Mario Draghi will likely end his eight years at the helm of the European Central Bank (ECB) helm in October without raising rates once. His last board recruit, Liverpool FC fan Philip Lane, is set to become the holding midfielder of a team that may have to revive crisis-time measures to keep the show on the road.
Lane (49) emerged on Wednesday as the unopposed contender to succeed ECB chief economist Peter Praet, who retires in May.
There will be the usual formalities: a candidate grilling by the European Parliament economic and monetary affairs committee, as well as a euro zone finance ministers' discussion on the appointment February 11th, followed by a recommendation by ministers from the wider EU the following day. But the gig will be rubber stamped by the European Council of government leaders on March 21st – allowing the Republic to cede its unfortunate title as the only founding member euro not to have held an ECB executive board seat.
Praet’s successor doesn’t automatically become chief economist. However, as no other member of the board holds a doctorate in economics, aside from Draghi, the role is as good as his.
It’s the second-most influential seat at the table. The chief economist is in charge of monitoring the 19 national economies of the single currency and controlling what material is reviewed at governing council meetings.
Some have had a bigger say than others in shaping monetary policy. None more so than Otmar Issing, the one-time German Bundesbank arch-hawk who became the ECB's first chief economist in 1998.
When the first six ECB board members met at the original ECB tower in May that year to decide where each would hold court, president Wim Duisenberg said: "I don't care who gets which office, but Otmar must have one from which he cannot see the Bundesbank."
In decisions that mattered, however, the Dutchman’s powers were limited. Issing made sure to impose the German central bank’s “stability oriented” strategies on the wider euro zone. He is reported to have guarded his precious economic figures to such an extent that he occasionally refused to hand over information requested by his boss.
Lane, a data man to the core, is no such ideologue. But as he prepares to pack his bags, the economic figures aren’t looking great.
While the ECB reaffirmed last week that its key rate – at zero for almost three years – will remain at a record low level through this summer, the money markets are betting it will hold firm until well into 2020.
Figures out this week showed that Italy, whose populist government was locked in a long standoff with Brussels over its budget, fell into recession late last yer for the third time in a decade.
Germany, Europe’s largest economy, may not be far behind, as its all-important carmakers struggle with new emission standards. And France, the second-largest, saw its growth slow late last year as “yellow vest” anti-government protests weighed on consumer spending and investment.
More widely, the global economy is weakening, with the engine that is China easing back last year to 6.6 per cent expansion – the slowest in 28 years – amid a trade war with the US.
Meanwhile, the US Federal Reserve, which has led the world in raising borrowing costs by hiking rates nine times since 2015, pressed the pause button this week. "The case for raising rates has weakened somewhat," Fed chairman Jerome Powell said at a press conference on Wednesday.
Significantly, the US central bank indicated that it may ease back on the phased reduction or the $4.5 trillion (€3.9 trillion) balance sheet it had built up under its quantitative easing (QE) bond-buying programme – which was designed to pump money into the economy following the 2008 financial crash.
While the Fed had been selling down its QE portfolio since 2017, the ECB, which belatedly joined the QE party in early 2015, only stopped new bond purchases in December. It hasn’t said when it may start to reduce its €2.6 trillion QE book.
Last week at the World Economic Forum in Davos, Axel Weber, the former Bundesbank chairman and current chairman of Swiss investment bank UBS, declared the ambition of central banks to return interest rates to a "normalised" level in the current economic cycle is a case of "mission aborted", as growth eases.
This limits the levers the ECB can pull in the event of another sharp downturn and knock-on impact on inflation (which is Frankfurt’s main focus). Draghi suggested on Monday that the ECB could restart QE with fresh bond purchases “if things go very wrong”, though this is unlikely this year.
Stalling on rate hikes will be good news for Irish holders of tracker mortgages linked to the ECB benchmark. That includes cases uncovered in the past three years under a Central Bank-overseen search for borrowers who were wrongly denied their right to tracker loans, or put on the wrong rate entirely.
The Central Bank, under Lane, has been widely criticised for its handling of the €1 billion tracker-mortgage scandal. Lenders really only faced up to their responsibility from late 2017 when the Oireachtas Finance Committee and Minister for Finance turned up the heat.
While the number of admitted cases stood at 38,400 as of August, the figure is set to rise again when the Central Bank publishes an update next week.