For the first ten months of 2019, the European Central Bank (ECB) will still be chaired by Mario Draghi. His term, which lasted for eight years, cannot be further extended. In the meantime, Heads of State and Government will ponder the choice of his successor. During this last period of Draghi’s presidency, difficult decisions are expected, which the Board of Directors will have to take in a concerted manner while promoting harmony and continuity as the presidency changes.
As for the choice of the successor, at least three aspects should be guaranteed, including the way in which politicians will reveal their preferences. First, there should be no doubt about the president’s technical expertise in monetary policy and knowledge of financial markets. Second, the issue of her nationality will have to be de-emphasised, honouring the Treaties dictating that members of the ECB’s governing board only work to serve to interests of the euro area as a whole. Third, the President’s leadership skills must be such that they can be exercised in harmony and cooperation with the other five members of the Executive Committee and with the governors of the national central banks. Together, they will have to ensure unity in their communications with the markets and discretion in their individual statements.
The succession will take place in a delicate period: it will be necessary to exit in an orderly manner from the emergency phase of the monetary policy which, after the global (2008) and euro area (2010-12) crises, employed “non-conventional” tools. The massive (2,600 billion) purchases of securities within the quantitative easing programme will end in 2018, and the ECB will have to decide how and when to liquidate the huge portfolio it acquired, reinvesting decreasing shares of the maturing securities. It will also be necessary to decide when to start to raise the interest rates controlled by the ECB, which have reached negative levels. In recent years, the systematic forward guidance of the content of the ECB’s future policies served to strengthen its impact by influencing expectations – a policy that bordered on non-conventionality. The ECB will have to decide whether to continue to employ this method.
It is unlikely that the ECB will be able to come to a decision on how to bring monetary policy back to normal within Mario Draghi’s remaining term. Harmful discontinuities with the new presidency must be avoided. Some difficulties will arise from the uncertainty of the European and world economic situation: until a few months ago it seemed that it could take advantage of a phase of growth to normalise monetary policies, while now expectations have worsened and there will be discussions on whether or not to slow down normalisation.
Other issues will affect the last months of the Draghi presidency and, even more so, that of his successor. There is an increasing need to coordinate the monetary policies of the world’s major central banks in order to deal with increasingly interconnected financial markets. Coordination is currently taking place behind closed doors, and the rationale of the decisions is not being communicated: sooner or later we might need more transparency in the global governance of liquidity. In any case, the new president should share and further develop Draghi’s ability in maintaining a fruitful and balanced relationship with the US Federal Reserve.
The ECB will have to manage with increasing skill its now dual responsibility: to pursue monetary stability along with financial stability. For the past four years, it has been responsible for monitoring the fairness and risks of European banks. In addition to providing extraordinary liquidity in the event of temporary crises, it must also hand over the failing banks to the “resolution” authority that has since been set up and which it was decided to strengthen at the end of 2018. Banking supervision, especially when carried out in conjunction with monetary policy, has delicate prescriptive phases, also because of the political implications that its decisions may have. Under the chairmanship of Mr Draghi, the ECB was astonished at the speed and efficiency with which it began to manage its new supervisory responsibilities. In the next few years, it will have to refine its complex functions in the face of markets that are often fragile and unstable.
There is also the question of central bank independence, which is not being upheld in many parts of the world. Independence that should be safeguarded especially from the political pressures. In order to seek short-term consensus, politicians would like to distort monetary policy towards different goals than those entrusted to it by statute, namely monetary and financial stability. But also independence from the pressures of bankers and markets in search of undue favours and artificial support. In terms of independence, the ECB is generally considered among the best central banks. It is a reputational capital that Draghi has cultivated with prestige, and that must never be undermined. On the other hand, the current Presidency has also shown skill, both in its communication with markets and in its dialogue with the Commission, the Council, and the European Parliament – the capacity to understand their decisions and explain its own, to share macroeconomic analyses, and to illustrate fiscal and structural policies that foster the effectiveness of monetary policies. The valuable and successful experience of this dialogue is another one of the tasks that Mario Draghi will pass on to his successor.
Let’s focus on the likely contenders. The strong personality, the ability, and the experience of the German candidate Weidmann do not seem to go hand in hand with special skills in creating consensus or a strong support by his government; the ambitions of the governor of the Banque de France Villeroy de Galhau have long been noted; and the technical competence of the Irish economist and governor Philip Lane stands out. The latter is appreciated by many and should at least soon become part of the ECB’s Executive Committee. The most likely successor is perhaps the Finnish candidate, Erkki Liikanen, who would guarantee a great deal of experience and a balanced and politically realistic approach to the tricky problems coming ahead. After a national career as politician and minister, he went on to become European Commissioner in Brussels for many years and, since 2004 until last July, he was Governor of the Finnish central bank. As such, he was a member of the ECB’s Board of Directors both before and after the 2008 crisis. In addition to his obvious expertise in monetary policy, he has an in-depth knowledge of the regulatory, supervisory, and structural problems of the financial system. In 2012, he was the esteemed chairman of a group of experts for the reform of the EU banking sector, whose report, which is still valuable today, bears his name.
It is not unlikely that, after his exceptional presidency, Mario Draghi’s opinion will have retain some influence on the successor’s choice. Draghi is known for his particular closeness to and admiration for Benoît Cœuré, one of the architects of quantitative easing, who was deputy director of the French Treasury and, for the past seven years, has been part of the ECB’s Executive Board, displaying a sophisticated capacity for economic analysis and excellent relations with the financial markets. However, given Trichet’s precedent, his nationality could be an obstacle.