Tuesday 20 February 2018

The ECB frontrunner

He has powerful backers for the Frankfurt hot seat, but Italy's top banker is tainted by his past links to Goldman Sachs

AS THE clock runs out on Jean-Claude Trichet's term as ECB president, all eyes are on Italian central bank boss Mario Draghi to succeed him next October.

In the run-up to the creation of the euro in 1999, Germany insisted that the new European Central Bank, which would be responsible for managing the new currency, be closely modelled on its own central bank, the Bundesbank.

Having seen two currencies destroyed by inflation during the first half of the 20th century, the fear of inflation lurks deep in the German psyche. This meant that when, in 1948, Germany introduced its second new currency in just 25 years, the D-mark, there was an almost universal consensus that inflation must be curbed at all costs.

This was achieved by freeing the Bundesbank from political control. By giving the job of setting interest rates and controlling the money supply to independent central bankers rather than to electorally vulnerable politicians, it was believed that further bouts of inflation could be prevented and the value of the currency protected.


And so it proved to be. For the next half century the D-mark was the strongest of Europe's major currencies. While finance ministers in France, the UK and Italy all occasionally succumbed to the temptation to keep interest rates too low or let the printing presses run, the politically independent Bundesbank adhered rigidly to its hard-money policy.

This meant that the D-mark became Europe's de facto benchmark currency, a position that was formalised by the creation of the European Monetary System (EMS) in 1979. Membership of the EMS meant that all of the other participating countries had to effectively peg their currencies against the D-mark, with the Bundesbank setting an interest-rate floor for the entire system.

German dominance of the EMS was one of the main drivers behind the creation of the euro. By creating a single currency, in the running of which each member country would have a voice, German monetary dominance of Europe would be restrained.

That may have been the theory. The reality has been somewhat different. With German public opinion deeply suspicious of the entire single currency project and extremely unwilling to give up its beloved D-mark, Germany insisted that the new European Central Bank be a Bundesbank clone. And so it has proved to be. For the first 12 years of its existence, the ECB has diligently adhered to the path of monetary rigour.

However, despite being essentially a Bundesbank replica, no German has ever headed up the ECB. A Franco-German compromise resulted in Dutchman Wim Duisenberg getting the first shot at the job. When he stepped down in 2004, Frenchman Jean-Claude Trichet took over as ECB president.

With France having already had its turn at the ECB presidency, the original expectation was that the job would go to Bundesbank boss Axel Weber when Trichet's seven-year term expired later this year. The deepening eurozone crisis, and mounting resentment in the so-called PIGS (Portugal, Ireland, Greece and Spain) at the harsh austerity measures being demanded by the ECB, put paid to German hopes.

While the PIGS have had no choice but to swallow the unpleasant medicine prescribed by the ECB, the temptation for one or more of them to block a German candidacy could have proved irresistible. Unwilling to risk such a rebuff, German Chancellor Angela Merkel quietly withdrew her support for Weber who, with the prospect of the ECB presidency now closed to him, quit the Bundesbank earlier this month.

Now the focus has shifted to Mario Draghi, the governor of the Bank of Italy. As Weber's star has waned, so Draghi's has waxed. Having already secured the support of the Italian government to succeed Trichet, this week his campaign for the ECB presidency received a powerful boost when French president Nicolas Sarkozy announced that France would also be backing his candidacy.

Sarkozy's support is merely the latest in a series of high-profile endorsements of Draghi's candidacy. Among those who have already come out in his support are 'The Economist' magazine and 'Financial Times' columnist Wolfgang Munchau. Meanwhile, 'The Wall Street Journal' has reported that, with Weber now out of the running, German Finance Minister Wolfgang Schauble is now "open" to the possibility of Draghi becoming ECB president.

Draghi certainly ticks all the boxes for a potential ECB president. A native of Rome, he graduated with an economics degree from that city's La Sapienza University before going on to receive his PhD from the Massachusetts Institute of Technology. He was an economics professor at the University of Florence from 1981 to 1991, while he also served as an executive director of the World Bank between 1984 and 1990.

Then in 1991 he was appointed director general of the Italian Treasury, the equivalent of secretary-general of the Irish Department of Finance. He spent a decade in this position during which he oversaw the reform of Italian financial and corporate law as well as playing a key role in the negotiations that led to Italy's membership of the euro.

However, it was what Draghi did next that may ultimately scupper his chances of becoming the next president of the ECB.

In 2002 he became a vice-chairman of Wall Street investment bank Goldman Sachs, sitting on its management committee. Even if one doesn't necessarily agree with 'Rolling Stone' journalist Matt Taibbi's memorably over-the-top description of Goldman as "a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money", a Goldman connection is now a hindrance for anyone, including Draghi, who aspires to one of the top jobs in global finance.

An even bigger hindrance may prove to be the circumstances in which he became governor of the Bank of Italy in 2006. His predecessor Antonio Fazio was recorded by phone taps apparently seeking to block a bid by Dutch bank ABN AMRO for Italian bank Banca Antonveneta in favour of a rival Italian bid.

Fazio resisted calls to quit for several months, with the Berlusconi government claiming that, because the Bank of Italy was independent, it couldn't fire him, a stance which prompted the resignation of Economy Minister Domenico Siniscalco. Eventually, and with no little bad grace, Fazio resigned in December 2005.

While Draghi can hardly be blamed for Fazio's misdemeanours, the affair served as an unwelcome reminder that, in Italy, things are rarely what they seem to be.

Working in Draghi's favour is not just the absence of other similarly well-qualified candidates, but the shifting balance of power on the ECB's ruling council. This consists of the six members of the ECB's executive board, who are of course full-time ECB employees, and the governors of the national central banks.

When the ECB opened for business in 1999 there were just 11 members of the eurozone; in other words, the council had 17 members. This meant when the votes of German monetary satellites such as the Netherlands, Austria and Finland were added, Germany was guaranteed a council majority.

Not anymore. Since then another six countries -- Greece, Estonia, Malta, Cyprus, Slovenia and Slovakia -- have joined the eurozone. This has made it much more difficult for Germany to secure an ECB council majority, and that was even before the PIGS started to get restive. If Germany is to continue to call the shots at the ECB then it might be best served if its voice was heard in an Italian accent.

Irish Independent

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