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Hoping to Lead Bank, Italian Faces Hurdles

Liz Alderman and Jack Ewing |The New York Times
Friday, 25 Feb 2011 | 5:48 AM ET

He is a familiar face at the European Central Bank. Many economists think he should be the next person to run it.

European Central Bank
Getty Images
European Central Bank

But among government leaders in Berlin and Paris, where many of Europe’s most important decisions are made, Mario Draghi, the governor of the Bank of Italy, generates a palpable lack of enthusiasm.

A longtime central banker with sterling qualifications, Mr. Draghi has been put forward as a front-runner to succeed Jean-Claude Trichet after he steps down as president of the central bank in October.

But at a pivotal moment for the euro monetary union, France and Germany want to make sure that the bank’s next leader will have as steady a hand at the helm as any German would.

Germany is also reluctant to surrender its de facto right to name the next president. French officials are among those expressing reservations about Mr. Draghi because he was an executive at Goldman Sachs from 2002 to 2005.

The investment bank was the lead manager for a 2001 derivatives transaction that allowed Greece to dress up its books in a way that brought it into the euro club.

As he tries to win more support, Mr. Draghi is unequivocal about where his priority lies: fighting inflation. Monetary policy at the European Central Bank should “first and foremost be geared toward price stability,” Mr. Draghi emphasized in an interview on Thursday.

His supporters say that Mr. Draghi seems to be the only one of the candidates mentioned so far who would not face a steep learning curve — a crucial consideration when euro zone countries are besieged by market speculators and Europe could easily fall back into another financial crisis like the one that hit the Continent last year.

As an influential member of the European Central Bank’s governing council and chairman of a panel that is rewriting the rules for global banks, Mr. Draghi is a familiar face at meetings of the Group of 20 leading economies and other international forums.

He would have immediate credibility in dealings with his counterparts at the Federal Reserve or the Bank of China.

“Mario Draghi is the most qualified candidate,” said Nouriel Roubini, the economist, expressing a commonly held view in the profession.

Mr. Draghi was favored by 29 of 45 economists polled by Reuters this month, compared with just six votes for the No. 2 candidate, Erkki Liikanen, the governor of the Bank of Finland.

Behind the scenes, Mr. Draghi’s supporters have already begun a quiet but determined campaign to make him the default choice.

Romano Prodi, a former prime minister of Italy, described Mr. Draghi as highly discreet. He noted that he was more comfortable in the world of central banking than in the limelight.

“As a person, he is reserved,” Mr. Prodi said. “I’m not joking when I tell you he was born a central banker.”

But politics can often trump experience in Europe, which has a history of choosing second-tier candidates, notably Herman Van Rompuy, president of the European Council, who remains little known among the general public.

Baroque political maneuvering is nothing new to Mr. Draghi, who is seen in Italy as rising above any particular interests or political agendas — a consensus-builder who in his understated way has deftly navigated the minefield of Italian power politics.

“Even though he’s a technocrat who has never been involved in politics, he often acts like a politician,” said Massimo Giannini, the business editor of the Rome daily La Repubblica.

“He’s seen as a kind of Cardinal Richelieu who knows how to understand certain political dynamics and work inside them in a very intelligent way.”

During an hourlong interview on Thursday in his office in Rome, Mr. Draghi, sitting beneath a tapestry depicting Alexander the Great, displayed a reluctance to ruffle political feathers and a highly institutional approach toward public office.

Comfortable with power, he nonetheless refused to speak about himself, instead focusing relentlessly on views that underscored his credentials as an inflation-fighter.

Time and again, Mr. Draghi emphasized that the most important thing for the European Central Bank was to hold down prices even before they started to creep upward.

His statements were consistent with warnings by other members of the central bank’s governing council in recent months that rising costs for oil and other commodities are putting pressure on prices.

The risk has risen as popular uprisings in Libya and other countries in the Middle East have pushed oil prices sharply higher.

But as a result of the lukewarm attitudes toward Mr. Draghi, analysts say that the contest for the post remains wide open.

Angela Merkel, the German chancellor, is loath to squander political capital at home by backing an Italian for the job.

President Nicolas Sarkozy of France may see a chance to sideline a rival by supporting Dominique Strauss-Kahn, managing director of the International Monetary Fund, for the post.

But as they hunt for a candidate who offers them more of a political payoff, the leaders face a problem. Can they entrust the euro to a compromise choice?

Central banks around the world are trying to gauge whether the current oil price spike will have “a permanent effect on inflation, or if it’s just a one-off shock,” Mr. Draghi said.

Noting that the European Central Bank has not changed interest rates “for a very, very long time,” he said the central bank would have to “guarantee that inflation expectations remain well anchored.”

Whether Mr. Draghi ultimately emerges as Mr. Trichet’s successor will depend on whether his clear qualifications outweigh his two main liabilities: his nationality, and the roughly three years he spent as a vice chairman and managing director of Goldman Sachs International.

Because the vice president of the European Central Bank, Vítor Constâncio, is from Portugal, Mr. Draghi’s candidacy has raised fears in Germany that the euro will be placed in the custody of central bankers from two of Europe’s most indebted countries.

France sees Mr. Draghi as competent and a strong consensus-builder, said a high-ranking French official who spoke on the condition of anonymity.

But his links to Goldman, a bank Paris sees as having fueled financial excess, represents what the official described as “a problem” and “a question mark.”

A former Goldman partner with knowledge of the Greek deal said that Mr. Draghi was aware of the derivatives transaction with Greece. But it had already been approved by Goldman’s chief financial officer, David A. Viniar, and was not the kind of thing that someone like Mr. Draghi would have been able to undo easily.

The former partner spoke on the condition of anonymity to preserve business relationships.

Mr. Draghi was brought on more as a power broker to get business with major European corporations, another former Goldman banker said.

During the interview, Mr. Draghi said he was not involved in the transactions Goldman devised for Greece, and was unaware of their specific nature because he worked in another part of the bank dealing with corporate clients.

“I joined Goldman after these operations had been undertaken, and that’s it,” he said. “I was never involved in this.”

Mr. Draghi’s supporters see the Goldman issue as an excuse to block his candidacy. “There are all these vague allegations without proof,” said Mr. Roubini, who has known Mr. Draghi for years.

If anything, Mr. Draghi has annoyed many in the banking industry with the positions he has taken as chairman of the Financial Stability Board, which was created by the Group of 20 to work out rules for large international banks.

Some American and European bankers do not like the way Mr. Draghi has insisted that large, complex institutions — banks considered too big too fail — be required to keep extra capital in reserve.

Bankers say Mr. Draghi has been inflexible on arguments that large banks would be put at a disadvantage with smaller ones.

“Societies and governments need to be able to let a big institution fail without creating market disruption and using taxpayers’ money,” Mr. Draghi said.

The views on Mr. Draghi’s background have so far overshadowed any debate about where he actually stands on monetary policy.

Mr. Draghi seems concerned about the European Central Bank’s continuing intervention in markets for European government bonds.

But he has expressed his reservations much more discreetly than Axel A. Weber, president of the German central bank, who openly criticized the European bank’s move.

Mr. Weber took himself out of consideration for the central bank’s top post this month, acknowledging that he had become an outsider on the council.

“He was as uneasy as Axel Weber was with purchase of bonds by the E.C.B.,” said Francesco Giavazzi, who was a classmate of Mr. Draghi in the doctoral program in economics at the Massachusetts Institute of Technology and later served as his deputy in the Italian Treasury. “But he is more of a diplomat.”

During the interview on Thursday, Mr. Draghi emphasized that the intervention was justified only to make sure that the central bank maintained its influence over interest rates, and not as a form of economic stimulus or stealth financing for overindebted governments.

“The initiative of the E.C.B. to buy bonds on the secondary market was justified as a monetary policy decision to restore the functioning of transmission channels of monetary policy,” he said.

“This initiative is temporary, limited in size, and its impact should be compensated for by reducing the amount of money in circulation. And it should never violate the Maastricht Treaty, which is the ultimate guarantee of the independence of the E.C.B.”

The treaty in 1992 established the euro.

During his time at the Italian Treasury, Mr. Draghi was sometimes criticized for slow decision making, and even his friends say he is very deliberate.

According to Mr. Giavazzi, Mr. Draghi often retreats to the Bank of Italy to confer with staff members for several days before meetings of the E.C.B. governing council, so he can study briefing documents without distraction, Mr. Giavazzi said.

(Mr. Draghi declined to comment on whether this was true.)

The jockeying for the central bank presidency is likely to continue for months.

Political leaders do not want to limit their search to members of the central bank’s governing council, nor will they let their choice be dictated by professional economists.

But analysts and insiders say that European leaders should not play down the importance of experience.

“Now is not the right time,” said one high-ranking central banker who spoke on the condition of anonymity because his job requires him to appear neutral, “to be learning on the job.”

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