Race to the top: Who does Europe want to lead the ECB?


It should be easy to predict who will succeed Jean-Claude Trichet at the ECB. But since Germany’s Axel Weber said he planned to abandon policy making for academia, the options have been cast wide open.

It should be easy to predict who will succeed Jean-Claude Trichet at the ECB.
But since Germany’s Axel Weber said he planned to abandon policy making for
academia, the options have been cast wide open.

The current favourite to follow Jean- Claude Trichet as European Central Bank (ECB) President is Banca d'Italia governor Mario Draghi, who has led Italy's central bank since 2006.

The odds on him gaining the prestigious position are 4:6, according to Irish financial betting service Paddy Power. That is quite surprising.

Italy's eligibility has been somewhat affected by political scandal surrounding its premier and its ailing economy, causing European peers to question whether it can act as a credible representative of the whole bloc.

As Jens Sondergaard, Nomura's senior European economist puts it: "Whether Draghi will get it depends on whether his candidacy will get the approval of Italy's European partners, where the German view is critical."

Adding to that element of doubt is whether the northern European members of the ECB will accept a candidate who is, on the surface, not another Weber.

"Is he acceptable enough for the northern countries?" asks Valentijn van Nieuwenhuijzen, ING IM's chief strategist. Draghi needs to overcome the perception that the southern peripheral countries cannot fulfil a role of responsible economic leadership.

Italy's current debt to GDP ratio is 103.7%, according to the CIA World Factbook. Its public deficit has dropped, although it remains high, from 4.1% in Q4 2009 to 3.8% in Q4 of last year. If Italy commits to fiscal responsibility, Draghi should be in a stronger position.

Although no one is privy to what goes on behind closed doors in political circles, it appears as though a deal may have been struck between Germany's chancellor Angela Merkel and Italy's prime minister Silvio Berlusconi, says Sondergaard.

That political ‘horsetrading' involves Italy accepting a strict debt reduction plan on Merkel's insistence. But to make it acceptable for the Italians, a deal sweetener is needed. In return, Germany, the lynchpin of Europe's political and economic power, could back Draghi for the presidency.

But that is not to undermine Draghi's suitability. He is frontrunner for a reason. Europe's leading economists respect him.

"He is within the ranks of the strong members of the ECB governing council," says Sondergaard.

Mario Valli, chief eurozone economist for UniCredit Research in Milan, says Draghi is his personal favourite candidate, as well as the most likely to succeed.

Draghi has an impressive CV. He is a well-trained economist, holding a PhD from leading US academic institution, the Massachusetts Institute of Technology (MIT). Unlike many of his peers who have spent their life shielded in more political circles, Draghi holds private sector experience. That is a great selling point for him as far as Europe's financial services industry is concerned.

For three years, he was vice chairman and managing director of Goldman Sachs International. He has also held other international roles, serving as executive director of the World Bank from 1984 to 1990.

"On paper, he's very good," says Sondergaard.

Diplomacy and communication

Draghi benefits from possessing the diplomatic attributes that Weber lacked, the industry thinks.

"He has the diplomatic skills which some of the governing council members don't have," says Valli at UniCredit.

Van Nieuwenhuijzen agrees diplomacy is a vital attribute for the ECB leader. "You have to be diplomatic; you have to be a team player. That's where it all went wrong with Weber," he says.

Weber is known for being outspoken, hawkish and set in his views. While being a strong leader, Draghi could offer more as a consensus builder, thinks Valli.

"Draghi puts things bluntly, but can do so in a relatively diplomatic way," he says.

"Weber was not a credible candidate for the job," agrees Sondergaard. "It was hard to see how he could adopt the more diplomatic and consensus-building tone required for the top ECB job."