Luis de Guindos speaks to reporters following his confirmation as vice president of the European Central Bank in Brussels, Belgium. (Photographer: Dario Pignatelli/Bloomberg)

Draghi's Understudy Starts as ECB Navigates Italian Turmoil

(Bloomberg) -- The new man who would step into Mario Draghi’s shoes in an emergency has just taken office.

Former Spanish Finance Minister Luis de Guindos started his job as European Central Bank vice president on Friday. He replaces Vitor Constancio on the same day that the Frankfurt-based institution celebrates its 20th anniversary, in troubled times.

Draghi's Understudy Starts as ECB Navigates Italian Turmoil

Guindos might find himself in a position of power should the ECB face its nightmare of Italy’s new government pushing to leave the euro. Such an outcome would threaten a crisis of legitimacy for his boss.

As an Italian, President Draghi could face pressure to resign if the country’s exit from the currency did indeed look imminent. In an equally extreme scenario, he might encounter desperate requests to return to Italy for a leadership role to stem political and economic turmoil.

Such outcomes may be highly improbable, but they put a spotlight on Guindos, a veteran politician inexperienced in central banking and with fewer academic credentials in economics than Draghi. The Spaniard would find himself as the caretaker chief of monetary policy for the euro region at a time of extreme tension, with the fate of the currency union on the line.

Brexit Precedent

Italy’s populists staked out their position after winning elections by nominating a longtime euro-skeptic, 81-year-old Paolo Savona, as finance minister. After that choice was vetoed by the president, the parties managed to form a new government in which Savona will be responsible for European affairs.

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The U.K.’s shock decision in 2016 to leave the European Union provides a recent precedent for resignations in the wake of a popular vote. Within hours of the outcome, David Cameron had quit as prime minister. Jonathan Hill, the British member of the EU Commission at the time, announced his resignation a day later.

“If Draghi were to step down for any reason, it would put pressure on politicians to speed up the process to find a replacement,” said Anatoli Annenkov, an economist at Societe Generale in London. “Meanwhile, the ECB’s consensus-driven framework guarantees it would continue to inspire stability and confidence -- even if it would possibly be slower to react to unfolding events.”

The ECB chief currently has another 17 months left in his role, and the race to succeed him is already under way. Bundesbank President Jens Weidmann and Bank of Finland Governor Erkki Liikanen have both hinted that they’re waiting to be asked.

The central bank has endured the early exit of members of its Executive Board members before, but never that of a president. When German chief economist Juergen Stark resigned in 2011 in protest at the bank’s emergency buying of bonds from Italy and Spain, another board member temporarily assumed his tasks, until a replacement was chosen by governments.

Pragmatic Claim

Guindos is the first sitting economy minister to move directly to the ECB’s Executive Board. His views on monetary policy are relatively unknown, though he has described himself as neither a hawk or a dove but as “pragmatic.”

The 58-year old former Lehman Brothers banker highlighted his experience in restructuring of lenders when pitching for the ECB role at the European Parliament earlier this year. He argued that the resolution of Banco Popular Espanol while he was a minister was a success as no taxpayer funds were used and deposits were safeguarded in a crucial test of new European Union rules.

It’s not yet clear which areas of ECB work Guindos will be responsible for as vice president. His predecessor was in charge of financial stability and research, as well as more mundane issues such as IT and administration.

©2018 Bloomberg L.P.