Tuesday, January 31, 2017

Europe Could Shuffle Top Jobs Ahead Of 2019’s ‘Year Of Expiry’

Once it gets past 2017’s elections, 2019 could be the year Europe’s luck runs out.


By David Marsh
MarketWatch
January 31, 2017

European governments and the European Central Bank may have to invent imaginative solutions for the “year of expiry” coming in 2019, when many linchpins of European politics and economics will slip away, possibly with disastrous consequences.

With Donald Trump in the White House, a whiff of gunboat diplomacy in the South China Sea and a rush of European elections in 2017, political strategists in Europe’s capitals can be forgiven for not turning their eyes right now to circumstances in two years.

Further signs of polarization came on Sunday with news from France that Benoît Hamon, the firebrand left-wing former minister previously regarded as a no-hoper, beat Manuel Valls, the former prime minister and early front-runner, to become the Socialist candidate in April’s presidential election.

Yet 2017 may not see the nadir of Europe’s fortunes. Assuming the European Union and in particular the economic and monetary union (eurozone) survives the next 12 months without further ravages, 2019 might be the year when Europe’s run of bad news becomes terminal.

At that time, everything runs out: the eight-year mandates of European Central Bank President Mario Draghi and Bundesbank chief Jens Weidmann; generous flows of EU structural support funds to Eastern and Central Europe; and EU payments by the U.K., the departing third-biggest net contributor.

Moreover, any chance of further largesse for Europe’s problem-hit peripheral countries through the ECB’s (by then) €2 trillion-plus quantitative easing bond purchases will by then have ended.

Already, some ECB watchers are speculating that, as part of a last-ditch effort to shore up the EURUSD, +0.0374% edifice, EU leaders after the German elections in September could decide to “recalibrate” jobs at the helm of European central banking.

In 2018, assuming Angela Merkel, the German chancellor remains in power after the vote this autumn, she could lead a bold move to switch Weidmann, a year ahead of expiry of his eight-year term, to the helm of the ECB. This would free Draghi to assume the prime ministership in Rome as yet another technocratic government leader to maintain Italy’s fraught position in the EU and the euro’s economic and monetary union.

Such a scenario might appear far-fetched, but it would have three advantages.

First, promoting Weidmann to head the ECB would bind Germany comprehensively to continue its adherence to the euro, blocking any move (however complicated that might be) for Germany itself to depart.

Second, QE — extended throughout 2017 although at a lower monthly rate of government bond purchases from April until December — will almost certainly have ended by the second half of 2018, allowing Draghi to bow out of his tenure in Frankfurt on a message of “mission completed.”

Third, Draghi, who will be 70 in September, would be following in the highly respectable footsteps of Carlo Ciampi, another senior Italian technocrat who, like Draghi, headed the Banca d’Italia. Ciampi, who died aged 95 last September, became Italian prime minister in 1993, aged 72, and was Treasury minister supervising the euro’s introduction in 1999 as well as Italian president in 1999-2006 — a job that Draghi could still take in coming years if he proves resilient and successful enough.

A Weidmann-Draghi reshuffle would confirm the strong element of Realpolitik running through European decision-making at a time of challenges unparalleled since the 1950s.

German officials say there is no alternative to further QE this year even though it will lead to unpopular rises in German inflation — since the alternative would be worse. An early ending to government bond purchases could precipitate a capital-market shock and a banking collapse in Italy and other peripheral states — and this would have a still greater negative effect than QE on nervous German voters ahead of the September parliamentary elections.


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