The race to succeed ECB President Mario Draghi, whose term ends in October, is heating up. Already, the ECB’s forward guidance, which signals no rate hikes until next year at the earliest, extends beyond President Draghi’s term, and there is a question of how far it can be pushed without knowing who the successor will be.
The most likely date for a decision is at the June European summit in June. The ECB Presidency is the most important of a range of European roles that will be filled this year, including the President of the European Council (currently Donald Tusk) and the European Commission (currently Jean-Claude Juncker). Each of these appointments will affect the others. For example, the current favourite to become European Commission President is a German, Manfred Weber. If he were to be appointed, that would likely rule out his compatriot, Bundesbank head Jens Weidmann, from the ECB Presidency, on the grounds that no country will get more than one of the key roles.
Right now, the favourites to succeed Mr Draghi are two Finns and two Frenchmen.
The Finns are Bank of Finland Governor Olli Rehn, and his predecessor Erkki Liikanen. Both would represent the balance of a northern European succeeding a southern European, and both have extensive policymaking experience, although Mr Liikanen’s long spell on the ECB’s Governing Council would appear to give him the edge.
The Frenchmen are Banque de France Governor Francois Villeroy de Galhau and ECB Governing Council member Benoit Coeuré. Both have markets experience, Villeroy from banking, Coeuré from the French Debt Management Office. And, importantly, hailing from one of the largest European countries is a big advantage in the inevitable horsetrading involved in European summit decisions.
A dark horse? Possibly the most qualified eligible policymaker is the Bank of England’s Mark Carney, with over a decade’s experience as a central bank governor, an Irish passport, and a history of making surprising moves from one major central bank to another.
What will change with the new president? A year ago, when the Eurozone economy was still powering ahead, it was quite possible to argue that the new president would lead to a much more hawkish ECB. But weakening growth and lacklustre inflation have put paid to that, and if anything the ECB should be easing now.
Indeed, several ECB speakers this week sounded more open to reducing the amount of bank reserves that are remunerated at the ECB’s -0.4% negative deposit rate. This change, known as “tiering”, would reduce the cost of negative rates to the banking sector, in keeping with the approach taken by all the other central banks that have adopted negative policy rates. It would also make it easier to maintain negative rates for many years to come or, intriguingly, to cut rates further into negative territory if needed. The appreciation that the ECB may not in fact be at the lower interest rate bound had a powerful impact on Eurozone bond markets this week.
Instead, the biggest change is that whoever takes over as ECB president will have big shoes to fill. Mr Draghi will arguably go down as the outstanding central banker of his generation, simply because the challenges he faced in preventing the rupture of the Eurozone were greater than those faced by his peers. His ‘whatever it takes’ speech and the bond buying that followed were controversial at the time, but history has shown them to have been more than justified. The credibility built up from those interventions gave Mr Draghi the ability to act decisively. At least initially, whoever follows him may have to work harder to build a consensus, and so act less decisively, which is a concern given the economic and political storm clouds hanging over the Eurozone.