Coping with central bank politics

After de Guindos may come Weidmann

Luis de Guindos’ nomination as European Central Bank vice-president may bring a step closer the appointment of Jens Weidmann, Bundesbank president, to succeed Mario Draghi as ECB chief next year.

Yet approval for the Spanish finance minister appears to accelerate creeping political influence over the ECB. Many of the euro’s architects, particularly from Germany and other northern European states, may see this as damaging the central bank’s independence. De Guindos’ move would mark the first time in the ECB’s 20-year history that a serving finance minister has joined its executive board.

The de facto go-ahead for de Guindos at a euro area finance ministers meeting on 19 February illustrates the tortuous political arithmetic at the centre of bargaining for top jobs across a Europe split by the north-south creditor-debtor divide. The clearing of the way for the No. 2 post for a high-profile Spanish politician came after the Irish government withdraw its submission of Philip Lane, governor of the Central Bank of Ireland, in the interests of fielding a consensus vice-presidency candidate.

The nomination forms part of an elaborate balancing act designed to promote a representative of a northern creditor state at the ECB helm to offset a second-in-command from a southern debtor nation.

Weidmann’s ECB ascent is not assured. If he does get the job, the Bundesbank president will be under even more pressure from German conservatives to adhere to traditional hard money principles, especially over withdrawing ultra-cheap financing, at a time when politics is intruding more into central banking practices. In an early piece of manoeuvring, French President Emmanuel Macron has told embattled German Chancellor Angela Merkel that Weidmann is unlikely to get the top ECB position. France points out that German nationals are heading three top-flight European financial institutions – the European Investment Bank, the European Single Supervisory Mechanism and the European Stability Mechanism.

De Guindos would replace Vítor Constâncio, the former Portuguese central bank governor, who has held the post for eight years and will step down in May. He was appointed in 2010 as part of a bid to prepare the way for Axel Weber, then Bundesbank president, to take the presidency. But Weber withdrew his candidacy after receiving less than fulsome support from Merkel, leading to Draghi’s transition to Frankfurt in November 2011.

Particularly because they fear such a mishap could reoccur, Weidmann’s supporters will be striving harder to secure his nomination. Yet Merkel’s political weakness in view of the inconclusive German elections in September, the wearisome search for a new Berlin coalition and wrangling in her own conservative party over senior government positions may deplete her scope to fight for a German in charge of the ECB.

Spanish success in winning support from the euro group follows a long campaign by the euro area’s fourth-biggest economy to win back a place on the ECB board after a six-year absence.

It also serves as a useful reminder for other euro members that successful adherence to orthodox policies of the sort Spain has followed since the 2010 debt crisis can win rewards in terms of enhanced European representation.

Although Wim Duisenberg, the ECB’s first president between 1998-2003, was a former Dutch finance minister, he spent 15 years between the two posts as head of the Netherlands’ central bank. Constâncio, too, was Portuguese finance minister in 1978 before moving to the Banco de Portugal.

De Guindos, in contrast, has never worked in a central bank. Among his various jobs before he became finance minister in 2011, he worked for Lehman Brothers, the investment bank which failed in 2008, and PricewaterhouseCoopers, the accountancy firm.

The European Parliament last week raised concerns about de Guindos’s suitability, with its economic and monetary affairs committee backing his rival Lane. The Irish governor now seems poised to take over as the ECB board member for economics when Peter Praet, the incumbent, leaves in mid-2019.

David Marsh is Chairman of OMFIF.

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