Quest for new ECB second

FRANKFURT – The search for a new vice president of the European Central Bank looks like a relatively smooth affair so far compared with the messy compromise that put Wim Duisenberg at the helm of the ECB four years ago. It seems European leaders have learned from past mistakes and financial markets now assume the choice of the new ECB deputy and a successor to Duisenberg will not end in another embarrassing public row, similar to the one that tainted the bank’s birth in 1998. While no single nomination to the six-member ECB executive board is expected to have any direct impact on monetary policy, a swift decision could do much to dispel lingering doubts over how efficiently eurozone institutions can operate. It will also lay the groundwork for how future vacancies on the ECB board are filled. Staggered terms in the first board means there will be vacancies to fill in each of the next four years. «What we have is still a building site; with today’s decisions we will be creating a template for the future,» said Adolf Rosenstock, economist at Nomura International. Under the Maastricht Treaty, European Union government heads make the appointments to the ECB board by «common accord,» based on a recommendation by their finance ministers and after consulting with the European Parliament and the ECB’s policymaking council. Those who see fundamental flaws in the monetary union, such as the lack of a political counterpart to the ECB, argue that with 12 governments involved, the process is bound to be dogged by political infighting and national ambitions. So far, so good But the pragmatic view is that as long as politicians play it straight without bending the rules and come up with qualified candidates on time, this won’t matter. «Wherever you look, the selection of central bankers is a political process. When you want to have independent central banking, this is the only way governments can have any influence,» said Joachim Fels, an economist at Morgan Stanley in London. «But that is where it stops. Once they get elected, they become central bankers.» The requirement that board members must be selected «from among persons of recognized standing and professional experience in monetary or banking matters,» was also enough of a guarantee that whoever gets the job had the right credentials, he said. As far as the search for Vice President Christian Noyer’s replacement goes, the current verdict is «so far, so good.» Scenarios that suggested a twisting of the monetary union rules have been ditched and the field of official candidates has narrowed to two after potential contenders bowed out. Those left in the fray are considered well qualified. Greek central bank Governor Lucas Papademos in particular commands the respect of markets and fellow bankers. Duisenberg said he may have wished the procedures to be swifter but is resigned to the EU way of doing business. «I do admit, it seems to be, and that’s unavoidable, a typical European phenomenon, that these appointments are discussed across the countries,» he said last week. Spain’s economy minister, Rodrigo Rato, who chairs the group of EU finance ministers, expects Noyer’s replacement to be agreed by mid-April. But government chiefs may already try to hammer out a deal that will also cover mid-2003 replacements for Duisenberg and board member Sirkka Hamalainen at the EU summit in Barcelona this weekend. Still, the memory of the stormy EU Brussels summit in May 1998, when France’s insistence on getting the top ECB job for Bank of France Governor Jean-Claude Trichet threatened a deadlock, keeps fears of a row alive. «Then it turned ugly at the very end, so the moment of truth will come in the final minutes,» said Nomura’s Rosenstock. Another spectacular row would unsettle markets even though some usual political haggling has been already factored in and Noyer’s succession was off investors’ radar screens for now, said Glenn Davies, chief economist at Credit Lyonnais in London. «You have 12 nations jostling for position – it’s a messy environment and there’s a premium for that built into European investments,» said Glenn Davies, an economist at Credit Lyonnais in London. Back in 1998, Paris dropped its opposition to Duisenberg only after what it calls a «gentleman’s agreement» and what the European press dubbed a «rotten compromise» that the Dutchman would step down early in his eight-year term to make way for Trichet. The Dutchman dispelled some of the confusion that has hovered over the bank for years when he announced last month he would retire when he turns 68 next July. EU leaders have also signaled they want to close this chapter by reaffirming France’s claim to the top job. The only question open now is whether Trichet, a veteran widely admired by financial markets, will be cleared over his role in a banking scandal in time to take over from Duisenberg. Trichet is caught up in a complex inquiry into the near-collapse of Credit Lyonnais bank in early 1990s because as treasury director he was responsible for keeping tabs on state-owned groups, which the bank was at the time. For now, markets assume that the Frenchman will get the job even though some concern remains that whatever is agreed on now may still need to be rehashed. But analysts said fears that a fresh round of political bargaining will hurt the young bank’s credibility were exaggerated. With its members appointed for non-renewable eight-year terms and armed with legal guarantees of independence, the ECB is the best equipped of all central banks to fend off political interference, they argue. In the United States, for example, it is the president who nominates the members of the Federal Reserve’s Board of Governors, although the Senate has the final say. In Britain, the prime minister nominates the central bank governor, the chancellor of the Exchequer and four out of nine members of the rate-setting monetary policy council for three-year renewable terms. ECB watchers say that the bank’s three-and-a-half-year track record showed its 18-member policymaking council was taking its independence dead seriously. In fact, the ECB has been rather criticized for being too stubborn than too soft, an attitude best characterized by Duisenberg’s «I hear, but I don’t listen» – last year’s response to calls for interest rate cuts.

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