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ECB’s new faces give investors pause for thought over policy shifts

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Via Financial Times

When the European Central Bank holds its first rate-setting meeting of 2020 this month, almost half of its governing council will have been members for less than a year — highlighting how extensively its senior ranks have been revamped.

The arrival of former IMF managing director Christine Lagarde to replace Mario Draghi as ECB president in November is only the most obvious part of a changing of the guard at the bank, which economists say could unsettle investors.

“We are moving from a dovish and experienced team of central bankers to a less dovish and less experienced team of central bankers, so that is a risk for markets,” said Frederik Ducrozet, global strategist at Pictet Wealth Management.

The newest arrivals are Isabel Schnabel and Fabio Panetta, who were selected by Germany and Italy, respectively, to join the ECB’s executive board at the start of January, replacing Sabine Lautenschläger and Benoit Coeuré.

The other big arrival came last June when Philip Lane was made chief economist, replacing Peter Praet. Along with Mr Coeuré, Mr Praet was vital in helping Mr Draghi to shape the ECB’s response to the sovereign debt crisis.

All this change means that four of the ECB’s six-person executive board have been in their jobs barely more than seven months. A fifth, Yves Mersch, reaches the end of his eight-year term in December. The sixth member, Luis de Guindos, has only been vice-president since the middle of 2018.

The 19 other governing council members are national central bank heads, of whom eight joined last year. The most vocal arrival has been Robert Holzmann, a professor who was made head of Austria’s central bank by the country’s rightwing Freedom party and has regularly criticised the ECB’s monetary policy for being too loose.

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The new council may be less sensitive to financial markets and more willing to question ECB policies, according to Carsten Brzeski, economist at ING. “Being enthusiastic and inexperienced, they are likely to turn over every stone and risk going too far,” he said. “A key question will be if they can recalibrate monetary policy without causing markets to react in fear of rate hikes.”

Ms Lagarde has already announced plans to review the ECB’s strategy this year, which will include examining the effectiveness of its existing tools and potential changes to its core inflation objective.

The new ECB president, who is not an economist and has little monetary policy experience, has also promised to be more inclusive than her predecessor, who occasionally left noses out of joint by coming to decisions without much debate. This means those around Ms Lagarde could have greater influence than they might have done under Mr Draghi.

Some economists say a renewed impetus from a fresh team is exactly what the ECB needs. “The ECB faces a very different challenge to the one of eight years ago with the eurozone crisis,” said Lena Komileva, chief economist at G+ Economics. She added that the priority was no longer saving the euro, but avoiding Japan-style deflation.

“The challenge is not fixing the broken links of the monetary union, but how to restore dynamism to the economy,” said Ms Komileva. “The current low growth, low rates and low inflation world is not sustainable in the long term.”

Mr Lane, former head of the Irish central bank, is expected to be pivotal in shaping any changes to the ECB’s monetary policy strategy. As a vocal defender of the easing measures shortly before Mr Draghi’s departure, he is seen as one of the bank’s most dovish voices.

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The ECB has also given Ms Schnabel a key role by making her responsible for market operations including the ECB’s bond-buying programme, a portfolio previously overseen by Mr Coeuré.

Ms Schnabel disagreed with the ECB’s decision to restart its bond-buying in September, arguing that it was excessive. But she is seen as more pragmatic than many German nominees to the ECB and has pledged to improve its communication in her home country, where negative rates are often criticised for penalising savers.

“She has a better feeling for the sensitivities in Germany and she’ll try to get out of this confrontation between north and south, creditor and debtor nations, and try to bring the debate to another level, which I think is a good idea,” said Clemens Fuest, head of Ifo, the Munich-based research house.

Mr Panetta, responsible for international and European relations, has expressed his support for the ECB’s easing measures. The Banca d’Italia veteran previously led a push against the ECB’s stance on failing Italian banks, arguing that it should not impose losses on retail bondholders, marking him out as someone prepared to fight for what he believes.

Despite turnover in top ECB posts, there is significant continuity among the senior staff who have made the transition from Mr Draghi to Ms Lagarde, including Roland Straub, the president’s personal counsellor. Other long-serving officials include Massimo Rostagno, head of the monetary policy division, and Frank Smets, head of the economics division.

The new top team is likely to only show its true colours once faced by the next crisis, such as a potential US trade war with Europe after Donald Trump, US president, threatened to impose tariffs on many French goods.

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Ms Komileva at G+ Economics reckons the key test for the ECB will be how it responds if the eurozone economy suffers another downturn, adding that until then “the new blood of the ECB will create a question mark for markets”.

Additional reporting by Guy Chazan in Berlin

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