Skip to main content

The Globe and Mail

How an Italian long shot may become Europe's top banker

Mario Draghi, president of the Bank of Italy, is well respected among central bankers.

© Alessandro Bianchi / Reuters/Alessandro Bianchi/Reuters

Mario Draghi, the chief of the Bank of Italy, is now the leading candidate for the world's most challenging central banking job.

Germany Chancellor Angela Merkel's plans to assure voters that management of the euro would soon land in strong German hands took a blow when her favoured candidate to run the European Central Bank removed himself from contention.

The German Chancellor was reportedly angered by Axel Weber's decision, announced Friday, to step down early as head of the Bundesbank, the German central bank.

Story continues below advertisement

He was the lead candidate to become the ECB's next president and his exodus opens up the race for the world's most challenging central banking job. The 17-country euro zone is groaning under the weight of two sovereign bailouts, high unemployment, rising inflation and uncompetitive peripheral economies. Under the current president, Jean-Claude Trichet, the ECB was reluctantly thrust onto the front lines of the crisis, where it used a mix of fiscal and monetary policy to keep the euro intact.

With Mr. Weber gone, the top candidate for the job is Mr. Draghi, the well-respected president of the Italian central bank. There are no other high-profile candidates, though several names from smaller countries have been mentioned as potential rivals. While economists like Mr. Draghi, they also know that selecting an ECB boss is a highly political process where long shots can emerge triumphant.

"I think he is very skilled candidate," said Jens Larsen, chief European economist in London for RBC Dominion Securities Inc. "He understands the financial sector and can manage political tensions. But he's also Italian and a former Goldman Sachs banker and those facts work against him."

Mr. Draghi has been the head of the Italian central bank since 2006. Born in Rome, he earned his PhD in economics from the Massachusetts Institute of Technology. He went on to become an executive director of the World Bank, then managing director of Goldman Sachs Group Inc. He is 63, speaks English and, since 2009, has been head of the Financial Stability Board, the international body that oversees the global financial system. He is said to have a low-key, consensus-building manner and is easy to get along with.

His nationality, however, would not play well with German voters, who consider the euro zone's southern fringe, if not Italy itself, the epicentre of the euro crisis. The German newspaper Bild posted a picture of Mr. Draghi next to the headline: "Mama Mia. Please, not this Italian."

The Greek government underplayed its debt problems for years, then took a €110-billion ($147-billion) bailout from the European Union and the International Monetary Fund last spring. Portugal is considered the likeliest next bailout victim.

The Goldman Sachs stint might also work against Mr. Draghi. Goldman was accused of using derivatives to mask the true extent of Greece's budget deficit to grease its way into the euro zone, though he was not working at the firm at that time.

Story continues below advertisement

Mr. Weber was Ms. Merkel's favoured candidate for reasons beyond his nationality. The Bundesbank boss was an inflation hawk in a country with a traditional fear of inflation. He was also critical of the ECB's purchase of the sovereign bonds of troubled countries such as Portugal, another stance that made him popular among Germans.

The ECB has spent about €75-billion since last spring on the bond purchase program, which was designed to stabilize government funding rates. Mr. Weber apparently considered the bond purchases a loosening of monetary policy, and hence inflationary. He also thought the purchases treaded dangerously into the realm of fiscal policy, in that they were effectively a form of sovereign bailout. In an interview published Saturday in the German weekly Der Spiegel, he said: "A central bank must always be aware of what risk it is taking as soon as it acts in the border zone between monetary and fiscal policy."

He hinted that his position on the ECB's bond purchase program might have sabotaged his campaign to become the ECB's next president. "Taking such positions has not always helped my case with certain governments," he said.

While Mr. Larsen and other economists support Mr. Draghi, they know his chances of winning the ECB's top job would be slim if Ms. Merkel were to campaign for another candidate. On the other hand, she recently said Germany will do "whatever it takes" to safeguard the euro, suggesting she would want the best candidate at the ECB, regardless of nationality.

The selection of ECB chiefs is notoriously political. Mr. Trichet is French and it was assumed his replacement would be German. The current vice-president of the ECB, Vitor Constancio, is Portuguese. Appointing Mr. Draghi would mean the ECB would be controlled by two southern Europeans, potentially offending the geographic balance traditionally demanded by the heads of state who appoint the ECB's president.

Economists say that Mr. Draghi might find himself competing with Erkki Liikanen, the governor of the Bank of Finland. Mr. Liikanen is also well regarded and has the advantage of coming from a northern country, one that is not in financial crisis.

Story continues below advertisement

There is no timetable to select Mr. Trichet's successor, though it is expected to happen by the summer. Mr. Trichet's term ends in October.

Report an error Licensing Options
About the Author
European Columnist

Eric Reguly is the European columnist for The Globe and Mail and is based in Rome. Since 2007, when he moved to Europe, he has primarily covered economic and financial stories, ranging from the euro zone crisis and the bank bailouts to the rise and fall of Russia's oligarchs and the merger of Fiat and Chrysler. More

Comments are closed

We have closed comments on this story for legal reasons. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.