There’s no shortage of really terrible financial jobs out there. But of all the major positions in global finance, none is probably more daunting, nor likely to be less rewarding, than the presidency of the European Central Bank (ECB).
Within the next year the leaders of the European Union will have to choose a new president for the central bank: Jean-Claude Trichet, the French incumbent, is due to stand down in 2011. There is already plenty of jostling for position. The two front-runners are Mario Draghi, a former Goldman Sachs executive, and now the governor of the Bank of Italy, and Axel Weber, a monetary economist who now runs the Bundesbank. Many other candidates are likely to emerge over the next few months. But whoever gets the job will have a Herculean task.
Trichet and the ECB have had a terrible year. True, the bank was dealt a very poor hand. The flaws in the euro were apparent from the start. The rules to make sure it worked successfully – mainly the Growth and Stability Pact that limited budget deficits to 3% of GDP – were widely flouted. Greece, Spain and Portugal ran up massive deficits. Meanwhile, France and Germany had already broken the pact in the first few years of its life, and were never in any position to lecture other countries on the need to stick to it.
Even so, the ECB hasn’t handled the crisis well. It steered its way through the credit crunch with a lot of skill, and won much respect from the markets for doing so. But that was mainly an Anglo-Saxon crisis. The ECB merely had to cope with the fall-out. The Greek drama has been a home-grown, euro-area catastrophe. And the central bank’s response has been found wanting, to say the least.
It didn’t take the crisis seriously enough to start with. At no time did it appear to understand the way the endless succession of rescue packages would be perceived by investors. It fought the involvement of the International Monetary Fund (IMF), even when it was clear that only the IMF had the skills necessary to impose some order and discipline on Greece’s chaotic budget. It resisted propping up Greek banks and other financial institutions holding large quantities of Greek, Spanish and Portuguese debt, then changed its mind. Each of those decisions took a bad situation and made it worse. All that makes Trichet an increasingly lame-duck leader of the ECB. And it makes the task of choosing his successor far more important than it would have been in more normal circumstances.
Each of the leading candidates to replace Trichet carries huge symbolical importance. In more settled times, the smooth, technocratic Draghi, with a background in the markets, might well have been a popular choice. Bank of England governors used to be financiers, rather than economists and civil servants, and there was a good reason for that. Central banking is not just about knowing monetary theory: you can always hire some boffins to do all the charts for you. It is about knowing how the markets work, and having a feel for how the economy is developing. Draghi will bring those skills to the job.
But how’s an Italian going to be received in Germany? Italy has always been the poster child for fiscal irresponsibility. Putting an Italian in charge of the ECB would signal that it was going to be a soft, southern European currency. There would be a real risk that it might well be the final straw for Germans fed up at having to bail-out what they regard as a bunch of layabout Mediterraneans.
Axel Weber would placate his fellow countrymen – and since they’ll have to pick-up the final tab for the bail-out, that would be useful. The Bundesbank has always demanded that the ECB should be the old German central bank, recreated with a different name. That was why the Germans fought so hard for it to be based in Frankfurt and ruled out a Frenchman as its founding President. They wanted a stern, monetarist institution, which believed in sound money, and made no compromises with inflation.
But there’s a problem – if the euro was going to be a rock-hard currency like the old deutschemark, then the Greeks would have been allowed to go bust. The bondholders should have been forced to suffer the losses. Bail-outs wouldn’t have been tolerated. The ECB has already comprised its independence. The euro area has accepted that the weaker members get bailed out by the stronger. The ECB has had to accept essentially worthless Greek bonds as collateral for loans. Now it’s engaged in buying government bonds from countries that are bankrupt – in effect, printing money by the back door.
Whoever becomes the new ECB president will be pulled in three different directions. They’ll have to reinvent the ECB as a politicised, compromised central bank. They will have to keep the markets onside, convince Germany the currency is still a safe home for their savings, yet run a monetary policy expansionary enough to stop the Mediterranean economies slipping into a deflationary spiral. It may well prove an impossible mission. So the real task of the next ECB president may well be to preside over the dismemberment of the single currency, or indeed to close it down. It is hardly an appetising prospect.