Global Daily – Wave of change at the ECB?

by: Nick Kounis , Aline Schuiling

ECB View: Executive Board changes may make it more dovish – The ECB’s six-member Executive Board – key to setting the direction of policy within the 25-person Governing Council – is in flux. By the end of this year, five of the six positions of the Executive Board will have seen a new occupant within the space of around a year and a half. The wave of change started with Luis de Guindos replacing Vitor Constancio in June 2018 as Vice President, while Philip Lane took over the Chief Economist post from Peter Praet in June of this year. Looking forward, we of course already know that Christine Lagarde will replace Mario Draghi as President in November, while Sabine Lautenschlager’s unexpected resignation (see below for more on this) means that her seat will change occupant at the same time (her term had been due to end in January 2022). The German government has said that it will nominate a suitable candidate soon to succeed her. Potential candidates that have been mentioned are Isabel Schnabel, finance professor at the University of Bonn and a member of Chancellor Angela Merkel’s council of economic advisers, and Claudia Buch, Vice President of the Bundesbank. Perhaps an outside candidate is Elga Bartsch, Head of Macro Research at Blackrock.

Meanwhile, Benoit Coeure’s term is up at the end of the year. Fabio Panetta, Senior Deputy Governor at the central bank of Italy, seems to be in pole position to replace him. These changes will leave Yves Mersch – a hawk who reportedly opposed parts of the September stimulus package – as the longest serving member of the Executive Board, with his term expiring at the end of next year.

These changes raise a number of questions. Will there be an impact on the future direction of monetary policy? What is the impact on the level of skills and experience on the Executive Board? Does the resignation of Ms. Lautenschlager damage the credibility of the ECB?

The composition of the Executive Board might become more dovish with these changes. In terms of the President, Vice President and Chief Economist, we judge that three dovish officials are being (have been) replaced by another three dovish officials. However, Fabio Panetta might be more supportive of net asset purchases going forward than Benoit Coeure, who appears to have dissented at the September Governing Council meeting. At the same time, it possible that Ms. Lautenschlager’s replacement is a (much) less hawkish economist (Such as Professor Schnabel or Ms. Bartsch) or someone of the same school of thought (presumably such as Ms. Buch). In any case, the likelihood is that a majority of both the Executive Board and Governing Council will be of a dovish disposition.

Overall, we judge that there will continue to be strong economic and monetary policy experience on the Executive Board given the above changes. Mr Panetta has a wealth of experience at the central bank of Italy, the ECB and on various international boards and committees. All of the German candidates discussed above are respected economists. One gap in knowledge and experience that opens up is on financial markets, given the departure of Messers Coeure and Draghi. From that angle, the case for the appointment of someone with the type of experience of Elga Bartsch (who has held top research positions at both an asset manager and an investment bank) seems more compelling, though for sure the German government will have other considerations.

We finally turn to the resignation of Ms. Lautenschlager. It seems that disagreement about the course of monetary policy was a key reason and she follows two of her compatriots (Axel Weber and Jurgen Stark in 2011) in resigning on this basis. While it would seem to most outsiders that having different views in any organisation is healthy, stark and fundamental differences in view on the goals and tools of monetary policy within the Governing Council (rather than for instance on just the economic outlook) can damage the ECB’s credibility.

In this sense, Ms. Lagarde will need to do more to improve the coherence and unity of the Governing Council about the institution’s aim and policy tools for the ECB’s monetary policy and communication to be credible and effective. As announced by the current ECB President, his successor will embark on a review of the ECB’s inflation goal and tools next year. Achieving an outcome that the Governing Council as a whole can support will be tough – see here for more. (Nick Kounis)

Euro Macro: Bank lending to companies resilient so far, but will likely slow – The ECB published its monthly report on money supply and bank lending today. The monthly flow in loans to non-financial companies (adjusted for sales and securitization) increased to EUR 24bn in August, up from EUR 22.5bn in July. As a result the annual growth rate increased from 4.0% to 4.3%. We think this rise in the growth rate of bank lending to companies is merely temporary and will be followed by a slowdown. Indeed, bank lending tends to follow changes in economic activity with a delay of around one to 1.5 years and the slowdown in GDP growth since the start of 2018 should start weighing on lending growth in the coming months. Indeed, in the most recent Bank Lending Survey banks reported that banks on balance had tightened lending conditions on loans to companies in Q2, while demand for loans has slowed down noticeably since the start of this year. Combined with a drop in business confidence and a slowdown in fixed investment growth this should limit bank lending. (Aline Schuiling)