Föhrenbergkreis Finanzwirtschaft

Unkonventionelle Lösungen für eine zukunftsfähige Gesellschaft

Lagarde’s First Job as ECB Boss: Sway Germany

Posted by hkarner - 5. Juli 2019

Date: 04-07-2019
Source: The Wall Street Journal

Draghi’s successor faces critical decisions about policies that have been unpopular in Germany

Christine Lagarde .The ECB’s relationship with Germany has at times been strained.

FRANKFURT—Christine Lagarde may be world renowned as head of the International Monetary Fund, but her first big challenge as European Central Bank president would be to win over skeptics in her next home country: Germany.

She is set to take the reins as the ECB faces critical decisions in the coming months over how to support the eurozone’s sagging economy. That could mean expanding or relaunching a giant bond-buying program that has been criticized by German officials.

The ECB’s relationship with its biggest shareholder is crucial but has often been strained, even though the eurozone central bank is housed in Germany’s financial capital and modeled on the nation’s Bundesbank.

Ms. Lagarde, a former lawyer, will need to master that relationship quickly, assuming she gains the necessary approvals to succeed Mario Draghi as ECB president on Nov. 1. She was nominated for the post by European Union leaders on Tuesday.

Mr. Draghi and his predecessor, Frenchman Jean-Claude Trichet, both faced opposition in Germany, which ranged from public sparring to ECB resignations and lawsuits.Adding to the tensions: Many Germans had hoped Bundesbank President Jens Weidmann, a member of the ECB’s governing council, would take the top job when Mr. Draghi steps down. But like his predecessor, Axel Weber, an early front-runner for the ECB’s presidency eight years ago, Mr. Weidmann’s chances were hampered by his opposition to key ECB policies, especially bond buying. If Ms. Lagarde is confirmed as chief, the ECB would be on track to spend the first 28 years of its existence without a German in charge.

“A President Weidmann would have been able to improve the image of the ECB in Germany, which would be advantageous for the currency union in the long run,” the publisher of conservative newspaper Frankfurter Allgemeine Zeitung, Gerald Braunberger, lamented in an opinion column on Wednesday.

For Ms. Lagarde, the early signs are promising: German newspapers praised her success in repairing the IMF’s reputation after the financial crisis, suggesting those skills would serve her well at the ECB. One German magazine described Ms. Lagarde as a “Prussian in Chanel.”

“A skilled negotiator…the conservative lawyer gets on well with Chancellor Merkel,” said the mass-market Bild Zeitung.

Ms. Lagarde will need all her diplomatic skills to navigate the ECB’s tricky relationship with the Bundesbank. While the Frenchwoman is well known internationally, Mr. Weidmann has almost rock-star status in Germany, drawing crowds of students, pensioners and executives to his public speeches. He can draw on support from the Bundesbank’s 10,000 staffers as well as politicians across the political spectrum.

Mr. Weidmann’s resoluteness is celebrated in a country where a stable currency verges on a national obsession. But his criticism has been perceived by investors as showing a lack of unity within the ECB. Mr. Weidmann, who is 51 years old, recently started a fresh eight-year term, meaning he would likely be at the Bundesbank for nearly the entirety of Ms. Lagarde’s ECB tenure.

Mr. Trichet, who was ECB president from 2003 through 2011, made some effort to woo his biggest constituency, learning German and trying hard to keep German officials on board during ECB policy decisions. Nevertheless, the ECB’s top two German officials resigned in 2011 in protest at a bond-buying program, and Mr. Trichet’s moves to raise interest rates just before recessions in 2008 and 2011 have since been criticized.

When Mr. Draghi took over in 2011, he praised Germany as a role model, receiving from the Bild newspaper a Prussian helmet as an endorsement of his inflation-busting credentials.

The ardor cooled as Mr. Draghi rolled out wave after wave of monetary stimulus, pushing interest rates below zero—to the ire of German deposit holders and bank executives—and spending trillions of newly printed euros to buy eurozone debt. Bild asked for its helmet back, and thousands of German plaintiffs lodged lawsuits against the ECB.

Mr. Draghi traveled twice to Berlin to explain his policies to German lawmakers, but ultimately seems to have concluded that he could live with German opposition. That is largely because the ECB’s strategy appears to have worked, helping to prop up soft inflation and create millions of jobs.

Its success could give Ms. Lagarde greater freedom to create policies without seeking German approval, said Carsten Brzeski, an economist at ING Bank in Frankfurt. “Draghi emancipated the ECB from its Bundesbank blueprint, he really brought it into complete maturity and independence.”

German economists have signaled they expect Mr. Draghi’s successor to continue his easy-money policies given the weak outlook for inflation and majority support in the ECB’s rate-setting committee for that approach.

Ms. Lagarde is “obviously going to make an enormous communications effort” in Germany, said David Marsh, chairman of OMFIF, a central banking think tank in London. “But I can easily see the honeymoon ending,” once it becomes clear that her policies are similar to Mr. Draghi’s, he said.

Germany’s economy has weakened in recent months, putting it more in sync with the rest of the eurozone and making it easier for officials to make the case for fresh stimulus. Still, Mr. Weidmann is likely to be careful of veering too far from the Bundesbank’s strict line because his office is revered in Germany as the guardian of national wealth.

Mr. Weidmann has softened his tone on the ECB’s bond-buying programs in recent weeks, as the race to succeed Mr. Draghi approached its climax, without admitting any error. At a Bundesbank open day in late May, Mr. Weidmann noted that the EU’s top court had declared the purchase programs to be legal. “I’m not enough of a lawyer to disagree,” he said. He added that the ECB was still able to act to support the economy.

That suggests he might support any future stimulus program launched by Ms. Lagarde that could include further reductions in the ECB’s deposit rate, currently minus 0.4%, or more bond purchases. If he opposes her, it could signal trouble ahead.

At the Bundesbank open day, Mr. Weidmann struck a humble note about his role within the ECB. He admitted that the Bundesbank’s power has waned since the days of the deutsche mark, and said his role was to bring a different perspective.

“The programs worked,” he added of the ECB’s bond buying. “That is undisputed, they lowered interest rates.”

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