The Euro­pean Cen­tral Bank should pick an Ital­ian to su­per­vise banks

The Star Malaysia - StarBiz - - Foreign News - By MELVYN KRAUSS

IT seemed like good news for Europe when Sharon Don­nery, deputy gov­er­nor of the Ir­ish cen­tral bank, made an ap­pli­ca­tion to be the top bank­ing su­per­vi­sor at the Euro­pean Cen­tral Bank.

She is widely re­garded as ex­tremely com­pe­tent, has ex­pe­ri­ence in im­por­tant ar­eas like non­per­form­ing loans, and is a wo­man in an in­sti­tu­tion that badly needs women in lead­er­ship po­si­tions.

But the case for Don­nery is not as clear-cut as it might ap­pear.

Her ap­point­ment prob­a­bly would pre­vent her boss at the Cen­tral Bank of Ire­land, Philip Lane, from be­com­ing the next ECB chief economist, as has been widely pre­dicted.

That’s be­cause of an un­writ­ten rule that no Euro­pean Union mem­ber country can hold two big EU jobs at the same time.

This would be a pity since Lane is widely con­sid­ered to be the best economist in the ECB gov­ern­ing coun­cil.

He is a mod­er­ate who would carry on the work and poli­cies of the cur­rent ECB pres­i­dent, Mario Draghi, who will leave of­fice in Oc­to­ber 2019.

That’s ex­tremely im­por­tant at a time when pop­ulists, who are try­ing to pry Italy loose from the EU, could use hawk­ish ECB poli­cies to con­vince Ital­ians that the EU is bi­ased against them.

It’s not at all clear who will re­place Draghi, though last week Ger­man Chan­cel­lor An­gela Merkel im­plied that it would not be the hawk­ish Bun­des­bank pres­i­dent Jens Wei­d­mann when she an­nounced that Ger­many would field a can­di­date for the EU Com­mis­sion pres­i­dency, not the ECB lead­er­ship.

This am­pli­fies the stakes for Ger­many in who gets the ECB chief economist post.

The chief economist can have a sur­pris­ingly pow­er­ful ef­fect on cen­tral bank pol­icy, con­trol­ling mem­bers’ ac­cess to the eco­nomic data that forms the ba­sis for pol­icy and de­ter­min­ing the agenda for the monthly gov­ern­ing coun­cil meet­ing.

It was an open se­cret that Ger­many was will­ing to tol­er­ate the Dutch­man Wim Duisen­berg as the first ECB pres­i­dent from 1998-2003 be­cause it felt that the hawk­ish and strong-willed chief economist at the time, Ot­mar Iss­ing, could con­trol him.

Iss­ing went so far as to oc­ca­sion­ally refuse to hand over eco­nomic data to Duisen­berg when the pres­i­dent asked for it.

Re­al­is­ing that Lane could have a sim­i­lar pow­er­ful ef­fect on pol­icy in the com­ing years, though from the dovish side and with­out a Ger­man in the top chair in Frankfurt, Ber­lin is now re­ported to be sup­port­ing Don­nery for the bank su­per­vi­sor’s post, claim­ing she would be the best choice for clean­ing up the huge bad loan prob­lem in Italy.

This ar­gu­ment not only is disin­gen­u­ous but wrong.

The best choice to clean up Italy’s bad loan prob­lem would be an Ital­ian, not an Ir­ish­man or Ir­ish­woman.

The most telling ar­gu­ment for Ital­ian banks to be su­per­vised by one of their own, es­pe­cially if bit­ter medicine is to be ad­min­is­tered as it prob­a­bly will, is that it would help counter pop­ulist pres­sure to pull Italy out of the euro and EU.

Hav­ing a com­pe­tent Ital­ian like the well-re­garded An­drea En­ria, cur­rent chair of the Euro­pean Bank­ing Au­thor­ity, as chair of ECB bank su­per­vi­sion would make it tougher to por­tray le­git­i­mate bank over­sight as for­eign med­dling in Ital­ian banks.

Europe can ill af­ford to give the Ital­ian pop­ulists a boost for the sake of block­ing Lane’s ap­point­ment as chief economist.

Don­nery should with­draw her ECB ap­pli­ca­tion and be pro­moted to Lane’s cur­rent job when he leaves for Frankfurt. — Bloomberg

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