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November 12, 2019


What to expect – and not to expect – from tomorrow’s ECB governing council

Apologies for yesterday's late arrival of the briefing. We experienced a technical problem that prevented the briefing from displaying correctly.

Today's main story is the reported attempt by a group of national central bankers to influence Christine Lagarde at the time when they think she is possibly most amenable to pressure - right at the beginning of her term. The FT writes that four central bankers want a different leadership style, with formal votes and the right to propose monetary policy decisions without the initiative of the president. The FT does not name them, but we assume that the group would at the very least overlap, if not coincide, with the group of four central banks that have expressed persistent disagreement with Mario Draghi. These are the central banks of Germany, the Netherlands, Austria and Estonia.

FAZ talked to Robert Holzmann, the new head of the Austrian central bank, who confirmed that he is among those who want Lagarde to change the way the governing council works, and to produce a more consensual decision-making process.

The author of the FAZ article unfortunately does not question Holzmann on whether he would still support consensual decision-making if the ECB wanted to raise interest rates and that were blocked by a group of national central banks. We recall that, in the early days of the ECB, it was the conservative central bankers who rejected transparency and formal voting. This is usually not an argument about governance, but about getting what you want at the moment you want it. It is always the losing side that wants more transparency. This is why we interpret Holzmann's proposal as a cry for help.

The governing council comes together tomorrow for an informal meeting, in which this and other issues will be discussed. We think it is highly unlikely that Lagarde will accept outright any concrete proposals from any group of central bankers. What we think is a more likely course of action is for them to discuss  the remit of a broader review of policies and operations, of which decision-making procedures will be part.

It is also important to recall that the governing council supported Mario Draghi’s policies throughout his eight-year term. It was only the last decision where a larger group of central bankers disagreed. We see no evidence that the majority views have shifted – neither among the national central banks nor among the ECB's new team of six executive-board directors. With the change in the German director, we would expect a shift in the other direction.

We have always supported voting transparency. But we don’t think this is going to make any policy difference, especially since those who were opposed to Draghi missed no opportunity to make their opposition known – just like the four central bankers who just talked to the FT. The problem for the four dissidents is their number. There are 19 member states in the governing council, and six members of the ECB’s executive board. The national central bankers vote on a rotating basis with four not voting at any given time. This November, Klaas Knots of the Dutch central bank is without a vote. Next month it will be Jens Weidmann. The six executive board members do not rotate. National central bankers only vote in nine out of twelve meetings. We just do not see where a majority for a policy U-turn is coming from.

Another consideration is the continued lack of support from fiscal policy. We think that Draghi’s campaign for a different fiscal/monetary policy mix may bear fruits in the long-run. But in the short term monetary policy remains the only game in town. A premature tightening of monetary policy could wreak serious damage. We assume that Lagarde is aware of the policy errors that occurred during the reign of the last French ECB president.

Our other stories

We also have stories on how the Catalan question poisoned Spanish politics; on Nigel Farage's promise not to stand against Tories; on the successes and failures of minority governments in Europe; on China's new trade deals with Greece; and on central banks now pushing for their own crypto-currencies.

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