In Europe, Haggling Begins Over Who Will Succeed Mario Draghi

Date : 05/25/2019 @ 12:29PM
Source : Dow Jones News

In Europe, Haggling Begins Over Who Will Succeed Mario Draghi

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.


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