ECONOMICS:An Austrian and a Belgian have the best credentials to succeed Jean-Claude Trichet in one of Europe's toughest posts, writes DAN O'BRIEN
LISTENING TO the Central Bank governor recently, I wondered if Patrick Honohan might be a candidate to take over as head of the European Central Bank when a vacancy opens up next year. Listening to Jean Claude Trichet, the incumbent, speaking at the ECB’s monthly press conference yesterday, the succession issue came to mind again.
Trichet’s eight-year term ends in 14 months. A successor will have to be agreed by the middle of next year. One of the heads of the bloc’s 16 national central banks is expected to fill the role. Issues of nationality, capability and personality will be at play when one of the world’s most powerful economic policy makers is chosen by the euro area’s political leaders.
Until a few months ago, the head of the German central bank, Axel Weber, was all but assured of the job. He is now unlikely to be given it following a second breaking of ranks with his ECB colleagues (all national central bank chiefs have, ex officio, a place on the board of the ECB, along with six other appointees). The most recent solo run took place on live TV when he pre-empted issues up for discussion at this week's monthly meeting of the board.
France never wanted Weber, or any other German, to get the job. His recent blunders are a perfect excuse to veto him. Germany’s chancellor, Angela Merkel, is more determined than ever that the next ECB president be Weber. The notoriously poor personal relationship between Merkel and France’s president, Nicolas Sarkozy, will not smooth matters.
Divisions between Germany and France – the two central players in the euro area – on fundamental issues of economic management are profound and have long existed.
Tensions rose sharply in the first half of the year when momentous decisions on bailing out weak euro area countries were taken. The sheer gravity of the situation contained the conflict then. The issue of who runs the ECB, however, could be a flash point. France is in a strong position – it is almost always easier to stop things happening in EU affairs than to make them happen.
Assuming France does not budge and Weber stays at the Bundesbank, there are 15 other central bank chiefs to choose from. Most are effectively ruled out before the contest starts. Four minnow counties – Cyprus, Malta, Slovenia and Slovakia – do not have the sort of policy credibility that would favour their nationals. There is a well-qualified Cypriot contender, Athanasios Orphanides, but the national credibility factor should exclude him from serious consideration.
The five PIIGS – Portugal, Ireland, Italy, Greece and Spain – have all but ruled themselves out owing to poor economic management records. Honohan’s chances are thus next to non-existent, even if he was interested in the job, which I very much doubt. The Bank of Italy’s Mario Draghi is justifiably held in very high regard, but his nationality will militate strongly against him. So will a recent stint working for the investment bank Goldman Sachs, an institution which is eyed suspiciously for its role in the financial crisis.
The remaining six euro area countries form the bloc’s core, along with Germany. Of these, the Netherlands and France are very unlikely to secure the job as the first and second ECB presidents came from these countries respectively (like most jobs in the EU, there is a very strong Buggin’s turn element to who gets what).
Of the four remaining countries, one, Luxembourg, is a microstate. The euro area economy is 1,000 times larger than the Grand Duchy’s. The leap from running a tiny, toothless central bank to steering one of the world’s two largest and most powerful is just too big. Besides, as the incumbent is a lawyer by profession, Yves Mersch is not sufficiently qualified. That leaves Austria, Belgium and Finland. The Nordic country is well managed, but its central bank boss, Erkki Liikanen, is a professional politician who does not have the technocratic credentials.
Austria’s Ewald Novotny and Belgium’s (Baron) Guy Quadan both fit the bill. The Belgian is perhaps the best fit. He is from a core country, has a PhD in economics, speaks a number of languages, has been head of the Belgian central bank since the euro was launched and has never been too political.
That final point may be Novotny’s greatest weakness – he was an MP a decade ago. But he is a German speaker and for Merkel this has appeal domestically. If she cannot persuade Sarkozy to accept a German, Novotny’s appointment could be presented as a victory for Teutonic monetary rigour. The chances are one of these two men will replace Trichet.
Given how difficult the job is likely to be, you might wonder why anyone would want it. The period from November 2011 to 2019, the duration of the one-time-only term of the ECB president, will be challenging, to say the least.
If there is not a further downturn in the real economy and if there is not another outbreak of financial turmoil, the appointment will coincide quite closely with a start of the process of raising interest rates. Divergences in economic performance and household debt levels among the member states will make a one-size-fits-all policy very ill-fitting for some.
The ECB will also be navigating a very dangerous course away from the emergency measures it has had in place since the credit crisis began. It has been the lender of last resort for three years, effectively nationalising (or Europeanising) much of the liquidity function performed in the past by short-term debt markets. Post-1990s Japan has shown how difficult it can be to return to normality.
Over the longer term, there may be a more fundamental re-evaluation of the conduct of monetary policy (owing to its contribution to creating the financial crisis). The debate is likely to be lively and long. Operationalising any changes would be complicated and may require treaty changes. A referendum here on such matters is not a pleasant prospect.
