Finance counsels

Mario Draghi’s drive to rein back bankers’ pay is pushing him to the forefront of candidates to succeed Jean-Claude Trichet as head of the European Central Bank.

Italian Foreign Minister Franco Frattini on Sept. 29 backed the country’s central bank chief to run the ECB when Trichet’s term expires in 2011, the first time a cabinet-level European politician has openly supported a candidate. The comments came three days after world leaders endorsed Draghi’s proposals on limiting bonuses and strengthening capital levels.

“Credibility-wise, Draghi’s position looks strong,” said Ken Wattret, chief euro-area economist at BNP Paribas SA in London. “This can be seen in the way he dealt with the financial difficulties of the period in his capacity as head of the Financial Stability Board.”

Draghi’s profile is rising as the FSB, a group of finance officials chaired by him, evolves into the Group of 20’s main consultant on preventing another financial crisis. At the same time, a candidacy from the former Goldman Sachs Group Inc. executive could face opposition if Germany pushed Bundesbank President Axel Weber for the job.

Draghi, who has never said publicly he wants the job, declined to comment on Frattini’s remarks. The German government said Sept. 30 it’s too soon to discuss who will succeed Trichet as ECB president and Frattini himself says European Union procedures won’t allow any nominations for at least a year.

Family Photo

Draghi’s growing influence was on display at the G-20 summit in Pittsburgh last week. His Financial Stability Board was charged by world leaders in April with monitoring their efforts to revamp regulation of the financial system and to provide early warnings of future crises. In September, governments and central banks tasked him with proposing measure that would prevent excesses in the banking industry.

Last week, the G-20 adopted almost wholly the recommendations of the Financial Stability Board on issues such as barring bonus guarantees and deferring executive pay.

In the “family photo” of leaders at the summit, Draghi was the only central banker present.

“Draghi’s experience both as a policy maker and in the private sector has given him a first-hand knowledge of the virtues and pitfalls of the market,” said Marco Annunziata, chief global economist at UniCredit Group in London.

With European leaders in charge of appointing the ECB’s president, Draghi’s chances of getting the top job may have as much to do with politics as his own qualifications.

Contention

Trichet himself was a point of contention as the ECB took shape in the late 1990s and leaders looked for a president. At a 1998 summit France pushed for Trichet, who had led the French Treasury and then the Bank of France for more than a decade. Most other countries, including Germany, backed the Dutchman Wim Duisenberg, who ran the Dutch central bank for 15 years. To defuse the standoff, France was assured that Duisenberg would resign before the end of a full eight-year term to allow for Trichet to takeover.

Finding a successor may also require a compromise, especially if German Chancellor Angela Merkel pushes a candidate such as Weber. The Bundesbank president, appointed in 2004, has more experience on the ECB’s 22-member Governing Council and is viewed by economists as one of Europe’s toughest inflation fighters. Draghi, by contrast, comments relatively rarely on monetary policy in public.

“It almost certainly has to go to a large country, Germany and then Italy in that order,” said James Nixon, co-chief European economist at Societe Generale SA in London and a former ECB forecaster. “Draghi’s certainly plausible. But he doesn’t come across as having particularly strong views on monetary policy.”

Scandals

Draghi will also need Italian Prime Minister Silvio Berlusconi to push his candidacy. While Berlusconi doesn’t need to call an election before 2013, sex scandals and political divisions have weakened his position. His approval rating, which peaked at 62 percent a year ago, was 47 percent last month.

Draghi is one of a cadre of former Goldman alumni who have moved into top positions in global finance. He served as a vice chairman of Goldman in London between 2002 and 2005 and sat on the bank’s global management committee with former chairman Henry Paulson, who later became U.S. Treasury secretary. He joined the Italian central bank in 2006, a move which also gave him a seat on the ECB’s interest rate-setting board.

Draghi’s new role recommending checks and balances on the banking industry comes after spending much of his early career finding ways to free business from government constrains. As an official in the Italian Treasury in the 1990s, Draghi led the privatization of $105 billion worth of Italian companies, including Enel Spa, Telecom Italia SpA, and Banca Nazionale del Lavoro SpA.

Free Markets

“Draghi has always been a believer in free markets,” said Annunziata. “It’s an interesting twist of fate that he’s now leading the effort to strengthen financial sector regulation.”

After earning a Ph.D in economics from the Massachusetts Institute of Technology, Draghi taught at the University of Florence. He earned a degree from Rome’s La Sapienza University and is married with two children.

Draghi’s experience in rewriting regulatory rules may serve him well in the post-Trichet period as the ECB seeks to manage what may still be a fragile economic recovery and carve out a possible new role on supervision. The European Union has proposed setting up a Systemic Risk Board to monitor threats to the financial system, which may be headed by the president of the ECB.

“The challenge will be to ensure that the euro-area economy and political structure develops in a cohesive way,” said Julian Callow, chief European economist for Barclays Capital in London. “The internal divergences and stresses, during the next two years, are likely to become greater than ever.”

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