Draghi Nagged by Unwelcome Distraction From Euro Area's East

(Bloomberg) -- Mario Draghi is finding the euro area’s eastern flank to be an unwelcome distraction.

The European Central Bank president is likely to find the Governing Council missing both its Latvian and Slovenian representatives this summer, with the former barred because of a bribery investigation and the latter opting to leave his job. The ECB is questioning Latvia’s restrictions on Governor Ilmars Rimsevics at the European Court of Justice.

It’s the latest nuisance from the European Union’s east, where countries such as Poland have long dragged their feet over deeper integration and Bulgaria is reluctant to allow ECB scrutiny of its banks. Latvia and neighboring Estonia have also been at the center of money-laundering scandals this year that have shuttered lenders.

“It’s very inconvenient for Draghi as they have to monitor this,” said Piet Christiansen, an economist at Danske Bank A/S in Copenhagen. “It takes some focus from the more pressing problems.”

Latvian Lapse

Economists surveyed before the last decision in February predicted the ECB will finish its bond-buying program by the year-end. The fate of the program may be sealed on June 14 at a meeting scheduled to take place in Latvia’s capital, Riga. But Rimsevics is banned from performing his national duties, and it’s not clear who will accompany Draghi during the press conference that’s traditionally attended by a central banker from the host country.

Forbidden to leave Latvia as long as the bribery investigation continues, Rimsevics hasn’t attended the last two ECB meetings. He denies allegations of wrongdoing, and Draghi has asked the European Court of Justice to clarify the situation. Latvian Prime Minister Maris Kucinskis said this week that the investigation against Rimsevics won’t drag on and “the indictment will be brought forward.”

“I’m convinced that justice is on our side,” Kucinskis told LTV television Tuesday.

Euro Resistance

Other issues are brewing around eastern Europe. Bulgaria -- the EU’s poorest member -- is aiming to join the ERM-2 waiting room for euro entry in summer. But efforts to place the Balkan state’s banks under ECB supervision -- a key concern after its third largest lender collapsed -- have stalled, and the government in Sofia says it sees that happening only when it trades in its levs for euros.

The region’s two biggest economies, Poland and the Czech Republic, have balked at joining the euro and integrating their banking systems, an obstacle to a French-German drive to make the currency union the engine of the EU. The ECB has also clashed with Hungary over about $1 billion the central bank has given foundations to invest in state debt and buy art and real estate, saying it may break a ban on monetary financing.

Slovene Switch

For now, though, Latvia and Slovenia are in the spotlight. Central Bank Governor Bostjan Jazbec announced his resignation last month -- he’s headed for a job at the EU’s Single Resolution Board -- but Slovenia won’t pick a new governor until after general elections in May or June. His deputy, Primoz Dolenc, will attend meetings but the central bank said it hasn’t yet been established whether he’ll have a vote.

A permanent replacement will depend on the victor of the elections. An anti-establishment comedian-turned-mayor, Marjan Sarec, is leading in opinion polls. He’s vowed to make changes in state institutions, which could put a wild card in Slovenia’s ECB spot.

“This is an important issue that the ECB cannot ignore,” said Frederik Ducrozet, an economist at Banque Pictet. “Although, it’s not a reason for the Governing Council to postpone a policy decision.”

To contact the reporters on this story: Boris Cerni in Ljubljana at bcerni@bloomberg.net, Milda Seputyte in Vilnius at mseputyte@bloomberg.net, Piotr Skolimowski in Frankfurt at pskolimowski@bloomberg.net.

To contact the editors responsible for this story: Andrea Dudik at adudik@bloomberg.net, Michael Winfrey, Andrew Langley

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