ECB Resignation Exposes Eurozone's Growing North-South Rift
Investing.com | Oct 02, 2019 03:25
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.
Get The App
Get The App
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.
Get The App
Get The App
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.
Get The App
Get The App
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.
Get The App
Get The App
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.
Get The App
Get The App
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.
Get The App
Get The App
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.
Get The App
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.
Get The App
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.
Get The App
Get The App
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.
Get The App
Get The App
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.
Get The App
Get The App
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.
Get The App
Get The App
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).
Get The App
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.)
Get The App
Get The App
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.
Get The App
Get The App
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.
Get The App
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.