The ECB Is Moving Closer to All-Out War

(Bloomberg Opinion) -- It’s all kicking off at the European Central Bank.

Sabine Lautenschlaeger, the executive board member from Germany, is to resign at the end of October, slightly more than two years before the end of her mandate. Her exact motives are unknown, but they add to a sense of chaos at the central bank barely a month before a crucial leadership change. Christine Lagarde, who’s taking over from Mario Draghi in November, will have a very tough job ensuring the ECB keeps running effectively.

Lautenschlaeger has been a vocal opponent of the central bank’s recent decision to restart quantitative easing, as it tries to counter a slowdown and bring inflation back on target. But a single difference of view can’t explain such a shock move. There are bound to be disagreements within any interest-rate setting bodies, particularly in a currency union such as the euro zone.

True, two other German members of the ECB’s governing council resigned in the past because of disagreements over monetary policy: Axel Weber, the Bundesbank president, and Juergen Stark, the ECB’s chief economist. Yet they had more central roles on the council than Lautenschlaeger (Weber was the front-runner to become the ECB’s president), so it’s more understandable that they felt their presence was untenable.

This week’s departure points rather to deep turmoil and unease at the central bank. Draghi’s recent monetary policy package, which also included a rate cut and easier lending terms for banks, has prompted sharp rebuttals from several governors of euro zone central banks, including the Netherlands and Germany. The impression is of a significantly divided ECB, which will require deft leadership to be brought back into line.

The stakes could not be higher. The ECB has been the best functioning institution in the euro zone. It has provided enormous support to the economy, while political leaders have often failed to deliver sensible fiscal policies and structural reforms. It has also promoted an innovative agenda to reform the euro area, starting with the creation of a banking union. For all the disagreements, above all with the Bundesbank, it has been a symbol of unity that has reassured markets about the euro’s solidity.

More than other economies, the euro zone simply cannot afford a dysfunctional central bank. Investors have learnt to trust the single currency because they believe the ECB stands ready to do “whatever it takes” if things go awry. Lagarde has stood behind Draghi’s famous 2012 promise to do just that. At a hearing before the European Parliament his month, she said she wants the ECB to act with “agility” to boost the recovery. An ineffective governing council would make such reassurances harder to believe.

She’ll need all her diplomatic skills to ensure that the council doesn’t fracture further. While Draghi led the ECB with competence and conviction, he didn’t mind leaving out some of his colleagues, especially at crucial junctures. Lagarde may need to balance exceptional leadership with more democracy.

Other central bankers on the council must do their part too. Lautenschlaeger’s replacement will need to be a talented economist and someone genuinely willing to operate in the interest of the euro zone as a whole. The same holds true for Fabio Panetta, the Bank of Italy’s director general, who has been proposed to replace Benoit Coeure when his term expires on the ECB’s executive board at the end of the year. National bank governors should feel free to express their views in public, while being mindful that they share a collective responsibility for ECB decisions.

The transition in the ECB presidency is much riskier than most investors realize. One hopes the warning shots of the past few weeks don’t turn into all-out war.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Ferdinando Giugliano writes columns on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.

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