France leans towards anti-inflation hawk in ECB board appointment

PARIS/FRANKFURT (Reuters) – France is prepared to switch allegiance from Spain to Luxembourg in the battle for a seat on the Executive Board of the European Central Bank, according to diplomatic sources, an appointment that would tilt the balance towards anti-inflation traditionalists.

Spain, Luxembourg and Slovenia are in a three-horse race to replace Jose Manuel Gonzalez-Paramo when the Spaniard leaves the ECB at the end of May.

Since the ECB flooded banks with cheap money for a second time last week, some of its policymakers led by Bundesbank chief Jens Weidmann have expressed alarm that the dramatic loosening of lending policy will fuel imbalances in the euro zone and stoke inflationary pressures.

The ECB hawks’ bargaining position could be further bolstered if Luxembourg’s central bank chief, Yves Mersch, wins the race.

French President Nicolas Sarkozy backed Spain to keep its seat on the ECB board before Madrid put forward the ECB’s top lawyer Antonio Sainz de Vicuna as its candidate.

Since then the veteran Mersch, who has one of the strictest anti-inflation stances among ECB policymakers, has entered the race for the post which manages the ECB’s day-to-day business.

Sources said France was now backing him rather than Sainz de Vicuna as part of a grand deal on top jobs at European institutions, which could see France bag the European Bank for Reconstruction and Development.

ECB board members are chosen by euro zone governments rather than the central bank itself. A decision may be made as soon as Monday at a meeting of euro zone finance ministers before being rubber stamped by heads of government at a later date.