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Analysis
Benefits of a Weidmann-Draghi move

Benefits of a Weidmann-Draghi move

How to overcome Europe’s ‘year of expiry’ 

by David Marsh in London

Mon 30 Jan 2017

European governments and the European Central Bank may have to invent imaginative solutions for the ‘year of expiry’. In 2019, many lynchpins of European politics and economics will slip away, possibly with disastrous consequences.

With Donald Trump in the White House, a whiff of gunboat diplomacy in the South China Sea and a rush of European elections in 2017, political strategists in Europe’s capitals can be forgiven for not turning their eyes right now to circumstances in two years.

Further signs of polarisation in European politics came last night with news from France that Benoît Hamon, the firebrand left-wing former minister previously regarded as a no-hoper, beat Manuel Valls, the former prime minister and early front runner, to become the Socialist candidate in April’s presidential election.

Yet 2017 may not see the nadir of Europe’s fortunes. Assuming the European Union, and in particular economic and monetary union, survive the next 12 months without further ravages, 2019 might be the year when Europe’s bad news becomes terminal.

At that time, everything runs out: the eight-year mandates of ECB President Mario Draghi and Bundesbank chief Jens Weidmann; generous flows of EU structural support funds to eastern and central Europe; and EU payments by the UK, the departing third-biggest net contributor. Moreover, any chance of further largesse for Europe’s problem-hit peripheral countries through the ECB’s (by then) €2tn-plus quantitative easing bond purchases will by then have ended.

Already, some ECB watchers are speculating that, as part of a last-ditch effort to shore up the euro edifice, EU leaders after the German elections in September could decide to ‘recalibrate’ jobs at the helm of European central banking.

In 2018, assuming Angela Merkel, the German chancellor, remains in power after the autumn poll, she could lead a bold move to switch Weidmann, a year ahead of expiry of his eight-year term, to the helm of the ECB. This would leave Draghi to assume the prime ministership in Rome as yet another technocratic government leader to maintain Italy’s fraught position in the EU and EMU.

Such a scenario might appear far-fetched, but it would have three advantages.

First, promoting Weidmann to head the ECB would bind Germany comprehensively to continue its adherence to the single currency, blocking any move (however complicated that might be) for Germany itself to depart.

Some European countries might criticise a ‘Bundesbank takeover’ of the ECB. Yet the more realistic governments would recognise that Weidmann – the first Bundesbank president to speak French – has covered his fundamental hawkishness in a far more diplomatic veneer than his immediate predecessor, Axel Weber, who was close to getting the top ECB job in 2011 but turned it down when he realised Merkel’s queasiness about dealing with him once in office.

Second, QE – extended throughout 2017 although at a lower monthly rate of government bond purchases from April until December – will almost certainly have ended by the second half of 2018, allowing Draghi to bow out of his tenure in Frankfurt on a message of ‘mission completed’.

Both Weidmann and Sabine Lautenschläger, the former Bundesbank board member now on the six-person ECB board along with Draghi, last week called for the ECB to start discussing an exit to QE in line with a rise in German inflation to close to 2%. However, both Weidmann and Lautenschläger, knowing that they are heavily outvoted on the ECB’s 25-person governing council, have been careful to couch their QE criticism in highly polite and conditional language.

Third, Draghi, who will be 70 in September, might be thought of as too old for a top government post. But he would be following in the highly respectable footsteps of Carlo Ciampi, another senior Italian technocrat who, like Draghi, headed the Banca d’Italia. Ciampi, who died aged 95 last September, became Italian prime minister in 1993, aged 72, and was Treasury minister supervising the euro’s introduction in 1999 as well as Italian president in 1999-2006 – a job that Draghi could still take in coming years if he proves resilient and successful enough.

A Weidmann-Draghi reshuffle would confirm the strong element of Realpolitik running through European decision-making at a time of challenges unparalleled since the 1950s. German officials say there is no alternative to further QE this year even though it will lead to unpopular rises in German inflation – since the alternative would be worse. An early ending to government bond purchases could precipitate a capital market shock and a banking collapse in Italy and other peripheral states – and this would have a still greater negative effect than QE on nervous German voters ahead of the September parliamentary elections.

David Marsh is Managing Director of OMFIF.

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