Why the Next ECB President Will Be from Germany—and Probably Jens Weidmann

March 20, 2019 4:15 PM
Photo Credit: 
REUTERS/Ralph Orlowski

On top of all their other problems, EU leaders face decisions by June on choosing the next heads of no less than four entities: the European Commission, European Central Bank (ECB), European Council, and European Parliament. The European Parliament to be elected in late May will have a say on these choices,[1] but the EU’s 27 leaders must agree to this “personnel package.”[2] Yet already the stars are lining up for a German to serve as the next president of the ECB, most likely Jens Weidmann, the president of Germany’s central bank, the Bundesbank.

Weidmann, whose tenure was recently extended for eight years, previously worked as chief economic advisor to Chancellor Angela Merkel. He loyally played Merkel’s “German bad cop” at the ECB since joining its executive board in 2011, opening domestic political space for her to approve necessary euro area crisis interventions. This stance justifiably earned Weidmann the enmity of ECB president Mario Draghi and others advocating the ECB’s necessary monetary stimulus measures. Yet in the next downturn, his earlier opposition to the ECB’s monetary policy measures makes him an excellent messenger to Berlin advocating fiscal stimulus.

The next ECB president will have less latitude to employ monetary policy ammunition than Draghi had. Given the latest extension of the ECB’s forward guidance on short-term policy rates, the ECB will probably be at or very close to the zero bound when the next cyclical downturn hits. The ECB’s new targeted long-term refinancing operations (TLTRO-III) also ensure that euro area banks already have ample liquidity for the foreseeable future. The next ECB president’s monetary arsenal will thus be limited to buying riskier private assets (i.e. equities, corporate bonds, and senior bank debt) or lifting the central bank’s self-imposed limit on sovereign debt holdings.

These measures would be delicate and controversial. Buying private assets in shallow euro area markets would be criticized as “picking winners” and could expose the ECB to significant credit risk, while exceeding the current self-imposed limit on sovereign bond purchases risks being ruled illegal by the European Court of Justice (ECJ).

These constraints make fiscal policy crucial to combatting the next slump. Thus the next ECB president will have to help cajole Germany to take the lead. Obviously, a German ECB president—preferably one with conservative credentials—has the best prospects for doing so. In essence, the German government may have to choose between more fiscal policy or a potential further expansion of the ECB balance sheet with fiscally redistributive consequences during the next downturn.

Small wonder that many—especially in the Anglo-Saxon world (and here at the Institute)—should be cheering for the next ECB president to be German. Another factor is that, as euro area governments have ruled out creating a meaningfully sized common euro area budget, the required countercyclical fiscal policy response can only come from the member states.

Several factors make Weidmann the most likely to get Merkel’s support in June. Among them are the increasingly poor prospects of Manfred Weber, a Merkel ally, of achieving his goal of becoming European Commission president. His European People’s Party (EPP) is projected to lose 40+ seats[3] in the new European Parliament,[4] and his long and until recently close relationship with Hungarian prime minister Viktor Orban is also working against his chances at gathering a majority in the new European Parliament. As a result, with the German candidate out for that job, Merkel will be looking to pick a Germany for another top EU position.

Despite Germany’s status as Europe’s biggest economy, no German has held the position of ECB president, the most powerful economic job in the region. It is now politically palatable to say “it’s Germany’s turn now”: The last time a German was favored for the post was in 2011, when Axel Weber suddenly resigned from his position as Bundesbank president, paving the way for Italy’s Mario Draghi to succeed Frenchman Jean-Claude Trichet instead. There are other potential candidates from small Germany-aligned euro area counties that Merkel might back, as sort of “substitute Northerners,” as was the case when Dutchman Wim Duisenberg was put forth for the position in 1999. But in 2019, Merkel has nothing to gain in backing a non-German candidate; a German ECB president is what domestic voters expect from Europe’s most powerful politician of the last decade. And in the interest of regional balance, that expectation is now especially high, with a Spaniard recently appointed ECB vice president, an Italian leading the ECB’s banking supervision, and a Portuguese running the Eurogroup.

The ECB’s high degree of institutional independence in effect mandates that its president come from within the ranks of the European System of Central Banks, leaving Bundesbank vice president Claudia Buch as the only likely German dark horse candidate.[5] She would correct the gender imbalance at the top of the ECB, but her lack of experience is a handicap.

Should the rest of the world fear a German ECB president overseeing a presumed hardline hawkish monetary policy? No, because the 21 voting-member governing council would remain dominated by advocates of easier monetary policies. Indeed, the traditional German focus on “single mandate inflation central banking,” with euro area inflation nowhere to be seen but labor markets tightening, would seem to be the best guarantor for continued low euro area interest rates. And just as Nixon went to China, a German ECB president will have no option but to push Berlin for more fiscal stimulus.

Notes

1. In principle, it is the newly elected European Parliament that independently elects its new president in early July and has to confirm the European Council’s nominee for new president of the European Commission.

2. Elections for these European institutions and the ECB presidency fall in the same year only once every 40 years.

3. If Viktor Orban’s ruling Hungarian Fidesz party is excluded from the EPP because of its anti-democratic actions in Hungary, this loss could rise to over 50 seats.

4. The European Parliament is scheduled to shrink its size from the current 751 seats to 705 after the 2019 elections and Brexit. Some decline in the number of seats for individual party groups is therefore unavoidable.

5. I am indebted to my colleagues Jeromin Zettelmeyer and Nicolas Veron for alerting me to this possibility.