Draghi’s ECB Fate Rests With Merkel, Not Schaeuble or Bookies
Governor of Italy's Central Bank Mario Draghi. Photographer: Antoine Antoniol/Bloomberg
March 4 (Bloomberg) -- Bloomberg's David Tweed reports on Italian Central Bank Governor Mario Draghi's chances of replacing Jean-Claude Trichet as European Central Bank President. Mark Barton introduces this report on Bloomberg Television's "On The Move." (Source: Bloomberg)
Europe’s oddsmakers call Italy’s Mario Draghi the favorite to take over the European Central Bank. Associates of German Finance Minister Wolfgang Schaeuble call his qualifications undisputed.
What the person who will determine the decision -- German Chancellor Angela Merkel -- wants is less clear. As Europe nears a late-June deadline to make the appointment, Draghi’s career and the ECB’s fate are caught up in her political calculus.
With Portugal’s looming bailout pushing the cost of aiding debt-wracked euro states past 250 billion euros ($361 billion), whether Merkel, who has been punished at the polls for backing rescues, could tolerate a southern European ECB chief is in question. The German choice, Axel Weber, withdrew amid concern his objection to ECB bond buying undercut his chance at the job.
“It makes more sense for Merkel to stay silent on this right now, whether there’s a new German candidate or not, showing her cards only at the point where it counts,” Lars Feld, a Freiburg University professor who serves on the German government’s economic-advisory panel, said in an interview yesterday. “That’s strategically sound.”
Unfolding behind the scenes, the campaign for ECB president runs in parallel with efforts to contain inflation while stamping out the debt crisis that generated renewed speculation that Greece, now drawing on 110 billion euros in European Union- led loans, will renege on its bills.
As Europe’s dominant economy, Germany is critical to picking a successor to ECB President Jean-Claude Trichet, a Frenchman whose term terminates at the end of October. Germany’s status as the leading guarantor of the euro rescue packages gives it further influence.
Last Word
Signals that Schaeuble is behind Draghi may not be borne out. Merkel and her finance minister have sparred over the handling of the debt crisis -- with the chancellor always having the last word.
Only last month, Schaeuble signed a financing agreement for the region’s 700 billion-euro emergency-aid fund to be set up in 2013. Two days later, Merkel tore up the deal, insisting on stretching Germany’s payments over a longer period.
Merkel also overruled Schaeuble’s attempt to keep the International Monetary Fund out of the Greek rescue -- doing so less than a week after the wheelchair-bound finance minister was released from the hospital in March 2010.
Draghi’s origins in Italy, Europe’s most debt-ridden state until overtaken by Greece in 2009, are “a potential issue,” said Holger Schmieding, London-based chief economist at Joh. Berenberg Gossler & Co. German acceptance of him may hinge on a wider bargain, including a “de-facto veto” over future bailouts, he said.
June Decision
Merkel refuses to be drawn on the ECB. Germany won’t settle on its pick until June, deputy government spokesman Christoph Steegmans said yesterday.
Bailout politics narrow Germany’s room for maneuver, with resentment at propping up deficit-prone governments translating into regional electoral defeats for Merkel’s Christian Democratic Union and its allies.
“There is deep-seated dissatisfaction with the euro in Germany and Merkel is conscious of that,” said James Nixon, co- chief European economist at Societe Generale SA in London and a former ECB forecaster. “Draghi is building up some degree of momentum, but has limited appeal in Germany and at this juncture that’s a weakness.”
Finland, like Germany a AAA rated state, offered a cautionary tale when an anti-bailout party finished third in elections on April 17. In Germany, the popular backlash led even the Free Democrats, the junior party in Merkel’s coalition, to slip their pro-European moorings and cultivate votes on the anti-euro fringes.
One of Several
In an interview last week, German Deputy Foreign Minister Werner Hoyer said Draghi would make a “very good” ECB chief, yet spoke of him as one of several possibilities.
“Draghi’s credentials as a sound fiscal-policy and monetary-policy stabilizer are beyond any doubt,” Hoyer, a Free Democrat, said in the April 15 interview. “We have not decided within the cabinet whether we are going to nominate a German candidate or whether we support one of the other candidates. It’s a completely open question.”
Weber, Germany’s first contender, dropped out in February, preferring a return to academic life over a chance to step into the glare of running the world’s second most powerful central bank. He also quit as head of Germany’s Bundesbank.
Euro’s Gain
The euro climbed to $1.4548, its highest in 15 months yesterday, on economist forecasts that the ECB will raise its benchmark rate a further 50 basis points this year to 1.75 percent.
Politics, not monetary credentials, will dictate the appointment. It will mark the first time Europe has named a new top central banker since the ECB’s first two presidents were simultaneously selected in May 1998, eight months before the euro’s debut.
At the time, Wim Duisenberg of the Netherlands, backed by Germany and the central banking community, faced a veto threat from France. A political deal was struck to give him the job, as long as he stepped down midway through his eight-year term to hand off to Trichet.
The EU has since dropped the policy of allowing solitary countries to block high-level appointments. The voting math now requires anywhere from two to six of the euro region’s 17 countries to band together to wield a veto, with bigger countries holding more clout.
Betting Line
Draghi, 63, a Massachusetts Institute of Technology-trained economist with stints at the World Bank and Goldman Sachs Group Inc. (GS) on his resume, is the bettors’ choice. Irish bookmaker Paddy Power Plc (PWL) makes him a 4-7 favorite, followed by Germany’s Klaus Regling, a non-central-banker, at 7-2. Luxembourg central bank Governor Yves Mersch and Dutch central bank chief Nout Wellink are at 7-1.
Money plunked down in a betting shop isn’t the best guide to European decision-making. Two weeks before Herman Van Rompuy of Belgium was named the EU’s first president in 2009, Paddy Power was tipping Dutch Prime Minister Jan Peter Balkenende and former U.K. Prime Minister Tony Blair.
Draghi carries none of the negatives that felled Blair, a polarizing figure who split Europe by backing the Iraq war in 2003, said Nick Kounis, an economist at ABN Amro NV in Amsterdam.
“Blair was talked about as a frontrunner, but it’s also clear that there were a lot of people who would say ‘over my dead body,’” Kounis said. “I don’t think that there’s anyone who would oppose Draghi violently.”
To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net
To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net
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