17 June 2019 You’re hired – who will get the EU’s top jobs?
Jan von Gerich | Tuuli Koivu
The game to pick the next EU leaders is on and especially the name of the ECB president will matter a lot to the market and the economic outlook. How much can one man/woman rock the boat?
On your marks. Get set. Go! The race for the EU top jobs is on. From an economic perspective, most attention is focused on the next ECB president as this time he/she will be nominated as part of the game. One would hope that the candidate would be selected purely based on merit and qualifications, but the history of EU nominations unfortunately suggests otherwise. Unfortunately, this probably means that the candidates’ nationality may play a larger role than normally. The nomination game will be on as early as at the EU summit on 20-21 June, but the final decisions will probably not come until late in the summer or early autumn.
• Draghi has shown that one person can matter a lot when the monetary policy stance is defined. A very hawkish ECB president would create new worries about the future of the Euro area and could lead to violent short-term market reactions. • In this round, the two most extreme frontrunner candidates seem to be the German hawk Jens Weidmann and the Finnish dove Olli Rehn. • We consider Jens Weidmann’s chances small given that Germany probably prioritises other high-level positions and his hawkishness raises objections in a number of countries, which limits the risk of ECB policy turning noticeably more hawkish. • Our best guess is that that the French central bank governor, Villerroy de Galhau, will be nominated. In our view, this would mean that if economic developments worsen, we still think that the ECB will be ready to act even after Draghi has left despite the diminishing scope for further monetary easing. • In a near-term market perspective, the nomination of the European Commission president is interesting primarily in terms of what it implies for the ECB nomination, even if also that selection will matter to the medium- term outlook of the EU.
e-markets.nordea.com/article/49348/youre-hired-who-will-get-the-eus-top-jobs The ECB president can make a dierence
While decisions are seldom made by a single person in EU circles, the importance of the top jobs should not be downplayed. For example, it is virtually impossible to overstate the significance Mario Draghi has had on the ECB’s policies and in holding the entire Euro area together.
When Draghi was selected to head the ECB in 2011, the common perception seemed to be that he would follow his successor Trichet in raising rates and establishing his credentials as an inflation fighter at an early stage. In fact, the ECB under Draghi cut rates at his first meeting. Further, Draghi has been the main initiator behind most of the ECB’s unconventional monetary policies.
The importance of the ECB president’s credibility is enormous as well. Most remember Draghi’s famous whatever it takes speech from 2012, which had a huge impact on market confidence. The Outright Monetary Transactions (OMT) bond purchase programme followed the speech, but Draghi’s words were so eective that to date the ECB has not had to buy a single bond under that programme.
Accordingly, the name of the next ECB president will have considerable market relevance. In the near term, the name of Draghi’s successor will probably be assessed merely in terms of whether the next president is likely to follow in Draghi’s footsteps (for example the Finnish and French candidates) or try to turn policy towards a more hawkish setting the minute economic conditions allow (Weidmann). The market impact would probably be bigger in the latter case, that is, if markets started to worry about premature policy tightening ahead.
Beyond the very short term, the importance of credibility rises again. A credible central bank is the prerequisite to preventing volatile market conditions and one important element to guarantee a stable operating environment for companies. The credibility aspect is also extremely important for the ECB at the moment, as forward guidance is an essential part of the policy tool kit and the central bank has missed its inflation target for an extended period of time.
Draghi was quick to change the course of monetary policy when he took over
e-markets.nordea.com/article/49348/youre-hired-who-will-get-the-eus-top-jobs Does Macron want a French ECB president?
This time the nomination process of the ECB president is dierent compared to the previous rounds because it coincides with the other high-level EU nominations. This can imply that the nationality of the candidates plays a more important role than normally because it will probably be politically dicult to give more than one high-level position to a single EU country. This round diers from the previous one also because there does not seem to be a candidate like Mario Draghi, whose credentials were clearly superior to those of the other candidates. Thus, the field is wide open for surprises.
The starting point for the nomination round seems to be that the largest Euro-area members, Germany and France, each get one of the top jobs. Thus, they need not only to choose on which position to concentrate but also to agree among themselves about the division. If they don’t reach an agreement, there is a possibility that all the high-level nominations go to smaller countries.
Germany’s Merkel appeared to set her sights on securing the Commission presidency, when she openly backed the top candidate of the European People’s Party (EPP), the very conservative Manfred Weber, coming from the CSU, the sister party of Merkel’s CDU.
Further, the top German candidate for the ECB presidency, Jens Weidmann, is quite a controversial candidate especially in the southern Euro-area countries due to his earlier objections to some of the ECB’s past easing programmes and his perceived hawkishness regarding monetary policy.
Against this background, we think that the French candidates are the most likely ones to succeed Mario Draghi. However, the preferences of President Macron will certainly also play a role, and the question is whether the post of the ECB president is enough for him. e-markets.nordea.com/article/49348/youre-hired-who-will-get-the-eus-top-jobs Who are the frontrunners?
The main candidates for ECB president are, in the order of their likelihood to succeed Draghi, in our view:
Francois Villeroy de Galhau
The governor of the Banque de France has not really diered in his public opinions from the ECB ocial line recently. He has repeated Draghi’s willingness to do whatever it takes but has added conditions have changed. He has, however, also pointed to the limits of what a central bank can do and called on politicians to do more. He wants the ECB to study the side-eects of very loose monetary policy, especially negative rates, in case such policies will be needed for a long time. Villeroy de Galhau speaks fluent German, has links to Germany and has experience from both the public and private sectors, which may make him a suitable candidate also to Germany.
Benoît Cœuré
The member of the ECB Executive Board since 2011 is highly appreciated inside the ECB and the Governing Council. He knows the financial markets in depth due to his experience as head of France’s debt management oce. Often classified as a dove, Cœuré has recently been rather cautious in his remarks on the possible future steps of monetary policy. His chances of getting the post are weakened by legal questions, since an Executive Board member can serve only one term.
Olli Rehn
The governor of the Bank of Finland has rather short experience from the central bank world but on the other hand, he acted as the European Commissioner for Economic and Monetary Aairs and the Euro during the Euro crisis. Rehn has recently been very active in making public new openings (for instance revising the ECB inflation target to be genuinely symmetric) for monetary policy. He supports dovish policy and seems to be more worried about the low inflation expectations than other candidates.
Erkki Liikanen
Liikanen is widely known as a team player who was ready to support the unconventional monetary policy measures. The very recent change of government in Finland may favour Erkki Liikanen, whose two terms as a Bank of Finland governor ended in the spring of 2018. He has a political background from the Social Democrats – the current prime minister’s party in Finland – while Mr Rehn acted for a while as a minister in the former centre-right government.
Jens Weidmann
We consider Weidmann’s chances to become the next ECB president rather small due to his hawkish stance and due to the fact that Germany probably favours other high-level positions than the ECB presidency. This is partly because the ECB faces its strongest criticism in Germany and the president alone would probably not be sucient to take the ECB’s stance in a more hawkish direction in the current very uncertain economic environment. Weidmann is known to be more hawkish than the French and Finnish candidates but has recently softened his tone to some extent. It is hard to say whether that is because of his candidacy to succeed Draghi or the weaker economic outlook, which Germany is now an essential part of.
Other names e-markets.nordea.com/article/49348/youre-hired-who-will-get-the-eus-top-jobs Female high-level candidates are scarce, but especially the European Parliament would probably be happy to find a first-ever female president. Thus, you never know if President Macron is able after all to persuade Christine Lagarde to return to Europe from the IMF.
Dutch Governor Knot would be a really hawkish selection and we do not consider that likely. His deficiency is also that Duisenberg, another Dutchman, was the first ECB president.
With the current set-up, after Draghi no Italians are left on the ECB Executive Board. As the term of Cœuré ends at the end of 2019, one possible candidate to replace him could be an Italian. There have already been strong voices from within the Italian government that Italy should have a seat on the Executive Board. Germany to take the Commission?
The largest parties in the European Parliament have tried to establish a more transparent and democratic way to select the Commission president. The idea here is that each of the European political parties decides a so-called top candidate or Spitzenkandidat, and the candidate of the largest party would then become the president. Current Commission President Juncker rose to power through this process.
If this process is followed, Manfred Weber would take the Commission presidency. However, President Macron has openly objected to this process, and it will be increasingly dicult to find a majority in the European Parliament for Weber after the EPP lost seats in the latest elections. Even the German government is not united on supporting Weber, as the SPD has suggested they would rather have a social democrat lead the Commission than a German.
If Weber faces too many objections, also because he is very conservative, who could then be the next head of the Commission? The EPP will probably still consider having the claim for the post, in which case less conservative candidates such as Finland’s Alexander Stubb or Ireland’s Leo Varadkar could come into play. Outside the EPP, France’s Micher Barnier, Frans Timmermans from the Netherlands or Denmark’s Margrethe Vestager could have a shot.
In short, deciding on the Commission presidency will be far from straightforward, and will probably be debated ahead of the ECB presidency. Most importantly, the nationality of that nomination will give insights into the ECB president. Council decides
While the process to decide who gets the top jobs varies to some extent by post, the Council, that is, the heads of the member states, has significant power in all the nominations. The Council decides directly its own president as well as the high representative.
For the ECB presidency, the process is longer, as the Eurogroup will discuss the candidates and both the European Parliament and the ECB Governing Council will be consulted. In practice, the decision will ultimately be made by the Council.
The Commission presidency is the only post where the Council does not make the final decision, as that decision rests with the European Parliament. However, even in this case the Council is the one that decides the candidate that the parliament will vote on. e-markets.nordea.com/article/49348/youre-hired-who-will-get-the-eus-top-jobs Overview of the nomination process for the top jobs
Jan von Gerich Tuuli Koivu Chief Analyst Senior Analyst [email protected] [email protected] +358 9 5300 5191 +358 9 5300 8073
e-markets.nordea.com/article/49348/youre-hired-who-will-get-the-eus-top-jobs