The European Central Bank is benefiting from an upsurge in optimism about the European economy generated by the waning of populist forces and the election of French President Emmanuel Macron.
But for each sign of success there is a measure of malaise. ECB credit tightening is getting closer – demonstrated by the volatile market reaction to last week’s upbeat speech in Portugal from Mario Draghi, the ECB president. This will please the German Bundesbank but will bring deep problems for heavily indebted countries, led by Italy.
This is a good time to reflect on the future of European institutions. There has been much talk of the ECB presidency passing to a German when Draghi steps down in just over two years.
Yet rather than aiming for the top ECB post, Jens Weidmann, Bundesbank president, should prepare for a higher prize: becoming the next German finance minister after Wolfgang Schäuble. He could far more decisively influence the reshaping of European integration from that position.
Franco-German co-operation has entered a more hopeful phase, although much depends on whether Macron can implement his growth and reform plans. In the ECB council Weidmann and François Villeroy de Galhau, governor of the Banque de France, appear to have sealed an informal ‘non-aggression pact’ not to oppose each other on monetary policy.
Numerous forces such as Donald Trump’s election, the British vote to leave the European Union and even the mid-June death of former German Chancellor Helmut Kohl fortified the Franco-German entente. As Dominique Moïsi, the French political strategist, has said, Europeans should raise a statue to President Trump for promoting European unity. Kohl’s weekend funeral with pathos-strewn ceremonies on both sides of the Rhine was a perfect opportunity to parade the new Franco-German spirit.
This was largely unexpected. Schäuble said shortly before last year’s UK referendum that EU governments, after a possible Leave decision, should not push for deeper European integration as voters would find this ‘crazy’.
The swing in the political climate has big implications. Weidmann and the German government – where Angela Merkel, his former boss, is likely to remain chancellor after elections in September – should continue to promote the view that he can take over Draghi’s job. That could be useful in European bargaining. But the job itself might be a relative sideshow.
France always wanted the ECB to be a more political institution. President François Mitterrand once famously said the ECB council should be mere ‘technicians’. Under Draghi, the ECB has certainly become more political. With the acquiescence of politicians, above all Merkel, it has become the main force for overcoming Europe’s sovereign debt crisis.
If the ECB has become politicised, then the natural role for Germany is to take full command of the politics. As Merkel’s finance minister, Weidmann would have far more power than at the ECB. Crucially, he could shape institutions such as an embryonic European finance ministry, debt management agency and treasury. Perhaps, in 10 years, Weidmann could be the euro area’s first finance minister.
If, on the other hand, Weidmann became ECB president he would face the same obstacles that would have dogged Axel Weber, his Bundesbank predecessor, had he taken the job in 2011. The ECB can never become the Bundesbank. As an institutional hawk, Weidmann would face the massive impediment of being structurally outvoted on key issues.
The Germans would win maximum political benefits by allowing Villeroy de Galhau, a seasoned and sensible figure, to take over the ECB when Draghi steps down in 2019.
That would solidify further the Franco-German concordat. Where Britain and the rest of Europe would fit in is another question.
David Marsh is Managing Director of OMFIF.