ADVERTISEMENT

ECB Gets Chance for German Reset With Lagarde-Schnabel Dual Act

ECB Gets Chance for German Reset With Lagarde-Schnabel Dual Act

(Bloomberg) --

The European Central Bank and Germany finally have a window of opportunity to start repairing their fractured relationship -- for the first time in years.

ECB Gets Chance for German Reset With Lagarde-Schnabel Dual Act

The German cabinet’s proposal of Isabel Schnabel to join the ECB’s Executive Board will give the institution an academic economist with a track record of defending its monetary stimulus against attacks by her compatriots. Combined with the advent of incoming President Christine Lagarde, a seasoned politician and communicator, the Frankfurt institution now has the best chance in a decade to reboot its reputation in the country it calls home.

Mario Draghi’s exit as ECB chief on Oct. 31 will help, after the policies he pursued enraged many across the euro zone’s biggest and most populous economy -- with Bundesbank head Jens Weidmann opposing quantitative easing, and politicians decrying negative interest rates for penalizing the nation’s savers. Former Finance Minister Wolfgang Schaeuble claimed easy money contributed to the rise of the rightwing Alternative for Germany party.

“From the government perspective, it makes a lot of sense to have someone who can explain what the ECB is doing,” said Lucas Guttenberg, deputy director of the Jacques Delors Institute in Berlin. “The basic challenge we have in Germany is that the ECB is pretty much perceived as a foreign institution, because nobody from the ECB is explaining its policies in German to the German public.”

Schnabel still has to win the support of European leaders and the European Parliament. That looks likely though -- Germany has always had a board seat -- and the ECB will be satisfied with her economic credentials.

If approved, she’ll be well-placed to play a similar role to Joerg Asmussen, a former deputy finance minister who sat on the board from 2012 to 2014 during the region’s debt crisis, and who crisscrossed the nation explaining what the central bank could and couldn’t do to help. He defended the ECB’s emergency bond-buying program, OMT, in Germany’s constitutional court -- with Weidmann in the opposite corner.

“Isabel Schnabel will have to focus on communicating with the ECB’s German audience,” Asmussen said in an interview. “It’s difficult, but you need to reach beyond urban centers and expert audiences.”

Serial Quitting

When Asmussen quit early to return to government, he was replaced by Sabine Lautenschlaeger, who left her position as Bundesbank vice president but carried her former employer’s deeply embedded criticisms of loose policy with her. She also quit before the end of her eight-year term -- the third German board member in a row to do so -- opening up the newest vacancy.

Like Asmussen, Schnabel doesn’t have that Bundesbank legacy. She’s an economics professor at the University of Bonn, and has served as an economic adviser to Chancellor Angela Merkel’s government since 2014.

When European leaders were debating this year who should succeed Draghi, she weighed in with a suggestion that Weidmann should revisit his rejection of the bond-buying program that helped prevent the euro zone from breaking up during the debt crisis. Shortly afterward, the Bundesbanker acknowledged that the program is legal and valid.

Mending fences could be critical just now, with the ECB already stretched and the economy weakening amid global trade tensions. Draghi has urged wealthy countries such as Germany to come up with fiscal stimulus to provide extra support.

ECB Gets Chance for German Reset With Lagarde-Schnabel Dual Act

Lagarde and Schnabel will still face an uphill struggle in rebuilding the ECB’s reputation in a country where fiscal rectitude is a mark of political virility, where ultra-low interest rates have hurt savings, and where some people harbor suspicions that QE might enable monetary financing.

“Germany and the ECB have become estranged,” Asmussen said. “I’m watching this with concern.”

Schnabel would be one of two women on the six-person board, along with Lagarde, who is likely to start in her job with a charm offensive. The new president built warm relationships with Schaeuble and Merkel in her previous roles as French finance minister and head of the International Monetary Fund, despite some differences on policy views.

Draghi holds his final policy meeting on Thursday. For all his success keeping the single currency together and averting deflation, his legacy includes an unprecedented split on the Governing Council after he pushed through another rate cut and resumption of QE last month. While the dissent was broader than usual, Germany was at the center of it again.

“The choice of Schnabel is a good decision that certainly shows the courage not to nominate someone from the Bundesbank,” said Guttenberg. “She’s an excellent economist, she’s been a good communicator and most importantly, she’s always managed to balance constructive criticism of the ECB.”

To contact the reporters on this story: Paul Gordon in Frankfurt at pgordon6@bloomberg.net;Piotr Skolimowski in Frankfurt at pskolimowski@bloomberg.net;Jana Randow in Frankfurt at jrandow@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Craig Stirling, Brian Swint

©2019 Bloomberg L.P.