Out of the gate, Italian central bank governor Mario Draghi was the frontrunner. He had restored the integrity of the Bank of Italy that was tarnished by the scandals of his predecessor, Antonio Fazio. Shortly after his appointment to the Bank of Italy, Draghi in 2006 became the head of the Financial Stability Forum, an informal group of regulators set up in the wake of the Asian financial crisis to help monitor potential future threats.
The Basel-based FSF, like authorities everywhere, was caught flat-footed by the subprime crisis originating in the U.S., but the Group of 20 heads of state quickly turned to Draghi and an upgraded Financial Stability Board for advice on international banking reforms.
However, the crisis also brought investment banks, and particularly Goldman Sachs, into disrepute among government authorities. And Draghi, who spent most of his career in the public sector, spent a few years working for Goldman in Europe. He may even have been in a position where he should have known about Goldman’s nefarious sleight of hand in hiding Greek government debt, blamed by many for exacerbating the later crisis in that country.
This allowed Axel Weber, the head of Germany’s central bank, the Bundesbank, to take the lead in the race for the ECB succession. The original deal to locate the ECB in Frankfurt had seemed to rule out a German as head of the bank. So Dutchman Wim Duisenberg was the first president, with a shortened four-year term, and Frenchman Trichet became the second.
Weber has been a strong, outspoken central banker in the classic Bundesbank mode. An inflation hawk, a fiscal conservative, and a strict monetarist, he began to look like the ideal choice to keep the euro on a straight and true path. An academic whose policy experience came on Germany’s council of economic advisers, he never worked for Goldman Sachs.
But then the euro crisis broke, and Weber began to show the dark side of his Teutonic strictness. When Trichet, who had maintained the ECB would never take the political step of buying government bonds, reversed himself and bought bonds in the secondary market to alleviate the pressure on the debt of Greece and other European peripheral countries, Weber not only opposed the move as a member of the ECB’s governing council, but publicly criticized the policy.
This breach of central bank protocol angered his colleagues at the ECB and earned Weber the reputation of being undiplomatic and perhaps not suited to the task of heading the ECB. Weber for a while went on a charm offensive but by the time of the IMF/World Bank meetings in Washington in October was back to being a blunt, undiplomatic contrarian – urging an end to the bond purchases and an early exit from the ECB’s easy monetary policies in opposition to the consensus on the central bank council.
Weber’s remarks in various forums in Washington were so blunt, in fact, that some observers suggested the decision had already been made against him – or that he simply doesn’t care if he gets the ECB job.
This has prompted speculation that a small-country candidate might emerge as a compromise, with Yves Mersch, head of Luxembourg’s central bank, mentioned as a possibility. This would fit in with a pattern of EU compromise that saw a relatively obscure Belgian, Herman Van Rompuy, named as the first full-time president of the European Council last year. Mersch certainly has the competence and diplomatic skills for the job. If Weber is a bit like Shrek, Mersch is a trimmed, pinstriped version of Asterix.
But Mersch lacks either the personal or political weight of a Trichet, or even a Duisenberg. Earlier this year, the ECB pick Portuguese central banker Vitor Constancio as vice president, implying that the presidency would remain with a big-country representative. Also, a putative north-south balance at the top seemed to give the nod to Weber over Draghi.
But Draghi still remains a contender if he can overcome concern about his Goldman role. Weber is still the 800-pound gorilla, but he may have gone too far in alienating France and other southern European countries.
Other possibilities would be to pick someone from the ECB executive board – say the German Juergen Stark, who unlike Weber supported the ECB bond purchases. The ECB could venture outside the ranks of current central bankers and turn to Jaime Caruana, former Bank of Spain governor who spent some time at the IMF before becoming the general manager of the Bank for International Settlements. Or some other dark horse candidate could emerge. Place your bets.
By Darrell Delamaide for Oilprice.com