The new EU leadership: Implications for the Euro and Brexit

Today, it was announced that after a (typically) long struggle, the leaders of the EU member states managed to come up with consensus candidates for the top jobs in the European Union. The challenge since the EU General Election in May has been to find a President of the European Council who was acceptable to both Emmanuel Macron and Angela Merkel. Furthermore, with Mario Draghi stepping down as the Head of the European Central Bank, this job was also in the mix. 

The premise:

It was clear that one of the top jobs had to go to a German and one to a French person. The risk for Macron, as well as the other southern European member states, was that by accident, the head of the Deutsche Bundesbank, Jens Weidmann, would become the successor of Mario Draghi. Weidmann has been one of the most vocal critics of the current ECB policies in the past and he is largely isolated within the ECB due to his aversion against quantitative easing and other unconventional monetary policies. 

In order to prevent Weidmann from getting the top job at the ECB, he could have accepted Manfred Weber as Head of the European Commission. But Manfred Weber is a bland and boring politician even for the already bland and boring standards of Brussels. It is difficult to imagine Weber leading the confrontation with the UK on Brexit in coming months. A Prime Minister Boris Johnson would steamroll right over him.

The compromise:

If they are approved, the new top jobs in the European Union will go to:

  • Head of the European Commission: German Defence Secretary Ursula von der Leyen

  • Head of the European Central Bank: Christine Lagarde, currently Managing Director of the IMF

  • Head of the European Council: Charles Michel, current interim Prime Minister of Belgium

  • High Representative for Foreign Affairs: Spanish Foreign Secretary Josep Borrell 

The assessment:

While the candidates are all surprise choices for the job that emerged within the last 24 hours, I think they are quite well chosen. It is also a good day for diversity since Lagarde and von der Leyen will both be the first women in their respective jobs. And for the first time, the two most important jobs in the EU are soon occupied by women.

Christine Lagarde:

Christine Lagarde has no experience as a central banker and is definitely not an academic who is well respected for her monetary policy expertise. With Mario Draghi, Peter Praet and Vitor Constancio leaving the ECB Executive Board in summer, the bank will lose three of its most respected experts on monetary policy. However, the bench in the local central banks is deep and given the incredibly difficult situation the ECB is in with the economy weakening at a time when policy rates are already negative, what is needed at the helm is a good communicator. And Christine Lagarde has proven both during the Global Financial Crisis (GFC) as well as during the Greek debt crisis that she is an excellent communicator and crisis manager. Ms. Lagarde also has a reputation as being able to build bridges and form compromises. Thus, she might be able to bridge the current gaps in policy views between the Germans (and Dutch) and the Western and Southern European countries. If the other vacancies in the ECB Executive Board are replaced with candidates from the different national central banks, we could even see a shift in dominance away from the Executive Board towards the national central banks. In this scenario Lagarde would occupy the role of moderator rather than intellectual leader that Mario Draghi used to be.

Verdict: Her great skills as an effective communicator plus her experience as a crisis manager mean that she is a better choice than any candidate that was mentioned in the press before. Under her leadership we shouldn’t expect a massive change in ECB policy but probably a much better communication style than the technocratic one of Mario Draghi.

Ursula von der Leyen:

Before becoming Defence Secretary, Ursula von der Leyen used to serve as Minister of Family Affairs and Minister of Labour under Angela Merkel. Von der Leyen is regarded as a Merkel loyalist who was once tipped as a potential candidate to succeed her as Chancellor of Germany. However, her star has faded in recent years as her time at the helm of the German Department of Defence was riddled with scandals. A chronic lack of funding led to a series of accidents and near accidents in the German Military. On top of that, expenses for consultants from the private sector went through the roof with often doubtful results. The expense scandal already cost a three-star general his job but ultimately, the consequences would have been suffered by von der Leyen. Thus, the move to Brussels might have been a convenient way out for her. However, von der Leyen has a subtle but effective leadership style that will suit her well in her new role where she has to manage a renegade bunch of heads of state with widely diverging views. I can well imagine her managing to forge a compromise between Victor Orban of Hungary and Emmanuel Macron of France. Her influence on Angela Merkel (and vice versa Merkel’s influence on her) is anyway beyond any reasonable doubt. Her job will start with a baptism of fire because just like her predecessor Jean-Claude Juncker, she will have to play a leading role in the Brexit negotiations with the new Prime Minister (likely Boris Johnson). Given her performances in dealing with Donald Trump and other strong-willed high-level politicians, she seems competent enough to handle these situations well. The fact that she is more closely aligned with the German position in Brexit than the French position may also mean that a second extension of the Brexit date might be possible in order to avoid a hard Brexit.

Verdict: Despite her mixed track record in Germany, von der Leyen seems like a decent choice who can hold her own against the British Brexit negotiators and might be a moderating influence on the Brexit hardliners within the EU, like Emmanuel Macron.

Charles Michel:

His job as successor of Donald Tusk is largely one of a coordinator. The Head of the European Council organizes and hosts the crucial meetings of the heads of state where all the important decisions are made. He will only take office on 1 December 2019 so he will not play a major role in the upcoming Brexit negotiations. However, what speaks for him is that he already knows his colleagues in the European Council through his current role as Prime Minister of Belgium.

Verdict: Largely unknown outside of Belgium, but probably not too bad.

Josep Borrell:

Does anyone know what the High Representative for Foreign Affairs does all day? Does anyone know the current occupant of the post or any previous holder of the office for that matter? You see my point.

Conclusion:

Overall, this seems to be a decent compromise between French and German, conservative and progressive political interests. We shouldn’t expect a significant shift in monetary policy of the ECB or in the Brexit stance of the European Union with these nominees. However, the style of communication will likely change in both instances. The more emotional and empathetic style of Christine Lagarde will be a key difference to the more technocratic Mario Draghi. Similarly, Ursula von der Leyen is a subtler communicator than the often-brash Jean-Claude Juncker. Both women have in the past demonstrated the ability to form compromises between far diverging views, something that is a key qualification when dealing with 28 (and soon 27) heads of state and central bankers.