Blog Post

The next ECB president

On May 28th, EU heads of state and government will start the nomination process for the next ECB president. Leaving names of possible candidates aside, this review tries to isolate the arguments about what qualifications the new president should have and what challenges he or she is likely to face.

By: Date: May 27, 2019 Topic: European Macroeconomics & Governance

On May 28th, two days after European Parliament elections have been held in all 28 member states, heads of state and government will meet in Brussels to start the nomination process for the leadership of many EU institutions.

Most of these posts – i.e. the presidents of the European Council and the European Commission, as well as the high representative of the Union for foreign affairs and security policy – are typically filled every five years when the incumbent European political cycle gives way to the new one. However, with Mario Draghi’s term coincidentally set to expire on October 31st 2019, leaders will also discuss candidates to fill the post of the ECB president for the next eight years. The below infographic of the summarises how the appointment process works.

The upcoming appointment has given rise to a flurry of media stories on who the new ECB president might be. Leaving names aside, this review tries to isolate the arguments about what qualifications the new president should have and what challenges he or she is likely to face.

For starters, some of the opinions focus on what the selection should not be about. For instance, Stefan Gerlach criticises the race to succeed Draghi as having taken on “the flavor (…) of the Eurovision Song Contest”. As he puts it, “governments want a candidate from their country to win because it makes them look good, and not because the candidate would necessarily improve ECB policymaking”, voting across regional block lines is very likely and, “absurdly, some commentators argue that it is their country’s turn to win”.

Similarly, the editorial board of the Financial Times calls for minimising the effect of the trade-offs involved when filling the multiple EU roles in selecting the next ECB president. Although the “EU leaders will seek to strike a balance between nationalities, regions of Europe, political party affiliations and gender”, the authors note that “the ECB presidency is the one job, above all others, that must not fall victim to horse-trading”.

What is special about the ECB presidency? The authors stress that although technically the ECB president is “first among equals” on the ECB Governing Council, the role the president plays in practice has profoundly changed and become more important over time, with the crisis acting as the catalyst. Whereas the first president of the ECB – from 1999 to 2003 – Wim Duisenberg focused on ensuring consensus-building in the ECB Governing Council  on the stance of monetary policy, later presidents had to assume a more prominent role. The authors argue that “Mr. Draghi’s ‘whatever it takes’ speech of July 2012 was an example of leadership at its best and proved to be a turning point in the [euro-zone] crisis”. They go on to describe the ECB as “the EU’s most effective, irreplaceable institution” during that crisis.

The experience of the crisis serves as the premise for many of the arguments made regarding the requirements the ECB president should meet. Stephen Gerlach, for instance, maintains that although an effective ECB president should reflect the diversity of the euro zone for reasons of legitimacy, he or she should also satisfy two additional criteria. Firstly, the new ECB president should act as a team player. “The ECB president does not set policy, but rather chairs the Governing Council meetings at which policy decisions are taken” Gerlach reminds us that disagreements with the rest of the Governing Council would make it “much harder to forge the broad agreements in the Governing Council that are the hallmark of good policymaking”, concluding that “risking a dysfunctional ECB does not seem like a wise decision at the moment”.

Secondly, the next ECB president should possess a solid economics background, Gerlach insists. During “ordinary times”, simple quantitative benchmarks like the Taylor rule may suffice to steer monetary policy, he argues. When economic and financial crisis hits, however, “prevailing economic concepts, such as the inverse relationship between inflation and unemployment posited by the Phillips curve, often break down and textbook solutions no longer apply.  In such cases, when “uncertainty typically skyrockets”, time is of the essence as “central banks need to act quickly and decisively to prevent problems from becoming entrenched by expectations”. The ECB president needs to have “a clear view of what needs to be done and the confidence to take decisive action” and “that, in turn, requires him or her to have a first-hand understanding of the problems that could arise”. To strengthen his case, Gerlach cites the example of former Federal Reserve chairman Ben Bernanke, arguing that his background as an academic economist specialising in “monetary policy mistakes made during the Great Depression” contributed to the timely and effective response of the Fed to the collapse of Lehman Brothers.

Lucas Guttenberg weighs in and argues that the most important requirement for the next ECB president will be his or her willingness and credibility to renew the promise to do ‘whatever it takes’ to save the euro. The latter remains the strongest safety net the euro has, he writes, adding that the alternatives are either undesirable or unpopular. On the one hand, failing to maintain that promise is an “existential issue for potential crisis countries, especially for those who are too big for the ESM [European Stability Mechanism]”, and more generally remains “a question for the stability of the monetary union as a whole”, whereas “far-reaching deepening of the monetary union” has little support in Germany. Therefore, Guttenberg believes that most member states will insist on this criterion rather than less important questions, such as “the question of how hard or soft one is when it comes to questions of “normal” monetary policy – that is highly data-driven at the ECB anyway and a question of majorities… Announcements to the markets, on the other hand, are purely a matter for the boss – that is what counts”, he claims.

If keeping the euro zone together requires maintaining the commitment to ‘whatever it takes’, there may be other challenges for which the next ECB president will still need to find an answer.

For his part, Martin Sandbu does not believe this to be the question of what the monetary toolkit comprises. On the contrary, he views “strong consensus on how the ECB works” as another element of Draghi’s legacy; “the unconventional has become convention” he notes, referring to unconventional monetary policies. Nonetheless, Sandbu wonders whether the euro zone runs a greater the risk from an “uninspired economic trudge leaving many citizens tempted by anti-European politicians, convinced that the eurozone does not work for them”, than it does from a “repeat crisis”. In the answer he is positive, writing that “more is needed than simply avoiding the worst in a crisis”, “the job of upgrading the ECB’s capabilities is far from done” and “the next president’s task is to improve monetary policy’s traction on the real economy”.

Finally, Jacob Kirkegaard (here and here) contemplates a different scenario for the next ECB president come the next downturn. Kirkegaard explains that the ECB’s arsenal will “be limited to buying riskier private assets or lifting the central bank’s self-imposed limit on sovereign debt holdings”. Choosing the first option “in shallow euro area markets would be criticized as ‘picking winners’”, while going for the second “risks being ruled illegal by the European Court of Justice”. Concluding that “these constraints make fiscal policy crucial to combatting the next slump”, Kirkegaard argues that “the next ECB president must not only be willing to use monetary policy to combat downturns but also effectively push member states to be more forceful in using fiscal policy for the same purpose”.


Source: European Council/Council of the EU


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More on this topic More by this author

Blog Post

The campaign against ‘nonsense’ output gaps

A campaign against “nonsense” consensus output gaps has been launched on social media. It has triggered responses focusing on the implications of output gaps for fiscal policy under EU rules, especially for Italy. But the debate about the reliability of output-gap estimates is more wide-ranging.

By: Konstantinos Efstathiou Topic: European Macroeconomics & Governance Date: June 17, 2019
Read about event More on this topic

Upcoming Event

Jun
25
08:30

How comprehensive is the EU political realignment?

Has the left-right divide become obsolete in EU politics?

Speakers: David Amiel, Otilia Dhand, Nicolas Véron and Silke Wettach Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article Download PDF More on this topic

Policy Brief

A strategic agenda for the new EU leadership

Memo to the presidents of the European Commission, Council and Parliament. 'A strategic agenda for the new EU leadership' by Maria Demertzis, André Sapir and Guntram Wolff is the first of our 2019 Bruegel memos to the new presidents of the European Commission, Council and Parliament. Focusing on the most important economic questions at EU level, these Bruegel memos are intended to be a strategic to-do list, outlining the state of affairs that will greet the new Commission.

By: Maria Demertzis, André Sapir and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: June 13, 2019
Read about event More on this topic

Past Event

Past Event

Past, present, and future EU trade policy: a conversation with Commissioner Malmström

What was trade policy during the last European Commission? What will be the future of European trade under the next Commission?

Speakers: Cecilia Malmström, André Sapir and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 13, 2019
Read article Download PDF More on this topic

External Publication

Effectiveness of cohesion policy: learning from the project characteristics that produce the best results

This study by Zsolt Darvas, Antoine Mathieu Collin, Jan Mazza, and Catarina Midões analyses the characteristics of cohesion policy projects that can contribute to successful outcomes. Their analysis is based on a literature survey, an econometric analysis and interviews with stakeholders. About two dozen project characteristics are considered, and their association with economic growth is studied using a novel methodology. Based on the findings, the study concludes with recommendations for cohesion policy reform.

By: Zsolt Darvas, Antoine Mathieu Collin, Jan Mazza and Catarina Midoes Topic: European Macroeconomics & Governance Date: June 11, 2019
Read article More on this topic More by this author

Blog Post

The inverted yield curve

Longer-term yields falling below shorter-term yields have historically preceded recessions. Last week, the US 10-year yield was 21 basis points below the 3-month yield, a feat last seen during the summer of 2007. Is the current yield curve a trustworthy barometer for future growth?

By: Inês Goncalves Raposo Topic: Global Economics & Governance Date: June 11, 2019
Read article More on this topic More by this author

Blog Post

The 'seven' ceiling: China's yuan in trade talks

Investors and the public have been looking at the renminbi with caution after the Trump administration threatened to increase duties on countries that intervene in the markets to devalue/undervalue their currency relative to the dollar. The fear is that China could weaponise its currency following the further increase in tariffs imposed by the United States in early May. What is the likelihood of this happening and what would be the consequences for the existing tensions with the United States, as well as for the global economy?

By: Inês Goncalves Raposo Topic: Global Economics & Governance Date: June 3, 2019
Read article More on this topic More by this author

Opinion

L’euro sans l’Europe : un projet incohérent

Jean Pisani-Ferry constate que tous les grands partis ne remettent plus en cause l’euro. Il souligne néanmoins que trois vulnérabilités – économique, politique et internationale – menacent la monnaie unique.

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: May 28, 2019
Read article Download PDF More on this topic

Policy Contribution

How to improve European Union cohesion policy for the next decade

This policy contribution investigates the performance of the design, implementation and effectiveness of cohesion policy, the most evaluated EU tool for promoting economic convergence. By analysing the effects of cohesion policy on economic growth through reviewing literature, conducting empirical research by comparing regions, as well as considering attitudes and expectations collected through interviewing stakeholders, the authors provide reform recommendations.

By: Zsolt Darvas, Jan Mazza and Catarina Midoes Topic: European Macroeconomics & Governance Date: May 23, 2019
Read about event More on this topic

Past Event

Past Event

Europe after Sibiu: Towards differentiated integration?

A comprehensive follow-up to the Informal European Council in Sibiu, Romania.

Speakers: Andrew Duff, John Erik Fossum, Paweł Karbownik and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 21, 2019
Read article More on this topic More by this author

Blog Post

The latest European growth-rate estimates

The quarterly growth rate of the euro area in Q1 2019 was 0.4% (1.5% annualized), considerably higher than the low growth rates of the previous two quarters. This blog reviews the reaction to the release of these numbers and the discussion they have triggered about the euro area’s economic challenges.

By: Konstantinos Efstathiou Topic: European Macroeconomics & Governance Date: May 20, 2019
Read article More on this topic More by this author

Blog Post

European bank resolution plans are undermined by a lack of transparency

The discussions of the now-aborted merger of Germany’s two largest banks underlined supervisors’ concerns over creating banks that are too big or too complex to fail. While European banks are increasingly funded through securities that could be subject to a bail-in, transparency over how any resolutions would unfold is as yet very poor.

By: Alexander Lehmann Topic: Finance & Financial Regulation Date: May 15, 2019
Load more posts