29 May 2019

OMFIF: Weidmann ECB countdown

Signals in Weidmann's favour may come as early as next week. Decision-making on the ECB job forms part of continent-wide political shifts – including the nomination of a new European Commission chief and expected departure of British Prime Minister Theresa May – after the European Parliament election results.

Voting on 23-26 May is likely to demonstrate pan-European fragmentation and a move away from centrist parties that will complicate both Britain's European Union departure and further steps toward European integration.

Weidmann switching to the ECB would be controversial. The Bundesbank chief has pointedly, but with decreasing vehemence, opposed many Draghi-driven ECB decisions since 2011 to support the European economy and prop up member states. [...]

Weidmann, too, would face strong pressures and risks as head of the ECB.

Up until a few months ago, he was widely viewed as an improbable candidate. But the odds have shifted, in the light of changing political currents between Germany and France over the desirability of Manfred Weber, a conservative German member of the European Parliament, to take over from Jean-Claude Juncker as European Commission president.

Merkel chose Weber to spearhead Germany's bid for the Commission presidency, but the likelihood that he will get support has fallen as a result of fragmentation in the European Parliament being constituted after 1 July. This opens the possibility of a French representative at the helm of the Commission, corresponding to a long-held aim of President Emmanuel Macron.

Weidmann as ECB president would have to adjust his own – and the Bundesbank's – traditionally hawkish policies. This would recognise the reality that a built-in majority of the ECB's governing council has been and will remain in favour of a highly accommodative monetary policy, probably for several years. He would probably disappoint many ordinary Germans who would expect a Bundesbank chief to accelerate monetary normalisation by switching away from negative interest rates and reducing the ECB's much increased balance sheet. He would be expected to clarify the ECB's stance on possible future quantitative easing and use of the outright monetary transactions mechanism (decided in 2012 but never used) for channelling central bank funding under strict conditions to debtor states like Italy.

Full article on OMFIF

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