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Thursday, 12 May 2011

Running for President… of the ECB Pt II: Mario Draghi was indeed a ‘no-brainer’!

Today the news was spread in the Dutch media that the current governor of the Banca d'Italia, Mario Draghi, is also endorsed by German Chancellor Angela Merkel for the position of president of the ECB.  This means in fact that Draghi will become the third president of the European Central Bank, after the current French president Jean-Claude Trichet and the late Dutchman Wim Duisenberg.

Mario Draghi, who was already heavily endorsed by Italy, France and Spain, has lately been the dead cert for this position. Initially Draghi lacked the endorsement of Angela Merkel. As the prime representative of Europe’s number one economy Germany, Merkel had what can be considered the final voice in this election. But since yesterday (May 10, 2011) the German support for Draghi is official.

Initially the appointment of president of the ECB would almost certainly go to Axel Weber, the influencial president of the German Bundesbank and the candidate-of-choice of Angela Merkel. But in February 2011 Axel Weber suddenly decided to withdraw, due to personal reasons. Since then no further motivation for his withdrawal has been disclosed.

Although various names of candidates were mentioned, like Klaus Regling, Erkki Liikanen, Yves Mersch and Nout Wellink, the most commonly mentioned name was that of Italian Mario Draghi.

A view weeks ago I wrote in Running for President… of the ECB:

That Mario Draghi is now such a clear favorite is due to:
  • An active lobby campaign of the Italian Government
  • The fact that he would be the first Italian in this position.
  • The fact that he has not an outlier opinion on the monetary policy, but is regarded as a centrist.
  • His public experience: he is the current chairman of the Financial Stability Board,in charge of coordinating global financial regulation
  • His private experience: he worked with Goldman Sachs. The bank that is Royal Warrant of US Finance Ministers and one of the most influential banks on earth.
Since yesterday the chances of Mario Draghi to become president have increased dramatically. After some shadowy horse trading between French president Nicolas Sarkozy and Italian Prime-minister Silvio Berlusconi, candidate-president Mario Draghi received the official support from the French government. This means in real terms that if Angela Merkel of Germany doesn’t ‘veto’  Draghi, he will become the next president of the ECB.

Initially, it was feared by German insiders that Mario Draghi would be an advocate of a looser monetary policy. This would be especially challenging for the German taxpayers, as the most powerful economy of the EU will largely carry the burden of the EFSF.

This European Financial Stability Facility is founded to help European countries in desperate financial need with emergency loans, against more acceptable financial conditions than the financial markets would supply. And the list of European countries in financial need is substantial and growing, with Ireland, Greece and Portugal as current candidates and Spain, Italy and Belgium as possible future candidates.

The conditions for receiving an EFSF will be quite challenging for the receiving countries. They need to be, to make certain that the receiving country will not spend the EFSF money inefficiently and without making the proper changes in the economy and financial policy.

Would there be an advocate of a loose monetary policy as President of the ECB, than could this mean that the trust in the Euro as a leading global currency would further diminish.

But the German support for Draghi means that Chancellor Merkel put here reservations aside, to force a smooth and quick selection. And the fact that Draghi worked at Goldman Sachs (GS) and was possibly involved in advising the Greek government in the years before the credit crisis, which led to Greece’s contested financial statements of those days, is seemingly not held against him.

I am not particularly happy with the choice for Mario Draghi: his GS history and the fact that he is again an insider from the national banks, makes me think that nothing will really change at the ECB.

In The ECB is becoming nervous I tried to emphasize that the time of fearmongering and using blackmail against Greece is over: the current ECB solution of helping indebted countries like Greece, Ireland and Portugal by creating more debt is certainly not a sustainable solution. But it seems that Mario Draghi will not be the person to change this policy, unfortunately.

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