ZURICH – Three months after they chose Christine Lagarde to succeed Mario Draghi as president of the European Central Bank, eurozone governments now have other major personnel decisions to make regarding the ECB’s Executive Board. With German board member Sabine Lautenschläger having unexpectedly resigned last month, and her French colleague Benoît Cœuré’s eight-year term ending in December, there are two open slots to be filled.
These positions matter. The six members of the Executive Board, together with the eurozone’s 19 national central-bank governors, form the Governing Council that sets the ECB’s monetary policy. Because the board members all work in Frankfurt, they are in close contact with one another and take the lead in proposing the direction and decisions the council should take.
Eurozone governments have an informal understanding that Germany, France, Italy, and Spain, which together constitute three-quarters of the eurozone economy, can always have a national of their choice on the board. That means the open slots are likely to be filled by a German and an Italian (because Lagarde, like Cœuré, is French, while the departing Draghi is Italian).
That seems like a sensible way to help ensure the ECB’s continued political legitimacy. Unfortunately, there can be no guarantee that large countries always have the best candidates to propose. In fact, two of the most credible contenders to succeed Draghi, the Finns Erkki Liikanen and Olli Rehn, come from a small country. So did the ECB’s first president, the Dutchman Wim Duisenberg.
In considering appointments to the ECB, governments naturally think of candidates who will forcefully support “the national view,” if indeed such a thing exists. The German government will thus probably prefer a hard-money proponent who believes that the central bank’s policy is far too expansionary and that interest rates are too low for individual savers, pension funds, and insurance companies alike. Meanwhile, the Italian government may propose a candidate who thinks the ECB should pursue a full-blown asset-purchase program, cut its key deposit rate further, and not put too much pressure on banks to sort out their stocks of non-performing loans.
But such candidates are unlikely to be very influential in the ECB’s Governing Council – as the example of Bundesbank President Jens Weidmann illustrates. Weidmann undoubtedly has all the necessary skills to be a successful ECB president: he has an impressive grasp of monetary theory, plenty of policy experience, and is a clear and engaging public speaker.
Unfortunately, he appears to have pushed the German view (or, perhaps more accurately, that of many German commentators) too strongly. Although Weidmann’s inflexible stance may have strengthened his profile in Germany as a firm supporter of monetary rectitude, it rubbed too many other council members and eurozone governments the wrong way. His candidacy to succeed Draghi thus failed to receive broad support.
For the same reason, Weidmann has had little impact on ECB policy, which is effectively determined by where the council’s center of gravity is on any particular issue. Council members who are too far away from that center, even if they are in tune with national sentiment, are disregarded and lose influence.
The experience of former US Senator Barry Goldwater is perhaps instructive in this regard. Goldwater held uncompromisingly conservative views on many issues and, in accepting the 1964 Republican presidential nomination, famously said that “extremism in the defense of liberty is no vice,” and that “moderation in the pursuit of justice is no virtue.” Although this was a good sound bite, and although his candidacy arguably set the stage for the nomination of Ronald Reagan a generation later, Goldwater lost to President Lyndon Johnson in a landslide.
Thus, rather than proposing Executive Board candidates who will forcefully promote national views, the German and Italian governments should instead consider nominees who are likely to be able to influence ECB policy. That calls for candidates who do not have predictable and rigid opinions on the issues that the Governing Council will face in the near future, such as whether the ECB should prolong its asset purchases and/or cut interest rates further.
Members of the ECB’s Executive Board should consider each policy issue on its merits with an open mind, and be willing and able to help forge broad agreements in the Governing Council in support of policy decisions. In many ways, these attributes are precise what French President Emmanuel Macron had in mind when he proposed Lagarde to succeed Draghi.
Stefan Gerlach is Chief Economist at EFG Bank in Zurich and a former deputy governor of the Central Bank of Ireland. He is also a former Executive Director and Chief Economist of the Hong Kong Monetary Authority and Secretary to the Committee on the Global Financial System at the BIS.