The decisions of the European Central Bank (ECB) earlier this month have caused friction in the bank's management layers. Lowering interest rates further and starting bond-buying again – thus keeping long-term interest rates low or pushing them further down – clearly didn't get everyone's approval. What does this mean?
Klaas Knot, the Dutch ECB board member, published a statement a day after the decision. The president of the Dutch central bank (DNB) distanced himself from the ECB decisions, a very unusual step in the monetary world. A total of 7 out of 25 board members (according to some sources even 12 out of 25) were against the aforementioned decisions.
Tensions within the board remained high, especially after Mario Draghi, the president of the ECB, described the open criticism in the European Parliament earlier this week as 'dangerous'. Even if the Italian is right; His regent-esque style is at least as dangerous for the ECB.
Tensions peak
Tensions reached a new peak this week when, on September 25, German board member Sabine Lautenschläger announced that she would leave the ECB on October 31. Her term of appointment runs until early 2022. Lautenschläger is a member of the ECB's six-member executive board. The full board consists of the executive board and the governors of the central banks of the euro countries. This makes her the third German central banker to resign from the ECB. In 2011, her compatriots Axel Weber (in February) and Jürger Stark (in September) preceded her.
Lautenschläger did not indicate a reason for her departure in the press release. This indicates that she is leaving the bank because the ECB's policies and plans are against its monetary principles. Just as was the case with her aforementioned two compatriots in 2011.
Solidarity damaged
Lautenschläger's departure is the best proof that the legacy of Draghi, who will leave at the end of October, is not something to be proud of. The solidarity and collegiality of the ECB board, which emerged under Presidents Duisenberg and Trichet, has been seriously damaged by his leadership style. Under his rule, the government became deeply divided.
All this could influence future monetary policy. But also, perhaps more importantly, how the financial markets deal with the ECB. For example, it is easy to imagine that from now on they will react more strongly to interviews and statements by other members of the board than just the president. After all, the divisions are so great that the opinions of individual board members can just as easily influence expectations about policy.
Since the ECB has 25 board members, this means that every week one of them gives an interview or gives a presentation. If the market indeed pays more attention to this, this cacophony of sounds could lead to more volatility and more uncertainty in the financial markets.
Opportunities for a flying start
The effect of the Draghi period may well be that the financial markets become and remain less certain about the ECB's course. This does offer the opportunity for his successor Christine Lagarde to make a flying start. If she takes the opponents of the current policy into account from day one, she can restore the cohesion of the board.
This would be good news for the future of the euro and the behavior of the financial markets in the eurozone. Lagarde's first weeks as Europe's highest monetary boss are therefore important. They could be decisive in how successful her 8-year presidency becomes.
In the meantime, interest rates for all maturities remain historically low in such an environment. Upward pressure on it could theoretically come from rising inflation, higher growth and a very different ECB policy. The former is not to be expected, just like the latter. And economic growth in the eurozone, especially in Germany, is under downward rather than upward pressure.