ECB Presidential Contest Centers on Crisis Management: French Debt Risk Becomes the Touchstone

According to Zhitong Finance APP, the contest for the position of President of the European Central Bank is increasingly focused on one core issue: which candidate is best able to deal with bond market “vigilantes.” As France’s debt problems evoke memories of eurozone turmoil and the current president, Lagarde, prepares for early departure, Dutchman Klaas Knot and Spaniard Pablo Hernández de Cos may soon take over amidst financial turmoil.

According to informed sources, market tensions have become an increasingly important factor in the European Central Bank’s next move. Eurozone insiders say that governments’ assessments of candidates’ crisis management abilities are now dominating the choice for president. Since the two candidates are equally qualified, evaluating their credibility, authority, and temperament during turbulence becomes more important. For the European Central Bank, these issues are of long-term significance, as the lack of fiscal integration within the monetary union is itself a structural vulnerability. Lagarde and her two predecessors have all experienced crises, and policymakers remain concerned about further troubles.

The current issue is that global scrutiny of public finances is overlapping with worries about high energy costs, throwing France into a difficult situation. The market’s speculative focus on such a large and pivotal eurozone member has never been so ominous. The French government is struggling to pass its budget, urban riots highlight political challenges, and government bond yields have sounded the alarm, which may ultimately force intervention from the European Central Bank.

Former ECB Chief Economist Peter Praet stated that if financial markets collapse, the central bank must intervene, but the challenge for any president is “how to do it, and how quickly”; strict conditions are needed, and all risks that could lead to fiscal dominance or weaken the bank’s independence must be avoided—“especially important right now.”

Lagarde has indicated she will step down early but has not announced a date. The working assumption within the eurozone is increasingly focused on a January departure. If so, this week’s decisions would mark her penultimate meeting. German Chancellor Merz said on Monday that if needed, a solution would be found very quickly within the Executive Board. Sources say he met with de Cos last week and with Knot earlier this month. The deadline for eurozone finance ministers to nominate a replacement for outgoing German Executive Board member Schnabel has been extended from October 28 to November 27, showing signs that the “grand bargain” around the presidency and two other ECB positions, mentioned by the Greek prime minister, is brewing.

Amid rising bond market tensions, the next president will have to deal with investors betting on ECB assistance for France. The preferences of key countries are hardly secret: France values a willingness to use all tools at hand, citing Draghi’s 2012 pledge to defend the euro “whatever it takes” as the benchmark for determination; budget hawks like Germany want a higher bar for action.

The resumes of the two candidates differ little. Knot served as President of the Dutch Central Bank for 14 years and as Chair of the Financial Stability Board. He was initially considered a hawk but moderated his stance during his tenure. A paper he wrote this month for the Peterson Institute for International Economics in Washington is akin to a declaration, saying he has gone from “skeptic to principled pragmatist.” In the paper, he says that embracing new tools—including the Transmission Protection Instrument (TPI)—is not out of enthusiasm for monetary activism, but from recognizing that allowing fragmentation to undermine monetary policy transmission or the single currency is incompatible with the ECB’s mission of price stability. Knot also held senior positions at the Dutch Ministry of Finance, providing experience in both fiscal policy-making and political trade-offs.

De Cos is currently President of the Bank for International Settlements, and has served as Chair of the Basel Committee on Banking Supervision. He is seen as slightly more dovish but not radical. He also witnessed the eurozone debt crisis first-hand as a Spanish central bank official, and, like Knot, supported the ECB’s emergency measures in recent years. He stated in a speech this month that if market dysfunction threatens financial stability or monetary policy transmission, the central bank needs to intervene; but when debt is high and public financing needs are substantial, even well-designed operations could be interpreted with a fiscal slant. De Cos has served in the eurozone central banks’ public finance working group and is familiar with regional policy; his experience advocating fiscal prudence in Spain may be useful when firmness is needed regarding France’s loose fiscal discipline.

Both have previously served as ECB Governing Council members, hold doctorates, and have many years of experience setting eurozone interest rates. At 59, Knot, or de Cos, 54, would become the youngest president in ECB history, and both are viewed as reliable candidates. Emanuel Moench, co-director of the Frankfurt Center for Central Banking, said the two have no major ideological differences and are well-versed in monetary policy and financial stability. Their similarities make this the first contest for the euro’s history without sharp doctrinal splits in the choice for president. ECB observers say the difference between the two is “shades of gray” rather than black and white; in contrast with Lagarde, the difference is larger—Lagarde is the first woman and the first politician to lead the ECB, and the only one who has never managed a central bank.

No matter who prevails, the winner will face a politically sensitive role. Draghi stated this month that the open domestic debate in France about ECB assistance makes the current situation unsettling—“it will only make intervention more difficult”; the ECB does not want to become part of any particular country’s internal political conflict.