De-nationalizing the ECB’s executive board

By Melvyn Krauss

The European Central Bank’s chief economist, Otmar Issing, may not be scheduled to retire until May 2006. But behind the scenes, maneuvering and politicking over his replacement are already in full swing.

If current practices are maintained, the choice for this key post will be made on the basis of nationality, not merit. The only certainty about Mr. Issing’s successor at the present moment is that he or she will be a German. This is because the big countries are acting as if they “own” seats on the Executive Board – that there is a “German chair”, a “Spanish chair”, an “Italian chair”, and so on. They are getting away with their power grab even though it goes against the Maastricht Treaty, which excludes nationality as a criterion for membership on the Executive Board.

The pattern has been all too obvious. First, there was the controversial appointment of the Spaniard Jose Manuel Gonzales-Paramo to replace his countryman Domingo Solans on the Executive Board in May 2004. In May of this year, Lorenzo Bini-Smaghi will replace another Italian, the retiring Tommaso Padoa-Schioppa. These appointments set a bad precedent, regardless of the merits of the individual members in question. Current practice is blatantly unfair, because it excludes candidates from small countries from competing for the vacated seats.

This practice is also unwise. Some of the best people serving the ECB – or who have served in the past – are from small countries. Preventing small countries – as well as other big ones – from competing for specific vacant seats reduces the Executive Board’s potential competency.

Giving big countries permanent seats on the Executive Board also makes it easier for their politicians to control the ECB through the appointments process. It is much more difficult to appoint a political puppet to the Board in a system of open competition than under the current scheme. The last thing the ECB needs is a political crony of German Chancellor Gerhard Schroeder assuming Mr. Issing’s key post.

Of course, opening up the competition for Executive Board portfolios to all member countries does not guarantee the most qualified and politically independent person gets the job; it only increases the probability of such an outcome.

After all, member governments would still pick the candidates, and there can be no escaping politics in what is essentially a political process. If member governments are intent on bad candidates, it will be impossible to avoid them. Still, an open competitive process, even with all the inevitable political horse-trading and compromise that this entails, will most likely result in better Executive Board members than under the current system.

Aware of the danger that Schroeder may pick a dubious candidate for Issing’s post, senior ECB officials are already quietly discussing ways to outmaneuver him. One proposal currently making the rounds in Frankfurt is to split Issing’s current portfolio in two, transferring part of the chief economist’s responsibilities to another Board member. Another is to decouple the economics portfolio from the “German chair” altogether. The question is whether Germany will respond by claiming that it “owns” Issing’s portfolio as well as his chair.

So far, the big countries have been able to get away with their power grab because the small ones have been too disunited to launch an effective counterattack. Belgium, for example, complains constantly about its lack of representation on the Executive Board, but it has been more interested in demanding equal treatment with the Netherlands in the ECB than pursuing a common strategy with its neighbor to counter the big countries’ unwarranted assumption of permanent seats.

The new EU members from Central and Eastern Europe, in particular, have a big stake in how the issue plays out. Many of the new members will be small countries who will introduce the euro someday and will want to have a seat on the Executive Board. If that is not possible because the original big countries have locked up most of the six seats on the Board for themselves, public opinion in Europe – which is broader than German, French, Spanish, and Italian opinion – could turn against the ECB. For this reason alone, the competition for the limited seats on the Executive Board must be an open one.

Melvyn Krauss is a Senior Fellow at the Hoover Institution, Stanford University. Copyright: Project Syndicate, 2005.

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