By Tom Fairless
FRANKFURT -- It's horse-trading season in Europe.
The continent's leaders are preparing for weeks of
politically-charged haggling to determine who runs its top
institutions including, most critically for investors, Mario
Draghi's successor as European Central Bank president.
The opaque process is coming under renewed scrutiny given Mr.
Draghi's dominant role in Europe's economic recovery since he
assumed office nearly eight years ago.
Mr. Draghi's 2012 pledge to do "whatever it takes" to save the
euro helped end the region's spiraling government debt crisis. But
its power derived from his personal credibility with investors and
within the ECB.
The backroom dealing over the job comes as the continent's
economy is softening amid waning overseas demand for its exports,
and as a new wave of anti-EU populists threatens to disrupt the
bloc's decision-making.
The criticism is less that the process delivers bad candidates,
than that it excludes names that should also be in the mix. It
could lead to a compromise candidate who doesn't upset anyone but
is not the best for the job.
The process "has absolutely nothing to do with competence for
the role," said Mujtaba Rahman, an analyst with Eurasia Group and
former EU official. "The ECB will be the most important institution
in the event of another crisis."
Europe's economy faces a plethora of challenges, including a
lack of large technology firms to compete with U.S. and Chinese
rivals, international trade wars and messy negotiations over
Britain's departure from the EU.
The ECB's key interest rate is already below zero, and officials
face tricky decisions on whether to reduce it further or, if the
economy slows considerably, restart bond purchases to provide more
stimulus. These deliberations could have big effects on bond and
currency markets.
The deal-making over top EU jobs kicks off immediately after
Sunday's European Parliament elections, with a preliminary EU
leaders' dinner scheduled for May 28. It is expected to wrap up in
time for their summit on June 20-21, although that could be
delayed.
In theory, eurozone finance ministers vote on candidates for the
ECB's presidency put forward by national governments, and EU
leaders then make a final decision, in consultation with the
European Parliament and the ECB itself. In practice, eurozone
leaders will likely converge on a consensus candidate as part of a
broader package of top EU jobs -- including the heads of the EU's
executive branch and foreign service -- that balances nationality,
political affiliation and gender.
The role of politics isn't unusual in such a selection. In the
U.S., the president nominates a Federal Reserve chair who is then
subject to Senate confirmation. The complaint in Europe is that
issues of nationality, geographical north-south balance and
big-versus-small countries narrow the field rather than expand
it.
Just a handful of policy makers stand a realistic chance of
replacing Mr. Draghi, according to EU officials. They include Bank
of France governor François Villeroy de Galhau, ECB board member
Benoît Coeuré, Finnish central-bank governor Olli Rehn and his
predecessor Erkki Liikanen, and Bundesbank President Jens
Weidmann.
Mr. Weidmann is seen as Germany's best chance to install one of
its own as ECB president for the first time, even though he vocally
opposed some of Mr. Draghi's crisis-era stimulus programs,
particularly bond buying.
Mr. Draghi's eight-year term ending in October is unrenewable,
unlike Fed chairs, who can serve multiple terms.
The ECB process contrasts with more open approaches at other
major central banks. Former Fed Vice Chairman Stanley Fischer
joined the U.S. central bank after running Israel's. Bank of
England Gov. Mark Carney previously ran the Bank of Canada, and the
U.K. central bank recently placed a public advertisement for his
successor.
European leaders "are excluding probably two thirds of those
they should be considering -- those without political ties to the
larger countries, including from outside the euro area and from
academia," said Adam Posen, an American economist who served on the
BOE's rate committee through 2012 and now heads the Peterson
Institute for International Economics.
The decision "matters gravely, but more for the ideology than
for the individual picked," Mr. Posen said. "There is clearly a
genuine division of views as to how activist the ECB should
be."
The ECB's next president will be determined in part by European
Parliament elections Sunday. Mr. Weidmann's chances would be hurt
if a German candidate emerged victorious from those elections
because, according to European convention, German nationals
couldn't hold more than one top EU job.
That would presumably bolster Mr. Villeroy de Galhau's chances
because France dominates decision-making along with Germany. But a
Frenchman, Jean-Claude Trichet, has already served as ECB
president. That consideration would be akin to ruling out a Fed
chair candidate because a predecessor was from the same state.
Political acumen is another requirement, since the ECB oversees
a currency union comprising 19 countries. Both Finnish candidates
are former politicians, while the French candidates both spent time
in the finance ministry. Mr. Weidmann was a top economic adviser to
Chancellor Angela Merkel.
Current ECB board members are unlikely to be elevated to the
presidency, because EU law appears to exclude it. That limits the
hopes of Mr. Coeure, a Draghi lieutenant considered by many
analysts to be among the best-qualified candidates. None of the
three most recent Fed chairs would have been eligible for the top
job if that rule applied in the U.S. because all previously served
on the Fed's board of governors, which is the equivalent to the
ECB's six-person executive board.
Panicos Demetriades, euro member Cyprus's former central banker,
says he suggested at a recent conference in Frankfurt that the ECB
copy the Bank of England by advertising publicly for Mr. Draghi's
successor. "People laughed," he said.
Write to Tom Fairless at tom.fairless@wsj.com
(END) Dow Jones Newswires
May 25, 2019 07:14 ET (11:14 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.