Who should succeed Mario Draghi as president of the European Central Bank? That is the most important decision European governments will take this year. It is more important even than how they deal with an idiotic UK. It is more important than dealing with Donald Trump. It is more important than who will be presidents of the commission or council. The next president of the ECB might determine whether there is a eurozone, perhaps an EU, at the end of the term in 2027. Mr Draghi’s period has been that important. His successor’s might be equally so.
In October 2011, I wrote an open letter to Mr Draghi. I argued the ECB must be a lender of last resort in markets for public debt, thereby also stabilising the banks. I concluded that the “eurozone risks a tidal wave of fiscal and banking crises. The European Financial Stability Facility cannot stop this. Only the ECB can. As the sole eurozone-wide institution, it has the responsibility. It also has the power. I am sorry, Mario. But you face a choice between pleasing the monetary hawks and saving the eurozone. Choose the latter. Explain why you are making the choice. And remember: fortune favours the bold.”
Mr Draghi did the right things, above all with his celebrated remark in July 2012 that “within our mandate, the ECB is ready to do whatever it takes to preserve the euro”.
In August 2012, the ECB announced its Outright Monetary Transactions programme, to buy the bonds of distressed governments who agreed suitable programmes. Then, in January 2015, the ECB followed other central banks, by starting quantitative easing.
By reasonable standards, inflation has failed to reach the ECB objective of “below, but close to 2 per cent”. But in other respects, the ECB’s actions were a success. The death spiral of soaring bond yields and enfeebled banks halted. The eurozone economy troughed in 2013 and then largely tracked that of the US, as yields normalised and confidence dripped back.
The recovery of the eurozone from its crisis, perhaps even its survival, owes more to the ECB than any other institution. This is not to deny the role of governments in setting up new institutions and, when push came to shove, backing the ECB. But this was the one eurozone-wide institution with the needed firepower. This will remain true in the future, given the enduring fragility of a eurozone characterised by national — rather than area-wide — politics, weak banks, inadequate fiscal backstops, and persistently divergent economies.
Mr Draghi has transformed the ECB from a descendant of the old Bundesbank into a modern central bank, and from a central bank thinking for a small open economy to one appropriate to a diverse and continental-scale economy. The crucial question then is whether his successor will possess the intellect, flexibility and courage needed to respond to whatever happens. Some of what might happen could indeed be perilous: the world is highly unstable; eurozone inflation is very low; and monetary policy is close to its normal limits. Even today’s slowdown demands action. A worse slowdown might demand heroic action. The next president might have to pull new rabbits out of the hat.
It is doubtful whether any of the candidates meet these high standards. The riskiest by far would be Jens Weidmann, Bundesbank president. Mr Weidmann has opposed many of Mr Draghi’s innovations, including resort to QE. He even testified against OMT before the German constitutional court. The ECB council might be able to force him to do the right thing, in a crisis. But that would be a mad way to run the central bank.
Yet there is an alternative possibility. The one thing that could reconcile Germans to how the ECB must behave is recognition of that reality by a German president. He would have to tell his compatriots some home truths. Most obviously, that inflation has been lower under the ECB than under the Bundesbank. Then he would have to point out that a world of low inflation and generally very low interest rates is not one in which their savings have much economic value.
Finally, such a German president should add that the German private sector has a surplus of savings over investment comparable in scale to that of Japan. It is possible for Germany to have full employment and a budget surplus because Germany has been running a huge current account surplus. That would have been far more difficult if Germany had not been inside the eurozone: a floating Deutsche Mark would surely have appreciated hugely, Germany would now be in deflation, much more of its export-oriented production would have moved out and its monetary policy might be like Japan’s.
In brief, Germany has been a huge economic beneficiary of the euro. A Mr Weidmann who had said that again and again, and had also strongly backed the actions taken by the ECB, could have made a big difference to eurozone politics. Unfortunately, such a Mr Weidmann has not been in evidence. Instead, he has represented and so validated the sceptical German view. If that is what he would do as president, it would be a disaster. If he took the broader view, it would be a blessing. This, and not his nationality, is the issue. There can be no objection to a German president. On the contrary, a realistic and reasonable German president would be a great boon.
So which would Mr Weidmann be? Only he knows. Above all, this decision must not be the product of horse-trading among governments. The question is whether the next president can and will do the job as Mr Draghi defined it. Everything else is noise.