The biggest immediate effect of Germany’s dramatic 6 September regional election surrounds the necessary but painful economic reform course pursued by Chancellor Friedrich Merz’s embattled coalition. But the landslide far-right Alternative for Germany win in Saxony-Anhalt will also influence a central issue likely to surface in the next few days: the future leadership of the European Central Bank.
At a time of political turbulence in France and Germany, and fiscal policy concerns exacerbated by the global rise in bond market yields, the presidency of the multinational ECB takes on still greater importance.
Behind-the-scenes manoeuvring involving the three main candidates for the succession to Christine Lagarde – Pablo Hernández de Cos of Spain, Klaas Knot of the Netherlands and Germany’s Joachim Nagel – is likely soon to give way to a wider debate.
Lagarde to take her leave
Lagarde, president since 2019, is expected to announce that she will leave early next year, ahead of her scheduled departure at end-October 2027. This would allow the former International Monetary Fund managing director and French finance minister to take up a post at an international organisation, probably the World Economic Forum.
A public statement of intent is likely to ensue after Lagarde presides over a meeting of the ECB’s governing council in Berlin on 10 September. At the Berlin gathering the council is almost certain to decide to raise its benchmark deposit rate to 2.5% from 2.25 %.
Early Lagarde withdrawal would give French President Emmanuel Macron – a prime instigator of Lagarde’s surprise appointment in 2019 – a hand in orchestrating a ‘package deal’ for an orderly board transition, before he leaves office after the April 2027 presidential election. Three important board members (the other two being Isabel Schnabel, in charge of markets, and Philip Lane, economics) would quit more or less at the same time in early 2027.
Schnabel has already been heavily trailed as moving to the IMF as head of the monetary and capital markets department, taking over from Tobias Adrian, who vacated the post last month. Adrian has agreed to stay on at the Fund for six months as an adviser to Kristalina Georgieva, managing director. This would allow a seamless transition should Schnabel take up the position at the beginning of 2027.
The three frontrunners
The well-documented race to succeed Lagarde is still open. All three main candidates benefit from first-class qualifications and experience. Hernández de Cos has been general manager of the Bank for International Settlements since July 2025, having spent six years to 2024 as governor of Banca de España. Knot was president of De Nederlandsche Bank from 2011 to 2025 and has widespread regulatory experience.
Nagel has been president of the Bundesbank since 2022 after a multifaceted career that has taken him from the Bundesbank to Germany’s public sector financial powerhouse KfW and the BIS. But decisions favouring any of the trio may be stymied by a range of political, economic and personal factors.
One factor holding back Hernández de Cos is worry about possible reputational damage to the ‘central bankers’ bank’ should its leader leave after a brief period. More concretely, some European BIS shareholders are concerned that the US administration might seek to put pressure on the Federal Reserve to use Hernández de Cos’ early departure as a chance to introduce a US general manager.
At a sensitive time for relations between the US Treasury and the Fed, and, more generally, for the trans-Atlantic relationship, mainstream central bankers would like to avoid a tussle over the stewardship of an institution with a pivotal role at the heart of world money.
The BIS was set up in 1930 to help resolve disrupted post-first world war European finances, centring on the thorny question of German reparations. US nationals chaired the BIS in its early years, but the US has never filled the general manager position. The other two North American shareholders – Canada and Mexico – have each had nationals in that post.
Another option
In the event of a stalemate over the ECB succession, European governments later this year may decide – as OMFIF has suggested previously – to opt for a ‘safe pair of hands’ in the form of a candidate from outside the shortlist. The front-runner would be François Villeroy de Galhau, former governor of the Banque de France, who stepped down more than a year ahead of his scheduled end-October 2027 departure. He was replaced in May by Emmanuel Moulin, former secretary general at the Élysée Palace and director of the French Treasury.
Villeroy de Galhau is a former French Treasury official who became a commercial banker with BNP Paribas before taking over at the central bank in 2015. As an adviser to then French finance minister Pierre Bérégovoy, Villeroy de Galhau is the sole recent ECB governing council member to have attended the Maastricht summit in December 1991 that paved the way to economic and monetary union.
Strasbourg-born Villeroy de Galhau termed himself in 2022 an ‘arch pragmatist’ rather than a ‘hawk’ or ‘dove’. He combines strong political antennae with urbanity, central bankerly charisma and a family background rooted in Franco-German linkages. Some European countries might voice surprise or irritation at the presidential ascent of a third French personality – after Jean-Claude Trichet (2003-11) and Lagarde. Villeroy de Galhau’s pan-European inclusiveness would be a major disarming factor.
The main disadvantage facing Nagel is the presence of Ursula von der Leyen, former German defence minister, as president of the European Commission. Her second five-year term extends until late 2029. The earlier Lagarde departs, the more difficult it would be to justify two Germans at the helm of the European Union’s two most important institutions for a period of up to three years. If Macron were to engineer this as part of his legacy, the ECB succession might turn into a controversial issue in the April 2027 presidential election – another uncomfortable circumstance that the EU as a whole wishes to avoid.
David Marsh is Chairman of OMFIF.
This article is the fifth instalment in a series on the ECB leadership question. Read the first, second, third and fourth parts here.
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