Cross-posted from The Baseline Scenario
Given recent maneuverings around European Central Bank (ECB) appointments and the obvious discomfort of Mario Draghi -- he carries the Goldman Sachs connection now like other people carry albatrosses -- the German financial-industrial complex seems to regard Axel Weber as a "done deal" to become the new ECB president.
Such an assumption is premature. Mr. Weber, as long standing head of the Bundesbank and general German economic maestro (including, quietly, on fiscal issues), is due to face his own round of questioning -- if you listen carefully, you can hear southern Europeans sharpening their arguments, and with good reason.
There are six important and difficult subject areas for Mr. Weber.
More broadly, Germany and Mr. Weber have been central in building a version of the Bretton Woods fixed exchange rate system within Europe. The entire burden of adjustment is placed on deficit countries (talk to Greece); it is considered beyond the pale to even suggest that German fiscal policy may be too tight, that Germany needs to expand domestic demand, or -- heaven forbid -- that Germany's intention to export its way back to growth (with a current account surplus, in their view) is not exactly a model of enlightened economic leadership.
On top of this, and unlike Bretton Woods, there is no mechanism for adjusting exchange rates within the currency union. Given what we have learned in the past two years, is this still such a bright idea?
With Draghi damaged and the Weberian model so open to question, look (or hope) for dark horses to emerge in the race for the ECB.
And don't make the mistake of thinking that you don't care. The broader European economy accounts for around 1/3 of world GDP, depending on how you count it. The President of the European Central Bank is the preeminent policy maker in this space.
If the growth prospects for this area remain dismal while European banks stay loosely supervised (our Axel Weber baseline), expect even more destabilizing capital flows into emerging markets - and into the United States.