Merkel, European Autonomy, and the ECB

We argued in our quarterly outlook that while speculation of ECB President Draghi’s successor would intensify, we thought many investors would again under-estimated the political acumen of German Chancellor Merkel. Merkel is most interested in projecting the interests of Germany and Europe is entering a new era.

 

Merkel has again shown herself to be more wily than most.  While pundits, investors, and politicians anticipated she would push hard for a German to replace Draghi as ECB President when his term ends next October.  After all, it is German’s turn at the helm, and its interests were ridden roughshod over by the extraordinary and prolonged monetary policy.

However, when one steps back and considers the historic moment, it seemed clear that despite understandably keen investor interest, in the current context, the ECB presidency is almost a distraction.  The fact of the matter is that regardless of who is the next head of the central bank policy will begin what will be a protracted normalization process.  It will be a thankless job as taking away the proverbial punchbowl always is.

It had seemed to us that Merkel, the ultimate strategist, would use her chits to where Germany would have the most influence in the coming years.  These years are exceptionally important in framing the new era for Europe, one in which the UK, a large economy and financial center, will have a less close relationship, while several central and eastern members are less enamored with the EU than it was during the Soviet era and the immediate aftermath.

It is also a period in which it must act more autonomous.  Even if America turns back to a more traditional president in 2020, it could reverse again in 2024.  We argued that Trump is the first post-Cold War president by which we meant that he prioritizes economic rivalry over ideological conflict.  Consciously or not, is personifies this force, which is also recognized by many European officials, including Merkel.

Europe must evolve into these new circumstances.  It requires institutional reform.  Europe needs the ability to defend its economic and commercial interests, which it cannot do presently.  The US unilaterally pulled out of agreement with Iran and credibly threatens to sanction any violators.  The embargo will also include as it did before Iran inclusion in the SWIFT system.  Although SWIFT is based in Belgium, like other European companies, risks being sanctioned by the US if it does not cooperate.

Since 9/11, the US has more readily used its financial and economic power to impose its will on others.  Previously, the dollar itself, but also dollar-funding, and access to its domestic market was close to a public good/utility that the US provided.  The withdrawal of this or the willingness to weaponize it is an important development in international relations and other great powers must respond.

The German foreign minister laid it out in a recent editorial.  He called for Europe to develop an independent payments system and a European Monetary Fund.   Currently, it has only limited ability to protect European businesses from punitive US actions over the Iranian agreement, which Europe leaders still want to respect.  The US has rejected numerous appeals for various industry carve-outs from Germany, France, the UK, and EU.  Separately, the US has levied tariffs on European steel and aluminum on national security grounds and is threatening to do the same with autos.

Germany’s interests and Merkel’s vision of Europe can best be projected not at the ECB, but in one or more of the other offices that will change hands next year.  We argued that it could be the successor of Juncker as the EC President and/or Tusk as the European Council President.  That said, there is no reason for Merkel to concede the ECB presidency just yet.  Otherwise, she diminishes it as a chit. While observers will review their list of potential ECB candidates and take alternatives to Weidmann more seriously, the future of Europe will be decided elsewhere.