Power shifts mark Draghi’s ECB accession

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According to insiders, Italian Mario Draghi, on track to become the new European Central Bank chief having received the backing of eurozone finance ministers, will need to dispel mutterings about lax southern Europeans and win over a more hawkish Bundesbank chief. 

Draghi, currently a governor of the Bank of Italy, has been careful to present himself as an orthodox central banker and wants to avoid any sign of being soft on debt sinners like his native Italy.

"He is a thoroughly respected, recognised member and someone with huge experience and a clear orientation towards stability," ECB Governing Council member Ewald Nowotny said on Tuesday.

Italy has a poor record on inflation and debt, although nobody lays the blame at Draghi's door.

Germany, on the other hand, is the bastion of fiscal orthodoxy in Europe and before hardline former Bundesbank chief Axel Weber dropped out of the race to succeed Trichet, the ECB was expected to be propelled in a tougher direction under his leadership.

The national stereotypes may be misleading.

Draghi's accession to the ECB presidency, which he will take over from November, coincides with an injection of new blood onto the bank's Governing Council this year that suggests its monetary policy stance will become slightly more hawkish.

But the greater scope for policy shift lies in the ECB's stance towards the periphery, where Draghi's eagerness to show his mettle and signs Greece is slipping behind its deficit goals may prompt the bank to take a firmer line.

"It may just be a moment where the tipping factor swings towards taking a tougher stance," said Vanessa Rossi, senior research fellow at London-based think-tank Chatham House.

Under Trichet's presidency, the ECB responded to the financial and eurozone crises by offering unlimited liquidity to banks, instituting a disputed programme to buy sovereign bonds and easing the collateral requirements it sets for loans.

The ECB holds 76 billion euros of bonds from its debt buys and is exposed to hundreds of billions more via collateral on its regular loans. This could prove a huge liability if a country restructures its debt and a lender subsequently fails.

The impetus to assuage concerns in Germany about his rigour could see Draghi – with support from a more hawkish Governing Council – take a tougher line on collateral rules, for example. Under Trichet, the ECB has vowed to accept Greek and Irish debt as collateral regardless of rating.

"The new guard could give an opportunity to change some aspects of the way the ECB works […] possibly tighten up the supply of funding for example," said Rossi at Chatham House.

German pragmatist

A faster pace of interest rate rises would also damage the likes of Spain, Greece, Ireland and Portugal and the new ECB policymakers appear a hawkish bunch.

Belgium's new central bank chief Luc Coene has already sounded tough on inflation, telling Reuters last week that eurozone price pressures were building, while his compatriot Peter Praet is seen as more of a hawk than Gertrude Tumpel-Gugerell, who he replaces in June. Malta's incoming ECB policymaker also labels himself as a hawk.

Draghi may be of a similar mind.

"When he comes in, he won't want to be seen as someone who is soft, so it could make the chances of a rate hike around the turn of the year more likely," said RBS economist Nick Matthews.

But the other new ECB policymaker on the block may rein in any eagerness on his part to be tougher on the debt-stricken.

Bundesbank chief Jens Weidmann, who took over from Weber, has established himself as an inflation hawk by calling for a normalisation of monetary policy. But his previous role as economics adviser to German Chancellor Angela Merkel has marked him out as a pragmatist when it comes to the debt crisis.

While Draghi will want to impress the Germans with his monetary orthodoxy, Weidmann could bring a more flexible approach than Weber when it comes to dealing with the periphery.

"For Draghi, the key thing is to firm up his credentials with core Europe," said Berenberg Bank economist Holger Schmieding. "He could sound tougher than Trichet."

"As a counterweight, the switch from Weber to Weidmann probably adds a dose of pragmatism, not necessarily on interest rates, but into the overall dealings with the European crisis.

"He brings a bit of a different background which probably makes him more amenable to finding, striking and endorsing the compromises you need in managing the European debt crisis."

(EURACTIV with Reuters.)

The European Central Bank (ECB) is the EU institution which administers the monetary policy of the 17 eurozone members. The bank is located in Frankfurt.

The EU institutions and national governments are bound by the treaties to respect the ECB's independence. However, the bank's autonomy has been under fire since the election of Nicolas Sarkozy as president of France in 2007.

The first president of ECB was Wim Duisenberg, a former president of the Dutch central bank and the European Monetary Institute, a predecessor of the ECB. Since 2003 the ECB president has been Jean-Claude Trichet, a French civil servant.

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