Tuesday 27 September 2016

There is only one man to succeed Honohan...

Dan O'Brien names the person he believes is the strongest candidate to replace Patrick Honohan at the Central Bank

Published 07/06/2015 | 02:30

STEPPING DOWN: It’s possible that Patrick Honohan’s decision to stand down this side of the general election was to make it more difficult to appoint a member of the ‘mandarinate’
STEPPING DOWN: It’s possible that Patrick Honohan’s decision to stand down this side of the general election was to make it more difficult to appoint a member of the ‘mandarinate’

Among the most powerful and important unelected positions in the apparatus of the state is the governor of the central bank. The very high profile of the incumbent, Patrick Honohan, is testament to that. But his decision to step down 12 months early - by the end of this year - raises the hugely important question of who should replace him.

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If it is vital that Honohan's successor is up to the job, it is unfortunate that no human being alive possesses all of the characteristics and skills needed to do all aspects of the job well.

The reason nobody can possibly meet all the requirement of the job is because it has such a wide range of responsibilities.

The skills and abilities a central bank boss needs include: deep knowledge of the many aspects of financial regulation in order to minimise the inherent dangers moneymen pose to economic security; expertise in issues around the setting of interest rates; an ability to intervene effectively when sitting around the table with 24 other people at the European Central Bank in Frankfurt; a capacity to communicate effectively, calmly and with authority to the general public; a strong personality who is independent-minded and capable of standing up to political pressures if and when they are applied; and an ability to manage what is now a very big and sprawling organisation of 1,500 people.

If the recruitment process is strictly merit-based, the decision on who becomes the next governor will come down to picking the person who ticks the most boxes and who has fewest weaknesses.

With such a large number of people having been mentioned as possible successors, it is useful to start by narrowing the field down; setting out who should not get the job, and why.

Before Honohan, it had been a tradition to give the governor role to an end-of-career mandarin from the Department of Finance as a retirement present. This way of doing things did not end well. The sorry tradition was broken by the previous government and it would be a highly retrograde step if this government were to return to it.

It may not be entirely fair that everyone in the civil service is ruled out on this occasion, but appointing one of their number would look like a reversion to old ways. It could even end up that way, resulting in outsiders never again getting a look in (it is possible that one reason for Honohan's decision to stand down this side of the general election was to make it more difficult for the government to appoint a member of the mandarinate).

If an insider is wrong for the job, neither should a non-Irish outsider get it.

Appointing foreigners across the administrative system is essential for small countries, and all the more so for small countries which are not unfamiliar with the problems of groupthink. It is, for example, a very good thing that both of the people immediately beneath Honohan - the deputy governor and the financial regulator - are foreigners.

But for a country in the euro it is important that a national leads the national bank. That is widely understood elsewhere. No member of the 19-member currency zone has ever had a foreigner lead its central bank. The reason for that is because a country's representative in Frankfurt must have a strong sense of the national interest. Nationals almost always have a better sense of their own country's national interest than foreigners, and are more likely to pursue it.

Another reason an Irish person should get the job is the need of the governor to have a deep understanding of politics. Over the seven-year term of the next governor it is very likely he/she will come into conflict with whatever government is in power on one issue or another, and very possibly on more than one issue.

Having a good feel for how politics works will be essential in any clash, and the sort of deep and detailed understanding needed is very difficult for someone who has not grown up observing matters at first hand (something that is true of all countries).

So if neither a civil servant nor a foreigner is right for the job, who should it be?

By a process of elimination I arrive at Alan Ahearne, the economist who was former finance minister Brian Lenihan's advisor at the height of the crisis. Although not without weaknesses, the head of the economics department in NUI Galway ticks more boxes than any other candidate.

Having worked in the US central bank for seven years and sat on the board (officially called the commission) of the Irish Central Bank since 2010, Ahearne is familiar with how these institutions work.

His academic background and work over the years qualifies him in the branches of economics - monetary policy and, if to a somewhat lesser extent, financial systems - most relevant for the job. (Although there are a couple of possible candidates who have greater specific expertise in those fields, they don't have as wide a range of skills, qualities and experience.)

Having knowledge is one thing, being able to apply it is another. Ahearne has not only worked in a pivotal policy-making role as Brian Lenihan's advisor, he did so at a moment of national emergency.

Given Ireland's fragilities (discussed in an accompanying column in the Business section of this newspaper) and the fragilities of both the European economy and the euro, there could very well be another period of crisis over the next governor's seven-year term. If that does happen, Ahearne has shown himself to be calm under fire and capable of handling pressure.

That has earned him credibility and respect at home. But he is also held in high standing internationally, as illustrated by his appointment to a group of three international experts by the IMF to scrutinise how it advises countries on their economic growth strategies. He is plugged into the EU scene via his position as research fellow at Bruegel, one of the most influential European think tanks.

Considering all of this, if Ahearne where to show up in Frankfurt as Honohan's successor, his career track record means he would be taken seriously and that the 24 other members of the ECB's governing council would be minded to listen him, something that is a vital national interest given the importance of the decisions taken around that table .

There is also reason to be confident that he would perform well in that forum. As a representative from a country that accounts for just 1pc of the euro area economy, no Irish governor will have the same clout as his/her German or French counterpart. That makes it all the more important that Honohan's successor knows when and how to intervene.

Ahearne does not have a reputation as someone who likes the sound of his own voice (not all other candidates for Honohan's job share this virtue), but when he does have something to say it is substantial and he has the tactical nous to know when to say it.

If he has a weakness in situations involving group dynamics it may be that he is not sufficiently extrovert and could do with a little more of the sort of charisma that can win others over.

What is not in question is Ahearne's independence of mind, a key requirement for the role. In his regular columns in this newspaper in the lead up to the crash and in the short time thereafter, before he became Lenihan's full-time advisor, he frequently took the then unpopular position of warning about the excesses of the time.

That is a characteristic all governors need, most particularly in financial regulation.

There is still some considerable way to go before domestic banks deal with their non-performing loans. Accelerating that process will have to be a priority for the next governor.

Even more challenging will be controlling the more exotic parts of the industry. Dublin's International Financial Services Centre has brought many benefits for Ireland in terms of jobs, exports and tax revenue. But it is not without risk.

The never-ending scandals involving big finance illustrate that there is no little amount of rottenness in the industry. Having so many global financial operators doing incredibly complex things out of Dublin's docklands means that there is a real danger of something going wrong. There are potentially major costs for Ireland if that happens.

Regulating financiers is extraordinarily difficult given their resources, their capacity to get around the rules and, not infrequently, their ruthless venality. Ensuring that the people with the necessary skills are available to supervise them will be among the major challenges for the next governor.

And this managerial matter is Ahearne's major weakness. Although he runs a university department, it does not amount to the sort of management experience ideal for taking over an organisation as large and complex as the Central Bank.

He would need a strong capacity to delegate and good judgement in choosing an experienced manager when the next deputy governor is appointed next year.

But it cannot be stressed enough that nobody has the full complement of skills and experience for the role. Ahearne ticks many boxes. Nobody ticks more. He should get the job.

Sunday Independent

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