x Abu Dhabi, UAEThursday 27 July 2017

ECB succession has timely lessons for GCC union

The adage that the devil makes work for idle hands has been rarely truer than for Europe's bureaucrats.

What happens at the European Central Bank (ECB) and the way succession there is managed could be a salutary lesson for the remaining Gulf countries that are hoping to establish their own regional central banks. The adage that the devil makes work for idle hands has been rarely truer than for Europe's bureaucrats. Decades of proof that they could not be trusted with the conduct of monetary, fiscal or antitrust policy has led to levers of power being either ceded to independent technocrats or tightly constrained by cross-border agreements.

Governors to the ECB are appointed by their governments rather than by the bank. It is no accident that of the governing council's 21 members, at least 11 are former politicians or finance ministry officials in their home countries. Jean-Claude Trichet's term as the ECB president does not end until 2011, but talk of succession has already begun. Some market participants think of Axel Weber, the German Bundesbank president, as his natural successor.

What these people underestimate is EU politics, a matter that is of profound importance when it comes to appointments. It is highly unlikely that a German will be the next president and even less likely that it will be Mr Weber, given how he is viewed in Paris. History is everything in this decision. Go back 10 years to a miserable EU summit in Brussels; a meeting convened to celebrate the imminent arrival of the euro currency but which ended in a bitter row between the French, Germans and Dutch.

Jacques Chirac, then the president of France, held the EU's other leaders hostage for 13 hours as he haggled in favour of Mr Trichet as ECB president, against the Dutchman Wim Duisenberg, the preferred candidate of Helmut Kohl, the German chancellor, and the Bundesbank. Mr Chirac was determined to get his man into the job on a simple principle: he claimed his predecessor, Francois Mitterrand, had won a commitment from Mr Kohl in 1993 that Frankfurt could be the seat of the ECB only if the president would be French. (If only Saudi Arabia and the UAE followed the same principle when it was finally decided to base the planned GCC central bank in Riyadh.)

The second principle was established in 2004 and 2005 by the euro zone "big four" of the time: Mr Chirac, Gerhard Schroder, Mr Kohl's successor as chancellor, and the Italian and Spanish prime ministers Silvio Berlusconi and Jose Zapatero. In 2004, the EU's smaller countries were upset after the four effectively imposed Jose Gonzalez-Paramo on the six-member executive board of the ECB. In another act of cynical EU closed-door politics, Mr Berlusconi backed the then little-known Mr Gonzalez-Paramo. This was because Italy's man on the board, Tommaso Padoa-Schioppa, was due to retire a year later and Mr Berlusconi wanted the pattern established that the big four should always have a national on the board.

Sure enough, in 2005 Mr Padoa-Schioppa stepped down and Lorenzo Smaghi, the director general for international financial relations at the Italian finance ministry, went unopposed to Frankfurt. The pattern is now firmly established. Of the six board positions, four must always be held by the Germans, French, Italians and Spaniards. The upshot is that this makes a Frenchman, Italian or Spaniard the most likely candidates for the ECB presidency ? not a German, given the unofficial pact when locating the ECB in Germany.

But Spain lacks a weighty enough candidate, and a second consecutive French president would be a hard sell. Indeed, Nicolas Sarkozy is unlikely to fight a losing battle, and would be keener to display his European credentials by backing a non-national. In this context, by far the most likely candidate to replace Mr Trichet is Mario Draghi, the governor of the Bank of Italy since 2006. And after Mr Trichet, are there likely to be any changes at the ECB? The question has been raised in the markets after Mr Sarkozy revived the idea of releasing detailed minutes and votes from top-level meetings, along the lines of the Bank of England and the US Federal Reserve, but this isn't likely to occur under a new president.

Still, there will be changes, as there were when Mr Trichet took over in 2003. For example, the bank's strategic review settled on a tighter definition of price stability. What is more important for Europe and the euro zone is the perception that, compared with recent UK and US action during the banking crisis, the ECB seemed helpless. The truth is that while euro unification brought about a centralised interest rate and monetary policy, sovereign European governments went their own way to rescue their banking systems from collapse.

There is an outside chance a more empowered ECB might emerge from the recent crises but this seems unlikely, given the national governments' preoccupation with manoeuvring to place the "right" candidate in the top slot. This should be a salutary reminder for the GCC, which is considering a monetary and currency union of its own. Dr Mohamed A Ramady is a former banker and a visiting associate professor in the department of finance and economics at King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia.