ECB Decision Reopens Divide Atop Central Bank

By Tom FairlessFeaturesDow Jones Newswires

The European Central Bank's reluctance to quickly phase out its bond-buying program has reopened a rift at the top of the world's second-most powerful central bank, pitting ECB President Mario Draghi against German Bundesbank head Jens Weidmann -- just as discussions begin about whether the German will succeed the Italian.

The dispute is a headache for investors, making it harder to figure out when the ECB might end its bond purchases and start raising interest rates. It could affect who is ultimately picked as Mr. Draghi's successor when he steps down in late 2019, a decision that will influence the scope of the ECB's role in Europe's economy for years to come.

Continue Reading Below

Mr. Weidmann, widely seen as a leading contender for the ECB's top job, has publicly opposed many of the bank's stimulus policies in recent years, notably its large-scale purchases of government bonds, known as quantitative easing or QE. Although he toned down his criticism in recent months, Mr. Weidmann changed tack this week, publicly opposing a decision to extend QE through September 2018.

In a speech in Paris on Friday, Mr. Weidmann said the ECB should have announced a fixed end-date for QE, rather than leaving open the option of another extension beyond September.

His opposition puts Mr. Weidmann at odds with national leaders in southern Europe, who would need to approve his nomination as ECB chief. It suggests that a Weidmann-led ECB would be a very different animal from the one that Mr. Draghi has created over the past six years.

The bank's president has only one vote on its 25-member rate-setting committee, but gets to decide which topics are discussed by council members.

"He has agenda-setting power," said Guntram Wolff, a German economist who is director of Bruegel, a Brussels-based think tank.

On Mr. Draghi's watch, the ECB has been transformed from a bastion of monetary conservatism modeled on the Bundesbank into an proponent of experimental policies such as negative interest rates. Its balance sheet has swelled by about half, to around EUR4.4 trillion ($5.2 trillion) -- bigger than the Federal Reserve's -- and is set to keep growing through much of next year.

The ECB "has become more Anglo-Saxon, much more like a modern central bank such as the Federal Reserve or Bank of England," said Mr. Wolff.

The bank has become one of the biggest players in global financial markets, so that uncertainty about the bank's future policy course affects a wide range of interest rates and asset prices.

The ECB's newfound activism is controversial, however, with critics arguing it should have been up to politicians, not the central bank, to defend a politically created common currency.

One senior ECB official says the bank has become "more politicized than ever before" under Mr. Draghi's leadership, because its new policy tools have broader implications for the distribution of wealth. The ECB decides which banks to supply with cheap funds, and how much financial support to give to governments, the official said.

ECB president is one of a handful of top European Union posts that are expected to be negotiated by EU leaders as a package over the coming months. They include ECB vice president, head of the "Eurogroup" committee of eurozone finance ministers, and head of the ECB's banking supervisor. The discussions could kick off in earnest after Germany forms a new government, possibly around the end of the year.

Mr. Weidmann's candidacy is expected to be strongly supported by Berlin, in part because a German has never run the ECB. The appointment needs a consensus among leaders of eurozone countries, however, and Mr. Weidmann's accession is far from guaranteed.

Whoever replaces Mr. Draghi, the scope of monetary activism by the ECB is likely to recede to some extent, as the financial-crisis era fades and central banks edge toward higher interest rates.

Three other major central banks are expected to replace their governors over the next two years, and in each case, the appointment has become politically charged.

Fed Chairwoman Janet Yellen faced unprecedented criticism from Donald Trump during last year's U.S. presidential election campaign, and the decision on her successor has become a hot political topic. In the U.K., Bank of England Governor Mark Carney faced attacks for his stance toward Brexit after he warned that leaving the European Union would have negative economic consequences. In Japan, Haruhiko Kuroda might become the first governor to be reappointed in two decades of central-bank independence, after his aggressive stimulus policies found favor with Prime Minister Shinzo Abe.

Politicians in Europe and elsewhere complain that central bankers are doing too little, or too much, to solve the problem of weak growth and inflation.

That is another reflection of the shifting role of central banks, which have morphed into major financial-market actors with powers to redistribute wealth that had traditionally been reserved for politicians. Despite those sweeping new powers, major central banks have largely failed to hit their inflation goals, prompting political attacks.

(END) Dow Jones Newswires

October 27, 2017 12:11 ET (16:11 GMT)