Insight
Germany should not run the ECB by Christian Odendahl 24 May 2019
If Jens Weidmann became president of the European Central Bank (ECB), it would be more difficult to fight the next recession and prevent future crises. Bundesbank boss Jens Weidmann wants to succeed Mario Draghi as President of the ECB, that much is clear. It is also clear that making him president would be a mistake. To meet the challenges that lie ahead – a weakening eurozone economy and a potential debt crisis in Italy – the ECB will need to implement bolder monetary policy than seen to-date and to preserve its role as de facto lender of last resort to governments. The eurozone needs someone even bolder than Draghi – not a conservative like Weidmann, who has been reluctant to support or outright opposed to some of the ECB’s recent policies. Moreover, Germany already dominates eurozone policy-making through its veto on further reforms and on the use of the main bailout fund, the European Stability Mechanism (ESM). To appoint a German to lead the ECB would be a step too far. Draghi’s mixed legacy In November 2011, Draghi took over from Jean-Claude Trichet. At the time, the ECB was far too cautious. During the acute phase of the euro crisis, Trichet had only intervened reluctantly to stabilise government bond markets, arguing that it was the job of governments to fix the eurozone, not the ECB’s. He had fiercely resisted debt restructuring in Greece for fear of contagion. His monetary policy had mechanically followed the near-term rate of inflation – he famously hiked rates in 2008 and 2011, in the middle of crises – failing to appreciate that a full-blown financial crisis, not inflation, was the real threat. Draghi reversed Trichet’s rate hikes within the first six weeks of his term, and provided Europe’s banks with almost €500 billion of cheap long-term funding to avert a liquidity crisis. In the summer of 2012, Draghi famously pledged “to do whatever it takes” to preserve the euro. He followed up that pledge with a programme called OMT (Outright Monetary Transactions), promising to buy government bonds in unlimited quantities to stabilise sovereign debt markets if necessary. It is widely agreed that this pledge – to make the ECB the de facto lender of last resort to governments – was the key to arresting the euro crisis. Under Draghi’s leadership, the ECB also started a programme of bond purchases (commonly known as QE, or ‘quantitative easing’) in early 2015 to stimulate the economy. CER INSIGHT: Germany should not run the ECB 24 May 2019
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