Germany's ECB Chances May Fade With Merkel's Bundesbank Choice
By Simon Kennedy and Christian Vits - Feb 17, 2011 1:00 AM GMT+0100 Thu Feb 17 00:00:01 GMT 2011
Germany’s chances of winning the European Central Bank presidency for the first time may be fading after
Chancellor Angela Merkel picked her chief economic adviser to run the Bundesbank.
Yesterday’s selection of Jens Weidmann to replace Bundesbank President
Axel Weber leaves compatriot Juergen Stark on the ECB’s six-strong Executive Board with three years to run on his term. It is convention that nations have only one representative on the ECB board at a time. Before Weber’s surprise decision to quit, economists had speculated he would succeed ECB President
Jean-Claude Trichet in November, with Stark taking the Bundesbank’s helm to make way for him.
Weber’s exit from the race to become the next ECB chief paves the way for candidates from
Italy to Finland, say economists at ING Group NV and Nomura International Plc. It may also give Merkel more sway in the debate over reshaping the euro-area’s economic governance as the European Union implements a permanent crisis rescue mechanism and revamped budget rules.
“We expect Merkel to agree to a non-German candidate in return for concessions from especially the smaller countries in the next ‘grand bargain’ to be agreed at the end of March,” said Jens Sondergaard, an economist at Nomura in London.
Merkel yesterday praised Weidmann’s talents and predicted the 42-year old, who joins the ECB’s Governing Council in his new role, will “raise his voice on behalf of stability culture at the ECB, thus promoting Germany’s own interests.”
‘Missed Chance’
His nomination came a week after Weber’s decision to depart the Bundesbank began leaking out, robbing Merkel of a candidate for the ECB presidency who embodied the German tradition of inflation fighting and support for low budget deficits. Klaus Regling, a potential contender as head of Europe’s bailout fund, may lack the monetary policy experience for the post.
“It’s unlikely now that we’ll see another German candidate,” said
Holger Schmieding, chief economist at Joh Berenberg Gossler & Co. in London. “From a German perspective, it’s a missed chance. A German would have been best to explain to his countrymen why peripheral countries need support.”
Among the alternatives to Weber,
Bank of Italy Governor
Mario Draghi may have strengthened his hand this week by calling Germany a “model” for the rest of the euro area.
His experience as chairman of the Financial Stability Board and two decades in economic policy-making bolster his resume. Italy’s reputation for fiscal imprudence as the nation with the euro region’s second-highest debt-to-gross domestic product after Greece, and his three-years at Goldman Sachs Group Inc. may count against him, as does the fact that another southern European, Vitor Constancio of Portugal, is ECB vice president.
Sarkozy’s Pick
Draghi, 63, may be well placed to win the support of French President
Nicolas Sarkozy, given Trichet’s departure at the end of his eight-year, non-renewable term deprives the ECB’s board of a representative from the euro-area’s second-largest economy.
Had Weber become president, Stark’s likely departure would have opened up a slot for a French candidate such as Xavier Musca, Sarkozy’s economics adviser, or Jean-Philippe Cotis, head of France’s statistics agency. Similarly, Draghi replacing Trichet would probably mean the exit of Lorenzo Bini Smaghi from the ECB board. If a candidate from another euro-area nation fills Trichet’s shoes, there may be no slot for
France for a time.
“I can’t imagine that the French would accept a small- country candidate as they can’t offer a seat on the Executive Board,” said
Carsten Brzeski, at ING Groep in Brussels. “Draghi’s chances are biggest now.”
Other Contenders
Other contenders include central bankers Erkki Liikanen of
Finland and Luxembourg’s
Yves Mersch, 61, who combined have 19 years of monetary policy experience at the ECB.
Irish bookmaker Paddy Power Plc yesterday installed Draghi as the favorite to take over from Trichet, offering odds of 4 to 9. That means a gambler betting 9 euros ($12) would win 4 euros and their stake back if Draghi got the job. Liikanen was second favorite with odds of 2 to one. Mersch had 8 to 1 odds and Regling was a 20 to 1 outsider.
Mersch, who yesterday said the ECB must act if rising oil and food prices fuel wage increases, “may appeal more to Bundesbank traditions given his historical position as one of the most hawkish on the Governing Council,” said
Nick Matthews, an economist at Royal Bank of Scotland Group Plc.
By contrast, the desire to avoid a squabble and the fact that Luxembourg Prime Minister
Jean-Claude Juncker already chairs the panel of euro-area finance ministers means 60-year old “Liikanen may be the most likely successor to Trichet,” said Marc Chandler, head of currency strategy at Brown Brothers Harriman & Co.
Rate Outlook
Chandler said investors may need to brace themselves for earlier interest rate increases given Weber won’t be ECB president. Weber as an “uber-hawk would not need to hike rates early in his tenure to establish anti-inflation credentials,” he said. “The fact that it won’t be Weber would seem to increase the likelihood of an ECB hike late this year.”
Merkel’s chief spokesman, Steffen Seibert, said yesterday Germany wants to keep the topics of ECB personnel and revamping the euro area separate. He and French Finance Minister
Christine Lagarde have also said nationality should play no role in selecting an ECB chief although those statements don’t mesh with
Europe’s hiring history.
Leaders are debating a package of policies to address economic competitiveness and the sovereign debt crisis, targeting a March 24-25 summit for agreement. Merkel wants to tie a strengthening of the euro-area’s safety net with a pact that would include caps on wages and spending as well as a retirement-age extension.
Merkel told NDR radio yesterday that “we haven’t given up hope or our claim” of getting a German president for the ECB. The time for deciding the post hasn’t come yet, she said.
Still, “a German candidate has no chance,” said Friedrich Thelen, founder of Thelen-Consult, a Berlin-based business advisory group. “But Merkel may do a fiscal policy counter- trade. That’s anything but absurd.”
(Bloomberg)
