European Central Bank row

The Financial Times reports that smaller countries are up in arms over the appointment of a German to the ECB's executive board. At the moment this is a row about politics, influence and pride, rather than economics but there is no reason for it to stay that way. The relative sizes, and hence importance, of the small and large economies in the eurozone will mean that ECB policy should be set with the interests of the large economies as its main objective.

At the moment this implies an expansionary policy as the German and French economies see growth slip once again. This is being mitigated thanks to the intellectual inheritance, particularly in the German representation, from the Bundesbank of monetary caution. "Uberhawks" such as Mr. Stark reduce the danger of ECB policy overheating the better performing economies in countries like Ireland. The smaller countries might, therefore, be wiser to welcome his appointment.

The situation where the fortunes of large and small economies are reversed and ECB policy depresses the smaller states would lead to a far uglier political situation. The large countries can be expected to push ahead with interest rate rises to slow their own economies while largely ignoring the pleas of smaller countries for expansion; ideology would cease to work in the interests of small countries.

The long term future of EMU is still in question despite the massive costs of leaving. Without convergence in the performance of the eurozone economies there are big political battles to come.