Mario Draghi appears well-placed to succeed Jean-Claude Trichet as the president of the ECB in October, leading to speculation about who will replace him as governor of the Bank of Italy. Four names are floating around: Lorenzo Bini Smaghi, a member of the ECB's executive board; Vittorio Grilli, the director general of the Italian Treasury and the president of the EU’s economic and financial committee; Fabrizio Saccomanni, the director general of the Bank of Italy; and Ignazio Visco, the deputy director general of the Bank of Italy. Eurozone horse trading could support Bini Smaghi, but domestic politics could help Grilli, and frequently new governors have been sourced from within the Bank of Italy.

 

In a eurozone-wide game of musical chairs, it has been rumored that Bini Smaghi would be offered the Bank of Italy governorship to free up room on the ECB executive board for a French candidate as a favor to President Nicolas Sarkozy, who declared support for Draghi as the next ECB president. Therefore, the type of political horse trading that is frequently involved in European political appointments seems to favor Bini Smaghi as the bank’s next governor, unless the French are prepared to wait until 2013 to get their candidate on the ECB board.

 

But Grilli has some powerful backers at home, an impressive resume and more expertise in finance. Formerly a well-known, prolific and respected academic scholar, Grilli was a professor of economics at Yale University and then at Birkbeck College and also worked as managing director at Credit Suisse First Boston. Grilli is thought to be the chosen candidate of Giulio Tremonti, Italy’s finance minister. Given Tremonti’s aspirations to succeed Prime Minister Silvio Berlusconi, Tremonti’s backing may prove to be either an advantage or a disadvantage for Grilli, depending on how political rivalries shake out.

 

When it comes to monetary policy, Bini Smaghi is a better-known quantity, as the ECB board shows little of the dissent and spectrum of views evident in the U.S. Federal Open Market Committee. Regarding fiscal affairs, Bini Smaghi has argued that members of the eurozone periphery in distress should strictly abide to fiscal austerity and structural reforms and should not consider any form of debt restructuring that would have serious damaging effects on that sovereign and the rest of the eurozone and its financial markets. He has even recently suggested that to prevent a restructuring of the Greek debt the EU/IMF should go as far as augmenting the current bailout package—as long as Greece does additional fiscal and privatization efforts to resolve the 2012 financing gap of 30 billion euros that the country will face next year, as it is now obvious that it will not regain market access. 

 

Grilli’s views on monetary policy are not known yet but are likely to be mainstream; any ECB newbie cannot initially distance himself from mainstream ECB views—pragmatic hawkishness—before establishing his reputation and credibility on monetary policy. Given German unease about alleged Italian dovishness on monetary issues, Grilli would have to work hard to establish his credibility as a traditional European central banker. He is rumored to have expressed the view that current burden-sharing within the European Financial Stability Facility is biased against countries like Italy that are large and thus contribute more to the guarantees but have smaller exposure to the distressed periphery than core eurozone countries such as Germany and France.

 

Saccomanni and Visco may also be serious contenders—frequently, new governors have been sourced from within the Bank of Italy, and Draghi, whose views of course remain influential, may push for this option.

 

Draghi’s replacement will be hawkish, whoever it is. Both the Bank of Italy under Draghi and the Italian Treasury under Tremonti have become quite hawkish since the onset of the eurozone crisis. The ECB is hardly in need of another “pragmatic hawk,” as it tightens policy irrespective of the damage that higher rates and euro strength will do to growth and sovereign and financial prospects in the periphery. But a hawkish approach to Italian fiscal policy will continue to help Italy distinguish itself from the other PIIGS.

 

Draghi’s vigilant monitoring of the financial sector and fiscal policy has been a hallmark of his leadership. By demanding onerous requirements for all securities sales, Italian regulators ensured that domestic banks emerged from the crisis relatively unscathed. The next governor should be strong enough to continue to face down financial-sector excess, ensure Italian banks are adequately capitalized and vocally oppose government attempts to ease fiscal tightening should current political instability lead to early national elections.

 

 

(c) Roubini Global Economics

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