Mario Draghi’s successor has some hard questions to answer

11/3/2018

By Wolfgang Münchau

Candidates with the necessary qualities for the ECB top job are in short supply

Well-designed institutions should be immune to bad leaders, at least up to a point. That is unfortunately not the case in the eurozone, where the next round of appointments matters more than it should. Choosing Mario Draghi’s successor as president of the European Central Bank in November 2019 will be the most important. There is a good chance that European leaders will get it wrong — in more than one way.

They could do worse than begin the process with a counterfactual observation: what would have happened had the job gone to a more conventional central banker than Mr Draghi? Would the governing council of the ECB have converged on the same views and policies? I doubt that very much.

Mr Draghi’smost important contribution was not his celebrated 2012 pledge to do “whatever it takes” to end the crisis. That mattered at the time, but it was never translated into law. Far more significant was the start of quantitative easing in March 2015, more critical even than the establishment of the European Stability Mechanism in 2012 or the start of the banking union in 2014.

Mr Draghi had previously been sceptical of QE’s benefits, but changed his mind when he realised conventional policies were insufficient to confront the deflationary pressures the eurozone faced during the years of fiscal austerity. Without that change in policy, the eurozone could have easily broken up.

Eurozone leaders must now find a successor with a similarly fine-tuned antenna and readiness to change course when the facts shift. Such candidates are in short supply. It is possible, but not certain, that Germany will propose Jens Weidmann, president of the Bundesbank. Mr Weidmann has voted against all of the ECB’s important decisions over the past few years, including QE. It is not immediately clear how he could forge a consensus in the governing council.

Erkki Liikanen, the governor of the Finnish central bank, is a rare example of a northern European central banker who has supported Mr Draghi all the way. But then again, it is possible that Klaas Knot, the hawkish governor of the Dutch central bank, will be picked.

I share the scepticism on Mr Weidmann of his critics, but they would be misguided to focus too much on his personal qualities or his nationality. With any high-level European appointment, you have to observe a balance of geography, gender and politics — and the unspoken rule that you cannot have two consecutive nominees of the same nationality.

The best way to move forward is to approach the selection of the candidates through a list of difficult questions.

The most important is what do they want to do with the €2.3tn in sovereign bonds on the ECB’s balance sheet? That number will be higher next year. Do they want to keep it, sell some or all of it or turn it into eurobonds, which the ECB would technically be in a position to do? Its balance sheet is as close as we have to a single safe asset in the eurozone. Without it, the system could become vulnerable again. I would strike off any candidates who would sell the bonds.

The next question is whether the candidates share Mr Draghi’s “whatever it takes” commitment. It may not have been as important as QE, but it still matters. The eurozone has no robust governance infrastructure in place. It remains inherently vulnerable.

Would the candidates protect the eurozone if a member state defaults? Do they favour an automatic or semi-automatic sovereign debt restructuring mechanism, as Germany does, or do they share French scepticism? This is a political question, one they might refuse to answer. But the central bank would play a key role if that were to happen.

The purpose of these questions is to determine whether the candidates have a clear understanding of future risks and how they see their prospective role as ECB presidents in managing them. That should matter more than whether they are German, French or Finnish. The real issue is not whether Mr Weidmann is right for the job but the dearth of candidates from countries with a plausible chance of landing the job.

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