By Tom Fairless
FRANKFURT -- Europe's faltering economy and fractious politics
are complicating the region's biggest personnel question in years:
Who will replace Mario Draghi as president of the European Central
Bank?
Mr. Draghi, who previously ran Italy's central bank, emerged as
the dominant force in the European economy and financial markets
during his seven-plus years as ECB head, holding the currency zone
together by breaking taboos, including with the launch of a massive
bond-buying program.
Eight months before Mr. Draghi's nonrenewable term ends in
October, at least five unofficial candidates appear to be in the
running to replace him, according to European officials: Two
Frenchmen, two Finns and a German. The candidates have very
different economic philosophies, and there is no clear
front-runner. All declined to comment. Others could emerge.
With elections to the European Parliament approaching, and
political allegiances shifting as anti-EU populist parties gather
support, the continent's leaders risk letting the crucial position
be hijacked by horse trading used to divvy up top posts, according
to Karel Lannoo, chief executive of the Centre for European Policy
Studies, a Brussels think tank.
"It's the most systemically important job in Europe, this man
controls the show," Mr. Lannoo said. "It can go badly wrong."
Raising the stakes, Europe's economy has stumbled, with
Germany's export powerhouse wobbling and Italy sliding into
recession.
Mr. Draghi's departure "takes away the big 'put' in the market,"
said Stephen Isaacs, chairman of the investment committee at Alvine
Capital, a London-based investment advisory firm. A put option
allows investors to protect against the decline of an asset below a
certain price. "In the next downturn, will the ECB president reach
for the same monetary tools as the last six years, or say this
doesn't work? It should be a big concern."
Europe's personnel carousel pushes off Tuesday, when European
finance ministers are expected to nominate Irish central banker
Philip Lane as the ECB's next chief economist.
After that, no further decision is expected for 3 1/2 months,
when Europe holds parliamentary elections that could kick off a
chain reaction of appointments to other top European posts,
including head of the European Commission, the EU's executive
arm.
Investors are already navigating a toxic mix of risks in Europe,
from Brexit to trade wars. Financial markets have trusted Mr.
Draghi, but may be less sure of his successor.
The ECB's next policy move is wide open. Until recently, the
bank was steering away from ultralow interest rates, moving in
December to phase out its massive bond-buying program, known as
quantitative easing or QE.
If the economy stabilizes, the ECB could raise interest rates
this year. If it doesn't, the bank might turn to new stimulus
measures. It has few tools left: Interest rates are already below
zero and it holds around EUR2.5 trillion of eurozone bonds.
"The process of phasing out QE went smoothly because investors
trust Mario Draghi," said Yannis Stournaras, governor of Greece's
central bank.
Eight years ago, Mr. Draghi quickly became the favorite after
former German central-bank president Axel Weber, an early
front-runner, pulled out of the race. Mr. Draghi used a savvy media
campaign to dispel doubts in Europe's biggest economy about whether
an Italian would adhere to Germany's anti-inflation mentality.
This time, German Chancellor Angela Merkel and French President
Emmanuel Macron -- who would typically steer the decision -- are
weakened at home. They are waiting on the outcome of the European
elections, where anti-EU populists are expected to make large
gains. That vote will help determine top roles at the European
Commission, which in turn will steer Europe's major unresolved
policy debates on immigration and defense.
Ms. Merkel has indicated she will support a German candidate for
Commission president, Manfred Weber, whose center-right European
People's Party is expected to emerge strongest from the European
elections in May. If so, France may stake a claim to the ECB.
France has two options in central bank Governor François
Villeroy de Galhau and Benoît Coeuré, Mr. Draghi's right-hand man
on the ECB's six-person executive board. Neither has ruled out a
run. But Frenchmen have already served as ECB president and vice
president, so some countries might be wary to give it the top post
again.
If Mr. Weber's ascension to the European Commission is thwarted
by populist parties, a Frenchman such as Michel Barnier --
currently the EU's chief negotiator in Brexit negotiations -- might
get the top Commission job. That could thrust German central-bank
President Jens Weidmann -- an outspoken critic of Mr. Draghi's
signature policies -- into the ECB presidency.
Mr. Weidmann's chances were until recently considered modest by
European officials because Ms. Merkel failed to throw her weight
behind him early on. But he was recently given a boost by Italy's
finance minister, Giovanni Tria, who unexpectedly indicated that he
might back the German.
Italy's populist government underscored its disruptive potential
after it attacked the country's own central bank over the weekend,
saying its top brass should be replaced because it had failed to
effectively supervise the country's troubled banks.
"Obviously if Weidmann is elected, that should totally reprice
[market] expectations" of future eurozone interest rates, said
Franck Dixmier, global head of fixed income at Allianz Global
Investors. Mr. Weidmann called on the ECB last month to press ahead
with plans to phase out ultralow interest rates, in contrast with
Mr. Draghi, who has indicated that the ECB could unleash fresh
stimulus to support the economy.
Investors are currently betting the ECB won't raise its key
interest rate to zero for more than two years. It is currently
minus 0.4%.
If Mr. Weidmann proves too controversial, leaders could settle
on one of two compromise candidates from Finland, a Triple-A rated
country that, like Germany, has a reputation for conservative
thinking on monetary policy: central-bank Governor Olli Rehn, or
his predecessor, Erkki Liikanen.
In Europe, national governments nominate their own candidates
for ECB president. European finance ministers then agree on a name
to put forward for a vote by national leaders, probably in June or
July. In reality, the winning candidate will have been agreed to
informally beforehand. It is a more convoluted process than in the
U.S., where the president nominates the Federal Reserve chairman
and the Senate confirms.
For now, Europeans aren't ready to say goodbye to Mr.
Draghi.
"The way you argue, the amount of information you bring, the
rigor of your reasoning -- all of that was exemplary," Bernd Lucke,
co-founder of the euroskeptic Alternative for Germany party, told
Mr. Draghi in a recent debate at the European Parliament.
Asked in January whether the process of finding his successor
should be accelerated, Mr. Draghi said no. "I don't have that
sense. Maybe people like me."
Write to Tom Fairless at tom.fairless@wsj.com
(END) Dow Jones Newswires
February 11, 2019 08:14 ET (13:14 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.