Who can replace Mario Draghi, the man who saved the eurozone?

The stability of the eurozone is almost now taken as given, its future secure. People who argued at the height of the crisis in 2011 that the currency union’s days were numbered tend to be portrayed as Cassandras or Eurosceptics ignorant of the complexities of European politics. This ignores the reality that it was the European Central Bank and its President, Mario Draghi, that saved the day, not the participating governments. And Draghi leaves office in just over a year. Should people again fear for the currency union’s future?

The eurozone did not survive because the crisis-hit countries cut public spending by enough to convince investors that they could remain solvent within the currency union. It survived because of President Draghi’s promise to do “whatever it takes” to save the single currency by purchasing as many government bonds as were needed to prevent banking systems collapsing, destroying the currency union.

Running the ECB is arguably the most demanding central banking job in the world. The eurozone comprises 19 integrated but independent economies with separate banking systems, and there is no eurozone budget to act as a macroeconomic stabiliser in times of economic crisis; responsibility for macroeconomic stability lies squarely with the central bank. The president needs to have serious political skills, intellectual heft, and an ability to act like a European rather than as a spokesperson for his/her home country. Draghi managed this adroitly.

The good news is that the German government is now pushing for a German to succeed Jean-Claude Juncker as President of the European Commission. As a result, it can no longer lobby for Jens Weidmann, President of the Bundesbank, to replace Draghi; Germany could not hold two of the three top European posts simultaneously (the other being president of the European Council). Weidmann was a vocal opponent of the ECB measures that stabilised the eurozone. He argued that the crisis countries’ problems were wholly the result of their own failures rather than the result of complexities of financial and economic interaction within the eurozone, including excessive German investment in Spain and other eurozone members in the run-up to the financial crisis. He pursued the perceived interests of his home state assiduously, opposing any measure that might have meant German taxpayers helping to underwrite sovereign or banking sector risk across the eurozone as a whole rather than just in Germany.

The bad news is that none of the prospective replacements for Draghi look likely to meet the benchmark he set. The most likely to emerge as president is the governor of the Bank de France, Francois Villeroy de Galhau; a safe pair of hands, but unlikely to lead by force of intellect and political nous. The same goes for two other leading French contenders, Christine Lagarde, managing director of the IMF and Benoît Cœuré, a member of the executive board of the ECB. The strongest candidate is probably Philip Lane, the current governor of the Bank of Ireland, who could yet win crucial German support. Conversely, it is possible that a hawkish, more German-than-the-Germans figure from the Netherlands or one of the Baltic states could yet win through.

The choice of ECB president would matter less if the eurozone faced plain sailing. But there several big clouds on the horizon. One is Italy, whose new populist-led government has called into question Italian membership of the eurozone unless there is reform of the currency union’s budgetary rules, among other things. Capital flight from Italy has picked up strongly, and with the ECB gradually withdrawing its purchases of government bonds, a renewed financial crisis in Italy cannot be ruled out.

Second, the timing of the next downturn. If the current recovery proves long-lived, public finances will be strong enough for governments to boost spending in an effort to ward off recession without breaking the eurozone’s fiscal rules. The ECB will also have been able to increase interest rates by a decent margin and hence be able to cut them to stimulate activity. While the current economic upturn appears to have legs, momentum is easing, and there are plenty of threats. These range from a full-blown crisis in Italy, to a worsening of trade tensions or a global financial crisis triggered by indebtedness in emerging markets.

Finally, eurozone reforms have largely ground to a halt, confounding widespread expectations that the election of Emmanuel Macron as French President would open the way for a Franco-German deal. The participating governments have been unable to agree on the measures—such as common bank deposit insurance—needed to complete the eurozone’s half-built banking union or to create a meaningful eurozone budget. As a result, the central bank will continue to play an out-sized role in holding the eurozone together. And this, in turn, explains why the choice of president is so important.

 

Read Adam Tooze on the ECB