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.
The third man in the race is Slovenia's former central bank head Mitja Gaspari. While he is seen as a potential compromise candidate he remains an outsider in the contest.
Speaking on Friday at an EU leaders meeting in Brussels, French President Nicolas Sarkozy said that, in addition to talks on strengthening the European Union's crisis firewall this month, "there are also some nominations that we need to talk about so I do not rule out another meeting before the end of March".
Europe is in the process of having a major shake up of some of its top jobs. In addition to the EBRD job, Finnish Prime Minister Jyrki Katainen is seen as a possibility to take over from Luxembourg's Jean-Claude Juncker as head of the eurogroup of finance ministers.
Germany is also pushing for Klaus Regling to become the permanent head of the euro zone bailout fund when it formally evolves into the European Stability Mechanism later this year.
Reporting by Andreas Framke and Paul Taylor, writing by Marc Jones, editing by Mike Peacock