Draghi Will Be Passing on Baton With ECB in Populist Crosshairs

(Bloomberg) -- The European Central Bank is preparing for a new president with the economic and political challenges that have dogged Mario Draghi’s eight years in charge far from resolved.

The economy is slowing again and nationalists across the bloc are challenging the principles of European integration, so the contest adds an extra layer of uncertainty as the ECB seeks to withdraw the crisis-era stimulus that’s kept interest rates at record lows.

There’s also a broader horse-trading process that will take in other key posts. Picking the next ECB head is part of a major reshuffle that will also see a new head of the European Council, who chairs EU summits, and a new president of the parliament president as well as a new commission and commission president.

Draghi Will Be Passing on Baton With ECB in Populist Crosshairs

Before addressing the issue of who should replace Draghi, probably over the summer, European Union leaders have to navigate the bloc’s parliamentary elections in May.

That could strengthen the hardliners centered in Germany who’ve long been demanding tighter policy and opposed the extraordinary package of measures Draghi used to hold the euro together during the debt crisis.

Or it could give leverage to Italy’s Matteo Salvini and his ally Marine Le Pen, a French Nationalist. They chafe against the constraints of monetary union and have at times raised questions about whether their countries should even stay in the euro.

National Interests

National governments though are key because they appoint the ECB president, and in all the key euro members leaders are sensitive to the rise in support for populists. They will consult with the EU Parliament and the ECB Governing Council, but ultimately finance ministers make the recommendation and national leaders have the final say.

Draghi Will Be Passing on Baton With ECB in Populist Crosshairs

An early marker comes on Jan. 21 when euro-area finance ministers are expected to call for nominations for Peter Praet’s board seat. That’s a critical appointment because Praet, as chief economist, oversees economic projections and writes monetary policy proposals.

His eight-year term ends in May, just after the EU elections and before a June 6 ECB policy meeting. Irish central bank governor Philip Lane is considered the front-runner to replace him, partly based on his academic credentials and partly because Ireland has never had a board seat.

Record-Low Rates

As for Draghi’s job, finance ministers are unlikely to have an official discussion before their meeting on June 13. Agreeing on a nominee could allow government leaders to sign off at their summit meeting a week later.

The number of posts in play could push the decision on Draghi’s succession beyond June, unsettling investors trying to gauge when the ECB will start raising rates. So far, the central bank is pledging to keep rates at current record lows “at least through the summer of 2019.”

One risk is that the next slowdown strikes before policy makers have a chance to tighten significantly, leaving a new president with little ammunition to support the economy and a firebrand in Rome, Paris or even Berlin blaming the central bank for stacking the deck against their supporters.

Market pricing currently suggests that the slowing economy will prevent Draghi from raising rates at all before he goes, making the policy views of his successor all the more important.

“The race is open and a surprise is possible,” said Mujtaba Rahman, managing director at Eurasia Group in London.

©2019 Bloomberg L.P.