Europe News

A German could be set to take the helm at Europe’s most powerful bank — and that could mean a lot for future policy

Key Points
  • Many suspect that the next ECB president — a role that becomes vacant next year – is more likely to come from a northern European country.
  • Jens Weidmann has often been mentioned as a potential replacement for Draghi.
Jens Weidmann
Eric Piermont | AFP | Getty Images

Analysts have started to consider whether the European Central Bank (ECB) could soon start aggressively reducing its huge stimulus program, with a hawkish German economist being tipped to take over at the central bank.

Spain's Economy Minister Luis de Guindos will soon be the next vice president at the ECB, after a rival from Ireland dropped out of the race Monday and backed the Spaniard for the position. This has led many to suspect that the next ECB president — a role that becomes vacant next year – is more likely to come from a northern European country for balance, and could therefore have a more hawkish outlook when compared to incumbent Mario Draghi.

"You do have to see it in the wider context of all the other roles that are on offer," James Nixon, chief European economist at Oxford Economics told CNBC Tuesday, about the appointment of Luis de Guindos.

De Guindos will add credibility to areas of ECB policy: Economist

Nixon said the Germans are probably suffering from a "lack of legitimacy" at the central bank and are still very concerned about the impact of quantitative easing — a massive stimulus program following the euro zone debt crisis of 2011 that's designed to boost lending but also stoke inflation. Inflation is a concern within Germany as it's still haunted by the hyperinflation of the 1920s and top economists — like Bundesbank President Jens Weidmann — have been noticeably cautious on too much bond buying from the ECB.

"I would have thought big picture … The French are really keen for (Pierre) Moscovici for example to take the (European) Commission, and the Germans absolutely feel it's their turn to be the head of the ECB, so they want Weidmann to run the ECB," Nixon added.

The ECB is the euro zone's body in charge of monetary policy, effectively deciding the cost of borrowing for lenders and borrowers. Its main mandate is ensuring stable prices and thus it moves monetary policy according to inflation numbers. The president has an executive board and a Governing Council to make decisions, but they are still seen as very influential in policymaking.

Want for ECB to be less accommodative than it is: Bundesbank president

Weidmann has often been mentioned as a potential replacement for Draghi. In fact, UBS said in a note Monday night that Weidmann is the most likely to take the ECB presidency in November of 2019.

"A significant share of the ECB Governing Council typically votes with the president. If this trend continues, and with Jens Weidmann at the helm, this could lead to a faster policy rate normalization path, starting in the second half of 2019," UBS said.

The German economist is one of the most vocal members of the ECB Governing Council, criticizing the slow policy normalization in the euro zone. Last October, for example, Weidmann criticized the ECB's decision to extend quantitative easing.

However, the fact that indeed Weidmann has been so outspoken, compared to his colleagues, about the impacts of an extended period of monetary stimulus, could hurt his chances of becoming president.

'Skeptical for three reasons'

"Much has been made in the media of Jens Weidmann's candidacy, but I'm rather skeptical for three reasons," Erik Nielsen, global head of CIB research at UniCredit, said in a note Sunday. "I suspect Weidmann's vocal opposition to most of the ECB decisions in recent years has generated too much opposition in too many other member states for him to get the nod," he said.

At the same time, the heads of the European Stability Mechanism, the Single Resolution Board and the European Investment Bank are all from Germany. Nielsen from UniCredit also noted that there's already another German in the executive board of the ECB, Sabine Lautenschläger, and she would have to resign if Weidmann were to be appointed, reducing female representation in the top jobs — an issue that has often been raised about the ECB.

Meanwhile, Carsten Brzeski, chief economist at ING, also told CNBC that these reasons hurt the chances of Germany putting Weidmann forward. This despite his central banking experience and the fact that the country has never held the ECB presidency

"In short, I still think that the game is very open," Brzeski said, but "De Guindos as vice president has clearly increased the chances for a Northern European to succeed Draghi."