The Hunt for Europe’s new Central Banker

As we hit on in a note yesterday titled “Who is Germany’s New Bundesbank President?”, the departure of Axel Weber throws a kink in the race to replace ECB president Jean-Claude Trichet in October, not only due to his experience and gravitas, but also his firm hawkish stance on monetary and fiscal policy.

 

Below we lay out the main candidates in the running for Trichet’s seat. Sifting through the candidates, it’s clear that each one has a fault of some sort, be it their nationality, past work experience or affiliations. If Weber was the heavily favored candidate before his departure late last week, now Italy’s CB governor Mario Draghi is the favorite, however in our opinion he seems like the best of the rest and we’re critical of his dovish, “Trichet-puppet” posture. 

 

Given that Europe continues to be in the thick of a sovereign debt crisis, which we believe has a 3-5 year tail, especially considering that European leaders appear unwilling to let member states default on their debt, the stakes for ECB succession are even further elevated. We’re of the camp that a more hawkish stance from the next ECB president would benefit the region given rising inflationary pressures and the need to impose fiscal restraint (including penalties for abuses) on countries that overstep debt and deficit limits.

 

So without further ado, here are the profiles of the main candidates:

 

 

Mario Draghi (Italy)

 

Position 1: Bank of Italy Governor since 2006, Draghi, 63, appears to be the front runner to replace Trichet.   As chairman of the Financial Stability Board, Draghi has been at the core of international efforts to rewrite the rules of global finance following the credit crisis, experience that should win him the favor of Trichet, who is chair of Europe’s new risk watchdog.  Draghi is viewed as a dovish candidate in the spirit of Trichet.

 

CV:

  • 1976: Economics doctorate from the MIT.
  • 1: Executive Director of the World Bank.
  • 1: Official in the Italian Treasury. He worked on Group of Seven meetings and led the privatization of $105 billion worth of Italian companies.
  • 2002-05: Employed by Goldman Sachs, in which he arranged currency swaps that helped Greece hide the extent of its budget deficit.   

Hang-ups:

  • Draghi has the backing of Italian Prime Minister Silvio Berlusconi, which should count against him given Berlusconi’s numerous political and sexual scandals over the last years, included a pending trial; the severe debt leverage on Italian balance sheets should serve as a further detractor, symbolic of southern Europe’s fiscal irresponsibility.
  • Draghi’s 3-year stint as a vice chairman of Goldman Sachs reflects poorly against a European populous that blames investment bankers for the region’s credit crisis.   
  • His selection would leave two southern Europeans atop the ECB, with Portugal’s Vitor Constancio as ECB vice president. A third, Jose Barroso of Portugal, runs the European Commission.

 

Yves Mersch (Luxembourg)

 

Position 2: Luxembourg Central Bank Governor Mersch, 61, ranks as a German-style inflation hawk, with the ability to speak German, French, and English. A lawyer by training who helped negotiate the 1991 Maastricht Treaty that created the euro, Mersch has sat on the ECB’s council since its inception.

 

CV:

 

1: Director of the Treasury

Since 1998: Govern of Luxembourg Central Bank

-Previous posts include: IMF and World Bank alternate Governor; European Bank for Reconstruction and Development (EBRD) alternative Governor; European Investment Bank (EIB) board member; and Development Bank of the Council of Europe board member.

 

Hang-ups: The appointment of Mersch might force Luxembourg Prime Minister Jean-Claude Juncker, Europe’s longest-serving government head, to give up his role as the chairman of the monthly meetings of euro-area finance ministers.

 

 

Erkki Liikanen (Finland)

 

Position 3: Liikanen, 60, has run Finland’s central bank since 2004. As Finland’s finance minister in the late 1980s, he oversaw the boom of the Nordic economy before growth slumped.  After negotiating Finland’s 1995 accession to the EU, he served as European budget and business-promotion commissioner. Liikanen is viewed as a more acceptable candidate than Draghi by Germany, although not known as an inflation hawk, and as a positive sale to Merkel as a northern European.

 

Hang-ups: Fellow countryman Olli Rehn is now EU commissioner for Economic and Monetary Affairs. As is so often the case, European leaders do not want to be seen favoring one country for top leadership positions, and all things being equal Finland represents a small percentage of the Eurozone GDP to have two high profile leaders. 

 

 

Klaus Regling (Germany)

 

Position 4: Klaus Regling is currently head of the European Financial Stability Facility (EFSF).

 

Hang-ups:

  • Critics suggest he’s at a disadvantage because of his lack of monetary policy experience, despite the years he spent working in the International Monetary Fund (IMF), the German Finance Ministry, and private industry.
  • Regling has different plans for the future and has already indicated to German government representatives that he would like to be president of the new European Stability Mechanism (ESM), which will replace the current bailout fund starting in 2013. The European Commission envisions the new facility, which is designed to permanently combat crises in the euro zone, becoming a powerful institution almost as important as the ECB.
  • Given Merkel’s appoint of Jens Weidmann as the new Bundesbank President this week, it is unlikely, due to timing, that Merkel could push through another high-profile countryman. 

 

OUTSIDE CANDIDATES

 

Juergen Stark (Germany)

 

Position 5: Juergen Stark, the ECB's German chief economist, could have been a candidate, but he would not be able to complete a full eight-year term because he has already served on the ECB council for more than four years.

 

 

Athanasios Orphanides (Cyprus)

 

Position 6: A long-shot contender, and the youngest, Orphanides, 48, who heads Cyprus’s central bank and has worked 17 years as a Federal Reserve economist.  He was the first ECB official to argue in favor of 0% interest rates amid the global downturn. He was born in communist-ruled Czechoslovakia and studied at MIT.

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The next weeks will be telling to see if Draghi loses his top pole position. While the top candidates come with impressive credentials, there’s a fierce battle brewing over nationality, namely northern versus southern representation. The Germans have largely voted against Draghi in favor of a northern candidate, and the initial read-though would suggest that Draghi is more dovish leaning than Mersch or Liikanen. Clearly the French under Trichet will also have considerable pull, and Trichet looks to be signaling his vote for Draghi. 

 

There’s speculation that the ECB would like to firm up a decision on the next ECB president by March, perhaps to coincide with the European Summit that takes place on March 24-25, the catalyst for the release of the framework for the new European Stability Mechanism.   

 

Tick tock,

 

Matthew Hedrick
Analyst