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Draghi's dovish talk steers his successor toward a new era of stimulus

Key Points
  • European leaders gathering in Brussels Thursday will have their second round of talks on who should lead the European Commission — the EU's executive arm.
  • Once that's achieved, the route for choosing the next Draghi will be opened.
European Central Bank President Mario Draghi arrives to participate in the morning discussion session during the last day of the 2019 ECB Forum on Central Banking.
Horacio Villalobos | Corbis News | Getty Images

Investors in Europe are likely to receive more clues this week on who will replace Mario Draghi, just days after the European Central Bank (ECB) president signaled that more accommodative policy could be on the way.

Amid a slowdown in the euro zone economy, Draghi's dovish tone and prospects for further monetary stimulus, there are questions about the path the next president might take. However, the decision on who will be the next ECB chief is tightly linked with a few other important calls in Europe.

European leaders gathering in Brussels Thursday will have their second round of talks on who should lead the European Commission — the EU's executive arm. Once that's achieved, the route for choosing the next Draghi will be opened.

"We are still waiting for the Commission (decision)," a European official with knowledge of the discussions, who did not want to be named due to their sensitivity, told CNBC Wednesday over the phone.

The 28 EU heads of state are at an impasse over the Commission presidency. However, European Council President Donald Tusk, who chairs the European summits in Brussels, said Wednesday that despite different viewpoints, there's "a common will to finalize this process soon."

Chancellor Angela Merkel of Germany said this should happen before July 2.

EU leaders must also agree on a new foreign policy chief, a new president of the European Parliament and president of the European Council. With all these decisions, due to happen before October at the latest, they will seek a balance between nationality, gender and political affiliation.

Who will be the next Draghi?

The same European official, who's close to the central bank's discussions, told CNBC that a Finnish candidate might have "good chances if Germany and France block one another."

Finland announced Wednesday that it had put forward two names to lead the ECB: Erkki Liikanen and Olli Rehn, the former and current chief of the Finnish central bank, respectively.

But there are other names floating around in the corridors of Brussels: Benoit Coeure, the French economist who currently serves as a member of the executive board at the ECB; Francois Villeroy de Galhau, who is France's current central bank governor, and Jens Weidmann, the current Bundesbank governor.

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All of them, apart from Liikanen, are members of the ECB's Governing Council — the group of policymakers that brings together the 19 central bank governors plus the six members of its executive board.

The European official told CNBC that members of the Governing Council have a better chance of replacing Draghi. The transition would be "easier," he said.

"Villeroy de Galhau, Rehn and in particular Coeure would largely continue on Draghi's path. Weidmann may be a bit different," Florian Hense, a euro zone economist at Berenberg bank, told CNBC via email Wednesday.

"While the (ECB) president matters in crisis times, we should not overestimate his power: After all, the Governing Council takes the decisions, not the president. What is more, the Governing Council does not look to turn from a bunch of largely dovish Draghies into one of hawkish Weidmanns all of sudden, if Weidmann would become president," he added.

Hands tied

In his latest remarks, Draghi said that if inflation does not pick soon, "additional stimulus will be required." He also said that the bank is not short of policy instruments to work with.

In this context, the bank's vice president, Luis de Guindos, told CNBC that there is a "wide range" of ways the ECB could prop up inflation, including by embarking on a new round of quantitative easing.

"By undertaking the contingency planning now, Draghi may leave his successor somewhat handcuffed to whatever the Governing Council agrees upon – an agreement he can steer over the next couple of months," Hense told CNBC.

"Any successor reluctant to provide further stimulus would then struggle not to do so if push comes to shove and the Governing Council has made up his mind to step it up," he added.

Carsten Brzeski, chief economist at ING Germany, also told CNBC via email that "with (the) latest events any successor has actually been tied to the Draghi chains. At least in the first months, it will be hard to break with the Draghi legacy."

"Any more hawkish ECB president will now have a harder time as he/she will be tested against Draghi's recent dovishness," Brzeski added.