Global Daily – Job reshuffle may make ECB less dovish

by: Nick Kounis , Aline Schuiling , Bill Diviney

ECB View: Four top jobs will come up for grabs by the end of next year – Over the next two years, four of the six Executive Board seats on the ECB’s Governing Council will become vacant and they are some of the most important roles in terms of setting the direction of the central bank’s monetary policy. The terms of ECB President Mario Draghi (31 October 2019), Chief Economist Peter Praet (31 May 2019), Executive Board member Benoît Cœuré (31 December 2019) and Vice President Vítor Constâncio (31 May 2018) will end. This raises the question of who will fill in these positions and how this may impact the ECB’s decisions going forward. The three key jobs – President, Vice President and Chief Economist – are currently filled by very dovish policymakers. It seems likely that the trio that replace them will be less dovish, on balance, going forward. Granted the front-runner for the Vice Presidency – Spanish Finance Minister Luis de Guindos – also appears to be a dove. He has not said too much about monetary policy, but he publicly backed the QE programme when it was launched in 2015. However, the President and Chief Economist roles might be filled with less dovish policymakers. Some have speculated that the Presidency would go to someone from a Northern European member state. In this respect, a lot of attention has been on the current Bundesbank President Jens Weidmann. Our sense that he is too hawkish to get the support of a broad range member states. Somebody with more centrist views on monetary policy – such as the Governor of the Central Bank of Ireland Philip Lane – is more likely. The door may be more open for a more hawkish Northern European (such as Ardo Hansson – the Governor of the Estonian central bank and also a candidate for the Presidency) to take the Chief Economist role. Such a scenario would see three doves at the top of the ECB being replaced by a dove, a hawk and a centrist by the end of next year. Would that impact the speed of the ECB’s exit? Well, by then, the policy discussion will likely all be about the pace of rate hikes. Such a new ‘balanced trio’ would probably be more inclined to raise interest rates modestly faster than the current dovish trio, though we also note that the more hawkish elements in the Governing Council seem to have more issues with QE than low interest rates. (Nick Kounis)

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Euro Politics: Germany’s grand coalition talks continue  – Almost four months after the general elections, Germany’s centre-left SPD party voted in favour of continuing coalition talks with the centre-right CDU/CSU on Sunday, albeit with a narrow majority of 56% of the votes. If these talks were to succeed and result in a final agreement for a new grand coalition, the SPD members will be allowed to vote on this agreement as well. In the preliminary coalition agreement that was reached more than a week ago, some demands by the most left-wing part of the SPD had to be dropped. For instance, raising the highest income tax rate (the agreement holds the phrase that no taxes will be hiked by the next government), allowing family reunification for refugees and overhauling the health insurance system. However, in line with the SPD’s demands there will be support for low and middle income households. For instance, the contribution to the unemployment insurance fund will be reduced by 0.3% and the employers’ contribution to health insurance will rise (they will be equally split between employers and employees). Also, some main elements of the SPD’s ambitious agenda for further European integration can be found in the preliminary coalition agreement. More specifically, Germany will support the creation of a common eurozone budget that will pay for economic stabilisation and structural reform and is prepared to work closely together with France on further strengthening and reforming the eurozone. (Aline Schuiling)

US Macro: Quantifying a government shutdown – While politics is an unpredictable game, we suspect the government shutdown that began on Saturday will not last longer than previous cases. A Washington Post-ABC News poll conducted before the shutdown began suggests Republicans have more to lose than Democrats – 48% of the public blamed Republicans, while 28% blamed Democrats. However, the episode paints neither party in a positive light, and both sides will want to resolve the impasse quickly. Indeed, negotiations continued into the weekend, and a new vote is scheduled at noon EST today. The most recent government shutdown, which lasted 16 days in October 2013, subtracted 0.3pp from Q4 GDP growth according to the Bureau of Economic Analysis – a relatively small impact, considering overall growth was 4% that quarter. As salaries were paid to government employees for this period, but work was not done, the hit to real GDP growth came in the form of higher prices for less output, i.e. nominal GDP growth was unaffected. There were no perceptible lasting economic effects of the shutdown, and indeed NY Fed president Dudley last week said that he would “not put a lot of weight on it.” We are inclined to agree, and unless the shutdown persists for much longer than the 2-3 weeks of past episodes, our constructive outlook on the US economy remains unchanged – please see note here. (Bill Diviney)