Draghi Looks On as Europe's Horse Trading Sends Guindos to ECB

(Bloomberg) -- If Mario Draghi had to design the way his colleagues get picked, it would probably be a bit different from how it is now.

The European Central Bank president twice stopped short of praising the process for board appointments -- aside from a mention of safeguards to independence -- when asked this week about how his future vice president was chosen. Minutes later, the man himself, Luis de Guindos, also spoke at the European Parliament as the first serving euro-area finance chief to be named by counterparts to the Frankfurt institution.

Draghi Looks On as Europe's Horse Trading Sends Guindos to ECB

Every central bank endures its own appointments system, with corresponding strengths and weaknesses, but the ECB’s unique setup adds eccentricities. Of the six senior officials and 19 central bank governors on its Governing Council, each got there based on their passport, though with a commitment to not favor national interests. For critics, prioritizing citizenship over expertise, particularly for the Executive Board, is a defect.

“The process is just flawed, from beginning to end,” said Charles Wyplosz, a professor at Geneva’s Graduate Institute. “The politicians that make these appointments see it as part of the bigger game of spoils for their compatriots.”

The ECB’s board is currently in an appointments cycle starting with the replacement of Vice President Vitor Constancio in May, and culminating late next year with Draghi’s retirement. Candidates proposed by euro-area members are vetted by finance ministers, and following input from lawmakers and the ECB, they are then appointed by heads of government.

Read more: Guindos Clears Symbolic Hurdle for ECB Vice Presidency

Spain openly campaigned for a post after a six-year absence, and Guindos will now replace Constancio. European lawmakers, whose opinion isn’t binding, preferred Philip Lane, the Harvard-educated governor of Ireland’s central bank, but his country withdrew his candidacy.

The Spaniard, a former Lehman Brothers banker who guided his economy through the region’s debt crisis, has raised eyebrows of Frankfurt officials cherishing the political autonomy of the ECB, an institution modeled on Germany’s Bundesbank. Guindos insisted to lawmakers this week that he’ll defend its independence.

“It’s a big institutional mistake,” Algebris Investments Chief Executive Officer Davide Serra told Bloomberg Television this month. “This idea that you go from politician to the ECB board, I think it’s very dangerous.”

Draghi declined to comment on Guindos, telling lawmakers that the ECB will issue its own assessment on March 8.

“Independence of the ECB is enshrined in the treaty” of the European Union, he said. “It would be protected by the treaty, which goes beyond any sort of personal profile. And the candidate for the position will be assessed for his competences.”

Draghi Looks On as Europe's Horse Trading Sends Guindos to ECB

The vice presidency episode is the prelude to a tussle for the bigger prize of Draghi’s job. The first Italian to be ECB president will retire in October 2019. Germany has never held the post despite being the bloc’s largest economy, making the Bundesbank’s Jens Weidmann a contender. With ECB officials Benoit Coeure and Peter Praet also leaving next year, the stage is set for horse-trading among governments.

“The board isn’t a collection of states, it’s a team of competent people who must not be responding to their local constituencies,” said Carlo Alberto Carnevale Maffe, a professor at the SDA Bocconi School of Management in Milan, who cites the Bank of England system as a better example. In the U.K., they don’t discuss if a deputy governor “should be Scottish or whether the Welsh should be given a minor role,” he said.

Aside from the Executive Board, all other Governing Council members lead euro-zone central banks. Each holds their country’s passport and can be vulnerable to national distractions, such as Latvia’s governor, Ilmars Rimsevics, who is fighting for his job amid a graft investigation at home.

Some members hail from institutions “with experienced staff and a long tradition of independent central banking,’’ said Stefan Gerlach, the former deputy governor of Ireland’s central bank and now an economist at EFG in Zurich. “The fabric of society in some countries in the periphery is often weaker and they don’t have a long history of a strong and independent civil service.’’

For all its faults, the ECB’s design does reflect the diversity of the euro region, and it might be too much to expect the guardians of an international institution with so much at stake to be blind to nationality.

It’s also a matter of debate whether the region’s political wrangling does yield weaker appointments than elsewhere, said Jacob Funk Kirkegaard of the Peterson Institute in Washington. He points to some U.S. Federal Reserve regional presidents whose background is business rather than economics, but who do get weigh in on monetary policy decisions.

Some “are just silent all the time,’’ he said, but “they’re good administrators, they’re good leaders, they know that doesn’t mean they’re monetary policy heavyweights. The same could be true of the ECB.’’

Draghi also knows more than anyone that the current system got him appointed in the first place, and some investors have no reason to complain.

“The ECB and Mario Draghi should be congratulated and thanked for taking it through the crisis,” said Ray Dalio, founder of Bridgewater Associates.

©2018 Bloomberg L.P.