More Thinking about BBK and ECB

It is now widely expected that Merkel's economic advisor Jens Weidmann will be named tomorrow as Weber's successor at the helm of the Bundesbank. There is some marginal concern that his close relationship with Merkel jeopardizes the BBK's independence. While perhaps not ideal, it is unlikely to derail the appointment. However, it does nothing to shed light on Trichet's successor.

There continues to be talk in some quarters, like the op-ed piece in yesterday's FT that head of Italy's central bank, Draghi, is the obvious choice, but this seems to under estimate Merkel's political astuteness. In order to help solidify Weber's chances, she successfully campaigned for Portugal's Constancio to be the vice president of the ECB. The reason this would have helped Weber is that by European tradition, a vice president from the south is balanced with a president from the north. This is not a question of ethnocentrism, or checking passports as has been claimed by some critics. It is about broader balance.

Contacts report that France was not keen on Weber, but was willing to defer to Germany. However, France does not want the ECB at this time to be headed by some one from a some country or a southern country. France does not seem very warm to Draghi's candidacy according to some reports.

Luxembourg's Frieden seems to have played down Mersch's chances as a compromise candidate, noting that countryman Juncker already has a top EU position.

These considerations suggest that Finland's Liikanen may be the most likely successor to Trichet. The only criticism we have seen about Liikanen is that the EU Economic and Monetary Affairs Commissioner Rehn is also from Finland. We tend to be sympathetic with arguments that given the shock of losing Weber, the desire to avoid a squabble, and the Merkel's machinations to ensure Weber's appointment, Rehn's position will not, under these conditions, negate Liikanen's candidacy.

There does seem to be a potential policy implication from this. When we were confident that Weber would be the next ECB president, we thought that the uber-hawk would not need to hike rates early in his tenure to establish anti-inflation credentials. The fact that it won't be Weber would seem to increase the likelihood of an ECB hike late this year. It also fits into the risk that headline inflation in the euro zone eases, but that the core rate trends higher.