ROI-Hawks circle as top two central banks switch leaders :Mike Dolan

By Mike Dolan

LONDON, Feb 19 (Reuters) - If the world economy is shifting into a boom that risks overheating, the case for more hawkish central bankers will grow louder — just as the top jobs at the Federal Reserve and European Central Bank come into play.

Markets have been obsessing for months about political pressure on the Fed and the impact of U.S. President Donald Trump's choice of Kevin Warsh to lead the central bank from May.

And now Europe seems set to put its own monetary policy leadership up for grabs this year too.

Although the ECB claims no final decision has been made, the Financial Times reported on Wednesday that ECB chief Christine Lagarde may step down early - well before her eight-year term ends in October 2027.

The two most powerful roles in global monetary policy may be about to change hands at the same time.

Even though Lagarde repeatedly denied speculation about an early exit last year, the FT report said the main reason for her going in 2026 would be to allow French President Emmanuel Macron a say in choosing her successor. That's because his final term ends in April 2027.

The politics of that relates to fears that a eurosceptic far-right candidate could win next year's French presidential election and then gain major influence over who runs the euro zone's vital institution. Opinion polls suggest that's the most likely outcome.

While some feel a maneuver to fill the ECB role early may tarnish the ECB's democratic legitimacy and damage its independence by another means, the more immediate investor concern would be who might replace Lagarde.

And that opens up another minefield of European and euro zone politics.

EURO HORSE TRADING

Even though Germany is the bloc's largest economy, it has never led the 27‑year‑old ECB. An unwritten convention dating back to the formation of the single currency in the late 1990s was that Germany would stand aside to deflect fears of Bundesbank dominance.

Nothing was codified, but it was seen as a quid pro quo compromise wherein other member states agreed to Germany's insistence on strict fiscal rules embedded in euro treaties.

That was then and this is now - and a lot has changed in the intervening decades.

Two ECB presidents have come from France, one from Italy and one from the Netherlands.

Now Germany may reasonably feel it has the right to take the role at last. What's more, other countries may feel that the intervening years of consensus building - not least by Lagarde herself - have matured the ECB to a point where they can now comfortably accept a period of German leadership.

Bundesbank chief Joachim Nagel has already said he has the credentials and should be considered.

Nagel - as with his Bundesbank predecessors - would typically be seen as more hawkish about inflation risks than candidates from other countries. And while a president is just one vote among 21 rotated at regular ECB meetings, his influence in shaping consensus would be important for tone and direction.

That doesn't necessarily mean he would always be pushing for higher interest rates, but he may be far more resistant to further easing in this cycle than others.

BOOM NOT BUST

Fiscal policy around the world is being loosened simultaneously for defense, tech and trade reasons, Berlin has abandoned its long-standing "debt brake" and a supercharged artificial intelligence investment boom is driving private-sector demand. Economies are heating up and old national and international settings are shifting.

Global investors are clearly now bracing for a boom rather than any lingering downturn risks, and the inflation risks around them may argue for a different sort of central bank leaning.

Even if resistance to a German ECB chief is just too great, the shape of the ECB's council may be changing anyway.

Political horse trading between euro capitals may see the six-person board turn more inflation wary, with hawkish Croatian central banker Boris Vujcic set to be the new ECB vice president and relatively dovish chief economist Philip Lane's term ending in May 2027.

Former Bank of Spain boss and current Bank for International Settlements chief Pablo Hernandez de Cos is seen as one leading "consensus" candidate to replace Lagarde.

But maybe the more hawkish former Dutch central bank governor Klaas Knot might end up a more agreeable compromise if Germany puts up a fight for the presidency.

Flipping back to the Fed, the picture is not much clearer, even though the upside economic and inflation risks are arguably more acute than in Europe.

Relative to other dovish candidates, Warsh's nomination was seen as at the more hawkish and orthodox end of the list. While he may have pledged to push for lower rates to get the job, he's been known as a hawk in the past and is certainly one when it comes to his opposition to Fed balance sheet usage.

Nuancing all that during a lagged U.S. fiscal uplift and an AI-related spending tailwind will take some dexterity, and hawks on the Fed's policy council may need convincing that it's all consistent with any further easing of Fed policy at all.

The world may be entering a new environment where it pays to have more talons than white feathers in the halls of its central banks.

(The opinions expressed here are those of the author, a columnist for Reuters.)

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