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Analysis

Ten candidates for make-or-break job

by OMFIF

Ten candidates for make-or-break job

The landmark defeat of Chancellor Angela Merkel’s Christian Democrat party in the Baden-Württemberg state election on 27 March has clear implications for deliberations over the successor to Jean-Claude Trichet as president of the European Central Bank.

Trichet’s eight-year term of office expires on 31 October. Merkel’s growing unpopularity with voters may increase her desire for a ‘stability-first’ successor to Trichet from one of Europe’s northern creditor states. This lowers the chances that Mario Draghi, governor of Banca d’Italia, will get the job – and leaves the race as wide open as ever. A decision on the succession is scheduled for June. Don’t be surprised if this is postponed. And watch out for more wrangling.

One factor making for a potential accord is that Merkel could throw her weight behind a strong interim candidate from Germany or the Netherlands, Jürgen Stark or Nout Wellink, who could serve until after the German parliamentary elections are out of the way in 2013. This would provide voters with assurance that the German approach will be adopted in the three crucial years that will be make-or-break for the Euro. It could also be seen as limiting risks on Germany’s indefinite exposure to the Euro’s problems. But at the same time it would assuage fears in countries like France that Germany will take unduly over-bearing influence.

Last year it was widely anticipated that Bundesbank president Axel Weber would be the first German to fill the ECB’s top position. But in February Weber announced that did not want to take over, not least because he had lost the confidence of his colleagues following his hard-line stance on ECB support for troubled euro area sovereign borrowers. Weber has also been involved in tussles – both in public and behind-the-scenes – with Merkel over political demands for ‘solidarity’ with hard-up European states.

Weber will retire from the Bundesbank on 30 April, a year ahead of the expiry of his eight year term. He will be replaced by Jens Weidmann, who has been Chancellor Merkel’s economic adviser since 2006 and was previously at the Bundesbank for three years (in a relatively junior position). Weidmann is notable for three reasons. He is the first German government official to make a direct transition to the No. 1 Bundesbank post – underlining a new interdependence between government and central bank. Aged 42, he is the youngest-ever Bundesbank chief. And he is the first one to speak French. Given permanent Franco-German monetary differences, this may come in useful.

Weber’s poor relations with Merkel came out into the open at the end of March when the German Chancellor made a veiled attack on the Bundesbank president at a high-profile banking conference in Berlin. In an otherwise unremarkable address at the conference, organised by the Federation of German Banks and attended by Weber and many key figures from German politics and economics, Merkel veered off-piste by indirectly accusing the Bundesbank chief of a lack of support for other European states over the future of monetary union. The dispute between the government and the Bundesbank over the government bond programme to support hard-up euro members, decided in May last year, was a major reason for Weber’s decision not to stand for the post of ECB president. Merkel said that the Bundesbank during its history had earlier shown solidarity with other European countries by buying currencies such as the French franc and Italian lira.

Now that Weber is no longer a candidate, 10 contenders for the ECB succession can be regarded as in the running, some quietly, others with government support, others apparently with none. Any over-eager bid could doom them. It is by no means clear that Germany has given up its claim on the title, even though Weber’s self-removal has widened the odds on a German president. Here is a list of prospects encompassing the favourites and not-so favourites. The star rating indicates the likelihood that they will be given the job. All are male, four are German, two are from Luxembourg and one each is from France, Finland, the Netherlands and Italy. Their average age is 58.

Nout Wellink (67) **** Netherlands central bank governor, due to retire on 1 July. Highly credible candidate if Draghi is ruled out. Would be only an interim incumbent, which could suit many governments. Studied law before obtaining a doctorate in economics at the prestigious Rotterdam Erasmus University and joining the Dutch Finance Ministry 1970. Since then, at centre of Dutch, European and international financial and economic debates, becoming an executive director of De Nederlandsche Bank in 1982 and taking over as president when his predecessor Wim Duisenberg moved to the European Monetary Institute in 1997 and became ECB president in 1998.

An unusual combination: tough-minded hard money man popular with his peers. He was chosen by other governors to chair the Bank for International Settlements (2002-06). Chaired the Basel Committee on Banking Supervision since 2006. Given his age he would be a candidate for no more than half the eight-year term.

For: Could be regarded as using the Netherlands’s entitlement to a further three years in the job after Duisenberg left (as pre-arranged) in 2003 before expiry of eight-year term.

Against: Lack of firm support from Dutch minority government which announced his departure last year, partly as a result of public criticism of the Nederlandsche Bank over shortcomings in Dutch bank supervision arrangements, and has been embarrassingly slow in making a decision on his successor.

Jürgen Stark (62) **** ECB Board member for economics since 2006, when he took over from Otmar Issing. He was Germay’s first choice to take the first ECB board member post in 1998, but Issing was regarded as a more neutral candidate. Immensely experienced former deputy president of the Bundesbank (1998-2006) and state secretary in German finance ministry (1995-98). Well-known as a monetary hawk but has gained diplomatic skills over the years. Close politically to Merkel’s Christian Democrats, having previously served under Chancellor Kohl including as sherpa in international summits. With three years of his non-renewable eight-year term on the ECB board still to run, he would be a ‘safe pair of hands’ for Merkel, tiding her over beyond the 2013 parliamentary elections. Used to taking on difficult jobs – was Bundesbank interim president after Weber’s predecessor Ernst Welteke resigned over an intrigue-ridden scandal regarding irregular hotel payments in 2004.

For: Would suit German voters’ penchant for toughness, without constraining a German to more than three-year term.

Against: Sardonic sense of humour not always appreciated by interlocutors. Monetary tensions with France and peripheral states might increase under a Stark presidency.

Mario Draghi (63) *** Governor of Banca d’Italia, vastly experienced official, head of the Basel-based Financial Stability Board. Long seen as an alternative to Weber. Privately favoured even by some German officials at the ECB. Merkel’s defeat in Baden-Württemberg, ending her CDU party’s 58 years of government there, may have tipped balance against him. Even before the election defeat, some analysts argued that backing the Italian for the ECB job would be politically dangerous. Profligate countries which have not followed the rules of the Maastricht treaty, including Draghi’s home country of Italy, are not popular with German voters. A politically weakened Merkel may not be able to risk backing Draghi even if she wanted to, and there has always been some doubt about that.

For: Bild Zeitung, Germany’s top popular newspaper, endorsed him in late March.

Against: Draghi’s previous employer, Goldman Sachs, earned Merkel’s ire by organising derivative transitions in early 2000s to hide Greek government debt.

Yves Mersch (61) *** Governor of Banque centrale du Luxembourg since its foundation in 1998. Experienced central banker, with 13 years of practice at ECB meetings (like Wellink), having been a governing council member since it started in June 1998. A former senior official in the Luxembourg finance ministry from 1975, he has been intimately involved in all the main decisions leading to EMU. Not afraid to stand up to Belgium, traditional senior partner in Belgo-Luxembourg arrangements. However, he and his country may lack the clout to play front-line role in international monetary affairs. All his significant appointments have been made by the government of Luxembourg, not by his peers in the international financial and economic community.

For: Well-versed monetary diplomat, fluent in English, French and German, wry sense of humour.

Against: A lawyer, not a trained monetary economist.

Klaus Regling (60) ** Experienced international economic policy official with European Commission, IMF and German finance ministry to his credit. No central banking experience. He ticks some of the basic ECB qualification boxes but not, it seems, the one that matters most, the backing of Angela Merkel. Moreover, he is, as head of the European Financial Stability Facility, already at the heart of efforts to contain Europe’s sovereign debt crisis.

For: Pro-European credentials appeal to France.

Against: Previously worked for hedge fund Moore Capital (together with Philipp Hildebrand, now president of Swiss National Bank). May not be regarded as a plus point by Angela Merkel.

Jörg Asmussen (44) ** State secretary for international monetary affairs in German finance ministry. Often substitutes for minister Wolfgang Schäuble in intergovernmental meetings. Wide national and international experience in government. Headed the ministry’s directorate responsible for European affairs and general financial issues . No central banking experience. Coupled with Weidmann’s move to Bundesbank and Merkel’s wish to keep an experienced civil servant close to her side in troubled financial times, this makes him a rank outsider.

For: Karl Otto Pöhl and Hans Tietmeyer, two former Bundesbank presidents, once held Asmussen’s job.

Against: Asmussen sat on supervisory board of IKB bank, the first major German bank to need support in the 2007 credit crisis.

Erkki Liikanen (60) ** When Europe is looking for compromise candidates for international jobs, it is never long before a Finn’s name pops up. Governor of the Bank of Finland since 2004, following 10 years as the Finnish member of the European Commission in Brussels. Lacks academic qualifications as an economist which, while not essential, would give candidacy more credibility. Some say that he has long had his eye on the job of President of the Finnish state.

For: Credentials as monetary hawk. Shows caring side through chairmanship of Finnish Red Cross.

Against: May appears to some as just another ambitious outsider.

Jens Weidmann (42) * Cannot be ruled out in an emergency. Merkel could push through her protégé, but – with just two months of experience in his new Bundesbank job when the European summit takes place at end-June – this might appear opportunistic. Weidmann speaks French and is well liked by the French establishment. But others on the ECB board would feel ill-treated by by being passed over. Jürgen Stark would quit the ECB board and return to Bundesbank as president.

For: Merkel would have her own man at the ECB.

Against: Might look like German take-over.

Jean-Claude Juncker (56) * Polished prime minister and finance minister of Luxembourg. Europe’s most experienced government leader, took office in 1995. He would have been a more serious contender until a few years ago but he has blotted his copy book. After having previously been a key Franco-German power broker under former German chancellor Helmut Kohl, he has fallen out with Merkel. Regarded as a friend by Gerhard Schröder, the former German chancellor – this will not help his candidature. High-profile but somewhat ineffectual head of the Eurogroup of EMU finance ministers since the trans-Atlantic financial crisis broke in 2007. Connected with general shortcomings in European governance.

For: Well-known on international stage.

Against: Transition of a seasoned government leader would indicate the ECB has lost its independence and become fully politicised.

Jean-Claude Trichet (68) Given the shortage of clear-cut candidates and the notable leadership he has provided, some have wondered if governments might tinker with the EU Treaty in order to remove Trichet’s constitutional ineligibility to serve even part of a further term. This is not going to happen. Trichet probably does not want the job. Selecting the incumbent even for a short period would demonstrate that Europe cannot solve its crisis. It would set a very poor precedent for encouraging longevity in office. The failed leadership of Alan Greenspan – aging, tiring, tiresome and overestimated – in his final seven years as chairman of the US Federal Reserve Board is a warning that this would be a thoroughly bad idea.

For: Familiar face.

Against: Familiar face.

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