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Analysis: Weidmann’s departure could set the stage for new ECB conflicts

  • Lagarde had decided to woo people who thought differently
  • Team spirit now broken: Brzeski. by ING
  • Scene for disagreement over inflation

FRANKFURT, October 21. (Reuters) – Jens Weidmann’s departure from the European Central Bank is the most tangible sign so far that the efforts of ECB President Christine Lagarde to win over dissenting politicians have reached a dead end and new tensions are emerging.

The Bundesbank president surprisingly announced his resignation on Wednesday, five years before the end of his term in office at the Deutsche Bundesbank.

Sources within the eurozone central bank and ECB observers said Weidmann’s resignation showed that Lagarde’s strategy of wooing political hawks who oppose the ECB’s cheap credit policy has not borne fruit, and that a rift between the ECB and Germany, its largest shareholder, far from it is cured.

While some hope that Weidmann’s successor – who will likely be elected by a new German government headed by the Social Democrats – will have a more constructive presence on the Governing Council, Lagarde may have to prepare for further conflict.

This is because the recent surge in inflation will prove temporary as a growing number of policymakers feel uncomfortable with the ECB’s official line defended by its chief economist Philip Lane.

“Lagarde was the moderator, the communicator, the leader of the team spirit, but that team spirit against inflation is now broken,” said Carsten Brzeski, Global Head of Macro at the Dutch bank ING. “There are different views on inflation and this divergence is getting bigger.”

Inflation in the 19 countries using the euro hit 3.4% last month, but the ECB expects it to fall back to 1.7% next year.

The timing of Weidmann’s decision, after 10 years at the helm of the Bundesbank in which he weathered many and larger storms, including being the only opponent of the then ECB boss Mario Draghi’s plan to save the euro in 2011, was surprising.

But while Weidmann and Draghi were widely known for disagreeing, the German decided under the supposedly more collegial Lagarde to throw in the towel.

The tipping point could have come in July when the ECB promised to keep interest rates at their lows until inflation stabilized at its 2% target despite Weidmann’s resistance.

Sources close to the matter speak of Lagarde’s dragging style at this and other meetings when policymakers express their opposition to the proposals Lane put forward.

“If they get stuck, they step in and basically say, ‘You stick it out, we’re in this boat together, we need a consensus, so tell us what you can live with,'” said an ECB politician when asked not to be named.

“She just gets people to the point and holds the pressure on until most give in.”

DISCORD AND DIPLOMACY

Lagarde began her tenure as ECB President in November 2019, hoping to heal the discord that had marked the twilight of Draghi’s eight-year reign, and even took the 25 members of the Governing Council to a retreat in the hills outside Frankfurt.

But when the pandemic broke out in 2020, divisions resurfaced and she had to overcome resistance from Weidmann and Dutch central bank governor Klaas Knot to start the massive emergency purchases of bonds that helped stabilize financial markets.

While Weidmann kept his dissatisfaction mostly private, he has since contradicted Lane’s political proposals to expand and increase such purchases.

Under Lagarde, other frequent dissidents like Knot have reduced the volume of their public criticism, and the atmosphere in the Governing Council is generally seen as more constructive than during Draghi’s tenure.

At another hillside retreat last summer, she won a diplomatic victory and, after extensive scrutiny, secured unanimous support for a change in strategy. This gives the ECB scope to allow inflation to overshoot its 2% target for a period when interest rates hit rock bottom.

But other inflation “hawks” have become more open, including the Belgian central bank governor Pierre Wunsch and the Austrian Robert Holzmann. This could mean that Weidmann’s departure has an impact on Lagarde, as she has lost a valuable interlocutor in the Falcon camp.

The ECB President herself expressed her regret about Weidmann’s decision on Wednesday and praised his “loyalty” and “willingness to compromise”.

“The implications of Weidmann’s departure are less easy to see than a few years ago because, in contrast to Holzmann, he has become more constructive,” said Pictet strategist Frederik Ducrozet.

“Holzmann and Co. might have found it easier to accept decisions once Germany was on board.”

Editing by Catherine Evans

Our Standards: The Thomson Reuters Trust Principles.

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