Draghi likely next ECB head after German backing

Associated Press
FILE - In this Nov. 12, 2011 file photo the Governor of Italy's Central Bank, Mario Draghi of Italy answers reporter's questions during a press conference for the G20 Summit in Seoul, South Korea. German Chancellor Angela Merkel has been quoted Wednesday, May 11, 2011, as saying that Germany could give its support to Italy's Mario Draghi as the next president of the European Central Bank. (AP Photo/ Lee Jin-man, File)
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FILE - In this Nov. 12, 2011 file photo the Governor of Italy's Central Bank, Mario Draghi of Italy answers reporter's questions during a press conference for the G20 Summit in Seoul, South Korea. German Chancellor Angela Merkel has been quoted Wednesday, May 11, 2011, as saying that Germany could give its support to Italy's Mario Draghi as the next president of the European Central Bank.

Italy's Mario Draghi is set to become the next head of the European Central Bank — and inherit the task of taming the continent's stubborn debt crisis — after Germany made clear Wednesday that it would back him.

Incumbent Jean-Claude Trichet's eight-year term expires on Oct. 31 and Draghi, the governor of Italy's central bank and a former Goldman Sachs executive, has emerged this year as the most prominent candidate to succeed him.

The 63-year-old had faced skepticism in part because he is from a country with high debts and a sometimes shaky history regarding government finances.

But his record heading Italy's central bank and as a member of the ECB's rate-setting board has apparently convinced German Chancellor Angela Merkel and other leaders that he has the credentials to lead the ECB, whose treaty mandate demands that it put fighting inflation first.

He secured France's backing last month, and Merkel signaled her backing on Wednesday.

The ECB, created along with the euro, is the chief interest rate and monetary authority for 330 million people in the 17 countries that use the euro.

The bank is working with the EU and the IMF to keep Greece, Ireland and Portugal from defaulting on their debts, and is propping up a shaky banking system in which many lower-tier banks are believed to lack sufficient financial buffers to withstand another economic or financial shock.

Trichet has marked out a tough anti-inflation stance despite criticism from politicians and economists that the bank is too quick to raise interest rates. In April, it raised its key rate to 1.25 percent from 1 percent, and further increases are expected despite fears this will make it harder on Greece, Portugal and Ireland as they struggle with recession and fears they cannot pay all their debts.

Draghi became the odds-on candidate by default in February when Germany's Axel Weber, whom Merkel was widely expected to propose, quit as head of Germany's Bundesbank and dropped out of the race for the ECB's top job.

Weber's move, though a surprise, came after he publicly disagreed with the ECB council majority over a decision to have the bank buy bonds of struggling countries. Consequently, he suggested he would have had a credibility problem as president.

Draghi must still win formal approval from a meeting of European leaders next month. No other strong candidate has emerged.

As the biggest of the 17 countries that use the euro, Germany has a large say in who heads the central bank. But Weber's sudden exit left Germany with no plausible candidate of its own, and the French and Italian endorsements of Draghi left Merkel little room to maneuver.

"I know Mario Draghi," Merkel was quoted Wednesday as telling German weekly Die Zeit. "He is a very interesting and experienced personality. He stands very close to our ideas of a stability culture and solid economic activity."

She added that "Germany could support his candidacy for the office of ECB president," Die Zeit reported.

The government confirmed that Merkel made the comments.

Government spokesman Christoph Steegmans said Merkel and Italian Premier Silvio Berlusconi talked by phone on Tuesday night and that "the necessary preliminary talks" have been held on the ECB presidency. "We believe that we have a good decision on this question," he said.

Draghi formerly served as a top official at the World Bank and the Italian Treasury before being named head of the Bank of Italy in December, 2005, and has extensive experience at international financial summits. He is chairman of the Financial Stability Board, an international group that seeks to coordinate financial regulation.

His 2002-2005 stint at investment bank Goldman Sachs led to speculation some might oppose him because of Goldman's role currency swaps that were said to help the Greek government reduce the apparent size of its debts.

He has a Ph.D. from the Massachusetts Institute of Technology, where his thesis adviser was Nobel laureate economist Franco Modigliani.

Draghi is "a moderate hawk," said Carsten Brzeski, an economist at ING in Brussels. Analysts distinguish central bankers between hawks — inflation fighters ready to raise interest rates — and doves, who are willing to risk more inflation with lower rates that promote growth and jobs.

"He's not the stereotype Club Med central banker governor," said Brzeski, referring to a pejorative term for southern European countries with reputations for loose finances.

"He built up a reputation, even when he was at the treasury in Italy, as being on the hawkish side."

Draghi is less hawkish on inflation than Weber, but would likely be a better consensus builder on the ECB's large, 23-member council, where the president has less direct clout than the head of the U.S. Federal Reserve.

As a Treasury official, "he was part of policy making at the peer group level," Brzeski said. "He knows very well how it works, how to forge consensus. In that he is much more the real successor to Trichet than Weber would have been. "

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Geir Moulson contributed from Berlin.

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