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Musical chairs at ECB leaves Germany on guard for dovesí attack

By Simon Kennedy

When the European Central Bank policy makers first convened in June 1998, Bundesbank President Hans Tietmeyer didnít like what he saw.

The sign in the front of every seat shouldnít carry the name of each nationís central bank, but that of the ECB, he said. That would underscore how officials set monetary policy for the whole euro area and not represent their homelands.

From this January there may be a need to highlight who comes from where. Thatís because with last weekís acceptance of Lithuania as the currency blocís 19th member, a new voting mechanism comes into action.

While President Mario Draghi and his five colleagues on the Frankfurt-based Executive Board will continue to have a vote on policy each time the Governing Council gathers, rules first set in 2003 and revised in 2008 dictate that others will have less of a formal say. At present each national central bank has a vote every month.

The five biggest economies -- Germany, France, Spain, Italy and the Netherlands -- will rotate so each sits out one vote in five. The 14 smaller countries will share 11 votes on a rotating basis. The system will be revised again when the euroís membership reaches 22.

ĎSecure Positioní

ďThis means that the biggest five can consider themselves in a rather secure position, whereas small countries are likely to see their influence decrease over time,Ē Silvia Merler, an affiliate fellow at Bruegel, a Brussels-based research organization, wrote in a blog last week.

Merler estimates the Executive Board will now enjoy 29 percent of the votes at each session, the five biggest will hold 19 percent versus 20 percent today and the smaller countries will have their share reduced to 52 percent from 56 percent. Additionally, as of January the Governing Council will set monetary policy every six weeks rather than monthly.

Theoretically, this may all mean very little for policy. Non-voting governors will still participate in the debate and shape any vote that way. Also the ECB makes most policy decisions on the basis of consensus rather than votes anyway.

Presentationally, there may be more of a challenge because of disquiet in Germany even though Chancellor Angela Merkelís government isnít seeking a permanent vote for the Bundesbank akin to that enjoyed at the Federal Reserveís Open Market Committee by the Fed Bank of New York.

Not Popular

The ECBís crisis-fighting measures of late havenít proved popular in the euro areaís largest economy with Axel Weber resigning as Bundesbank president in 2011 and his successor Jens Weidmann opposing Draghiís bond-buying plan of 2012 and last Novemberís interest rate cut.

Draghiís still-untapped program was challenged in Germanyís Federal Constitutional Court and only this month a business group allied with Merkelís party balked at giving him an award after concluding it was too soon to praise him for stemming the euro areaís debt crisis.

The German suspicion, already fanned by local media, may be that more dovish members of the ECB council use the months Germany lacks a vote to push through the easier monetary policy the German population already has qualms about.

The view of economists is that would be foolhardy given it would likely harm the ECBís legitimacy in Germany, something the central bank can ill afford. Any push could also draw the objection of board member Sabine Lautenschlaeger, a former Bundesbanker.

The upshot is even with the musical chairs any major policy choice will likely only be made in the months the Bundesbank carries a vote.

ďIt seems unlikely that decisions will be taken Ďbehind the backí of any big country,Ē said Merler.

[Bloonberg]

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