Merz Says ECB Deal Is 'In Sight' but Not Final as France and Germany Reportedly Back de Cos

Since Christine Lagarde announced on Oct. 29 that she will leave the European Central Bank on Feb. 7, nine months before her term was due to end, the fight over her successor has narrowed to two men and a package of three jobs. Today, as EU leaders gathered for an informal summit in Dublin, the horse trading moved into its most intensive stage.

An EU official said two candidates have been formally put forward to replace Lagarde: Spain's Pablo Hernández de Cos and former Dutch central bank chief Klaas Knot. Spain nominated Hernández de Cos, now general manager of the Bank for International Settlements, and the Netherlands nominated Knot on Nov. 6. The Eurogroup confirmed both nominations last week.

Merz: close, not done

German Chancellor Friedrich Merz and French President Emmanuel Macron are in what the EU official called "intensive" talks. Merz told reporters in Dublin that agreements were in sight but not yet final. He said he needs a few more days to consult his coalition partners and will present Germany's proposal next week.

That is a more cautious line than some of the press reports. The Spanish daily El País reported that Paris and Berlin are finalizing a deal with Hernández de Cos as the favorite. French weekly Le Point reported the two capitals had already sealed it. The German government denied that, and Handelsblatt's sources said nothing has been settled.

The reported package

Handelsblatt reports the outline this way. Hernández de Cos becomes president. Germany gets the chief economist post that Ireland's Philip Lane vacates on May 31, 2027. France gets market operations, the portfolio held by Germany's Isabel Schnabel, who leaves on Jan. 3 to join the International Monetary Fund.

Handelsblatt reports that Merz's office wants Princeton economist Markus Brunnermeier as chief economist. Tobias Adrian, a former head of the IMF's Monetary and Capital Markets Department, is also reportedly in the mix. Le Monde and the Financial Times have named Laurence Boone, a former OECD chief economist and former French Europe minister who now runs Santander's corporate and investment banking business in France and Ireland, as a leading French option for the markets job.

The formal deadline for those two Executive Board nominations has been pushed to Nov. 18.

Why Paris flipped

In September, Reuters reported that France was ready to back Knot in exchange for the chief economist job. Handelsblatt now reports that Paris prefers Hernández de Cos because it sees him as more willing to make concessions.

The policy difference is a matter of degree. "Simplistically, Knot is seen as slightly more hawkish and de Cos slightly more dovish, although we would not overplay the policy differences between the two," Modupe Adegbembo of Jefferies said. She added that the ECB is consensus-driven and "the institution is bigger than any one individual."

The money backdrop matters. The ECB is raising interest rates to fight inflation, while worries about French public debt have raised the prospect that the bank could be called on to calm bond markets. The market operations brief is the job that would handle that.

Spain's Economy Minister Carlos Cuerpo called Hernández de Cos "a steady hand, but always a profile to be able to find consensus." Dutch Finance Minister Eelco Heinen called Knot an "excellent candidate" with "a very clear understanding of the ECB mandate."

Geography and the Macron clock

Heinen has argued that countries should not treat the contest as northern versus southern Europe, or as an "opportunity to trade favors" on topics such as the multi-year EU budget. Handelsblatt's sources made a different point. They described southern Europeans as over-represented across EU institutions, citing Hernández de Cos's own post at the BIS and Greece's Kyriakos Pierrakakis as head of the Eurogroup.

Gender is another complication. Reuters noted that Lagarde and Schnabel are the only two women on the 27-member Governing Council, and both are leaving. Sources told Reuters that France is considering a woman for an ECB role.

The timing is also political. Lagarde's early exit lets leaders choose a successor while Macron is still in office, ahead of next year's French presidential election. Lagarde herself said she wants "the freedom of speech, the freedom of expression, and the freedom to engage on matters that are not monetary policy matters." Holger Schmieding of Berenberg called the early departure "no surprise" and said it does not change the outlook for ECB policy.

What comes next

European Council President António Costa updated leaders on Friday morning. He aims to begin consulting the European Parliament and the ECB's Governing Council at the EU summit on Nov. 26. Eurogroup President Pierrakakis has said the ambition is to finish the entire process by the end of the year. Schmieding has said leaders would likely try to settle all three posts before the Dec. 17-18 summit.

Germany's proposal, due next week after Merz consults his coalition, will show whether Berlin accepts the Spanish candidate in return for the chief economist job, and whether Knot's candidacy survives as the talks continue ahead of the Nov. 18 deadline for the other two nominations.