For two years speculation abounds over the candidacy of Jens Weidmann to succeed Mario Draghi at the helm of the European Central Bank.
Weidmann has undermined Draghi
Weidmann can hardly contain his ambition, as he declares himself “open” to the possibility.
Given that the next head of the Frankfurt-based ECB must be appointed in 2019, Weidmann appears to be mellowing his profile as a monetary hawk.
Weidmann undermined Draghi’s Mario Draghi’s €2.3 trillion bond-buying programme. The quantitative easing plan is now widely credited for putting Eurozone’s growth back on track and inflation nearer the policy objective benchmark.
For just under two years, Weidmann has been calling for a faster and more resolute rollback of the bond-buying programme that has allowed Eurozone states to consolidate their banking sectors and improve their sovereign debt profile.
In fact, Weidmann went as far as to question the systemic neutrality of ECB’s policy, subtly suggesting Draghi was effectively supporting the Italian economy.
The results of the quantitative easing programme appear to vindicate Draghi, not Weidmann. In October 2017, the Eurozone as a whole was in its fifth year of economic recovery; however, wage growth remained depressed and inflation subdued to 1,5%. Inflation in Germany was falling rather than rising.
Weidmann is now shifting his policy views to match the “Draghi consensus.”
The inflation debate
Until a year ago, Weidmann was siding with hawkish economists arguing that the ECB should drop the 2% inflation policy objective.
At the summit of Central Bankers in Sintra, Portugal, in June 2017, the discussion focused on inflation. Weidmann was among those exerting pressure on the ECB to begin unwinding the bond-buying programme immediately.
Weidmann was also reflecting the concerns of the international corporate banking sector.
At the time, the Basel-based Bank of International Standards (BIS) – and the umbrella organization of leading lenders – was calling for an immediate end to bond-buying and a rise in interest rates, if need be by abandoning the 2% policy target.
The argument was that technology and the reform of the labour market have subdued income and demand, which could mean that a 2% policy target is no longer realistic.
The implicit concern was that “fixed income” sectors – from insurance to pension funds – had seen their profit margins subdued for nearly a decade. That was also the case for pensioners’ savings and the largest population of this “endangered species” is in Germany.
However, this account would not be accurate without mentioning the primary concern expressed by BIS, not Weidmann. Bankers at the time feared that emerging economies, such as Turkey, were overly exposed to dollarized debt, fueling a credit bubble in emerging markets. That bubble appears to be bursting now in Argentina and Turkey.
As this bubble is bursting, Weidmann is not claiming to be vindicated. Instead, he appears to be siding with the 2% orthodoxy.
Weidmann changes his tune
Rapid technological advances only marginally and temporarily cut inflation, Bundesbank President Jens Weidmann said on Monday.
In a speech delivered in Freiburg, Germany, Weidmann argued that the root cause for stubbornly low inflation rates is the deep economic crisis a decade ago rather than the digitalisation of the economy.
“I am convinced that we should continue to aim for an inflation rate below, but close to, 2% over the medium term and should not raise doubts about the credibility of our monetary policy,” Weidmann was quoted saying.
As the date for choosing a successor to Mario Draghi is nearing closer, there is a strong pushback on Weidmann’s candidacy, and it is anything but clear that Chancellor Angela Merkel can impose her favourite at this point in time. Italy’s Salvini openly objects to his appointment. Recently, the Financial Times reported that Berlin may be willing to drop its pitch for the top ECB job in exchange for the Presidency of the European Commission.
This political background may or may not have a bearing in the “theoretical” interest rate debate. However, Mr Weidmann’s intellectual shift is timely.