Why Sharon Donnery should withdraw from ECB race
Melvyn Krauss: Her appointment would likely prevent Philip Lane from becoming chief economist
The European Central Bank in Germany. Photograph: iStock
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.
Realizing 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.
Melvyn Krauss is a senior fellow at the Hoover Institution at Stanford University and an emeritus professor of economics at New York University.