to end the stimulus program as soon as possible with those of Italy, for instance, which fears a too-sudden shutdown.

Liikanen's fellow Finn, Olli Rehn, is also a possible candidate. He was EU commissioner in charge of the euro during the debt crisis before returning to Finland to take over from Liikanen as central bank governor, where he led the country out of recession.

"The Finnish pair are individually quite attractive as a compromise solution. But there are elections in Finland due in the spring and while the present Finnish government would probably back Liikanen, a government of a different composition may prefer Rehn," said Veron.

Until summer 2018, the favorite to replace Draghi was a German: Bundesbank chief Jens Weidmann. He, too, is closely associated with a telling phrase — this time, Draghi's reported caricature of Germany's default position as "Nein zu allem" — no to everything.

Last summer he said the next president of the ECB must be prepared to tighten the money taps after years of being in crisis mode, invoking the ire of Italy's ruling League party.

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Bank of France Governor François Villeroy de Galhau.

Source: Associated Press

Weidmann's star waned still further after German Chancellor Angela Merkel reportedly decided to secure the European Commission presidency for a German when Jean-Claude Juncker steps down this year, making the appointment of another German to another top EU post unlikely.

France's central bank chief François Villeroy de Galhau backed Draghi's stimulus program and, as a former banker with BNP Paribas, he might sympathize with lenders' concerns over the ECB's negative interest rates.

The U.K.'s Adam Smith Institute suggests de Galhau would be a strong candidate: "Villeroy de Galhau described his monetary policy approach as being not like a train timetable but more how a captain sets a course and adapts to the wind and the waves.

"Knowing that it may not be clear sailing with failing fundamentals he's right about the need to set clear forward guidance, and he was prescient to not lose sight of the Italian banking risk, as well as to reject the influence of member states' fiscal policies on the ECB's monetary policy."

France has another potential candidate: Christine Lagarde, the first female head of the International Monetary Fund. At the moment, just two of the ECB's 25-strong governing council are women. However, Lagarde is a lawyer by training, has no experience as a central banker and would be the first president of the ECB not to have an economics degree.