Italy’s stuttering economy is one of the greatest obstacles to eurozone growth — but just as the country needs external policy support it is at risk of losing its seat on the European Central Bank.
For the first time in the history of the monetary union’s highest policymaking body, Italy may not have an appointee on its governing board after Mario Draghi, the Rome-born ECB president, steps down this autumn after eight years in charge.
Since the birth of the central bank in 1998, the eurozone’s third-largest economy has held one of six seats on a board that shapes everything from how the ECB responds to financial crises to the day-to-day running of the institution.
With economic growth non-existent and government debt at more than 130 per cent of gross domestic product, Italy would struggle without the aggressive monetary easing that Mr Draghi introduced. Tighter monetary policy raises borrowing costs for governments, banks and businesses, and dents growth as a result.
Whether Italy must give up its seat on the board will depend on the contest for the ECB presidency, which will itself be decided by the outcome of this weekend’s European elections and subsequent horse-trading over who gets the bloc’s top jobs.
The starting point for the reshuffle is the tacit rule that France and Germany, the eurozone’s two largest economies, must always be represented on the six-seat executive board. Leading candidates include hawkish Bundesbank president Jens Weidmann, who was the only ECB board member to object to Mr Draghi’s policies in 2012 when he pledged to do “whatever it takes” to preserve the single currency.
“If Berlin doesn’t manage to succeed in having a German become the next head of the European Commission or the European Council, then it may back a German candidate to lead the ECB,” said Mansoor Mohi-uddin, senior macro strategist at NatWest Markets.
If Mr Weidmann were to get the ECB’s top job then it is likely that existing German board member Sabine Lautenschläger would be required to step down, probably leaving space for an Italian, as the representative of the eurozone’s third-largest eurozone economy.
Meanwhile, the appointment of a French ECB president — possibly Benoît Coeuré, the executive board’s French member, or Banque de France governor François Villeroy de Galhau — would also allow Italy to keep its board seat, economists reckon.
But while the French candidates’ thinking is closer to the ECB mainstream, relations between Paris and Rome have recently frayed, again suggesting that the new president may not view Italy’s economic needs sympathetically.
If Mr Draghi is succeeded by one of two Finns in the race — former Bank of Finland governor Erkki Liikanen and incumbent Olli Rehn — or Dutchman Klaas Knot, then there would be no room for an Italian on the bank’s executive team until Yves Mersch departs at the close of 2020, analysts say.
Indeed, if France did not secure the ECB presidency, it would expect to be able to nominate a board member to replace Mr Coeuré, who departs at the turn of this year.
Under this scenario, two female candidates are seen as the favourites to replace him — Laurence Boone, chief economist at the Organization for Economic Co-operation and Development, and Sylvie Goulard, Banque de France deputy governor.
“Unless the next ECB president is German or French, Italy will lose its coveted seat on the executive board,” said Erik Nielsen, group chief economist at UniCredit. But, he said, Italy’s influence could be crucial in deciding who gets the job: “There’ll be little desire elsewhere to snub Italy on this issue [so it] might just become the decisive vote.”
Without an ECB seat, Italy’s most senior central banking official would be Andrea Enria, who became chair of the ECB’s banking watchdog in January. Mr Enria, unlike executive board members, has no responsibility for setting monetary policy.
Yet some in the European financial establishment believe that Italy’s absence from the ECB board could be a blessing, coming at a time when its ruling political parties are frequently at odds with officials over economic rhetoric that Brussels and Frankfurt view as incendiary.
Matteo Salvini, leader of the rightwing League, said earlier this year that the leadership of the Bank of Italy should be “zeroed” for failing to protect savers during the country’s banking crisis.
Meanwhile, Luigi Di Maio, leader of the anti-establishment Five Star, has lashed out at Mr Draghi’s decision to halt the ECB’s €2.6tn quantitative easing programme.
And monetary policy is rising up the agenda in Rome. The clearest sign of this came in April, when Mr Salvini met Shinzo Abe, Japan’s prime minister, to discuss “Abenomics”, the radical brand of stimulus introduced in an attempt to steer Japan out of decades of stagnation.
However, the ECB process, which requires appointees to be ratified in Frankfurt, means it is highly unlikely that the Italian government could appoint a populist candidate.
The most often-named contender is Fabio Panetta, a member of the Bank of Italy’s board who, although he has clashed with the ECB over its treatment of the country’s banks, is regarded as economically conventional.
Ultimately, some ECB watchers say, it would be politically unfeasible for Italy to go unrepresented on the board.
“Italy should have a seat no matter what other country the future ECB president comes from,” said Melvyn Krauss, a senior fellow at Stanford University’s Hoover Institution. “Italy is a country with great central banking talent . . . when Axel Weber dropped out eight years ago and Berlin, much like this time, could not find a suitable German candidate, the Italians actually had two — Mario Draghi and Lorenzo Bini-Smaghi.”
One former senior ECB figure said the bank would have to “find a way” to get an Italian on to its board — whatever the outcome of the race for the presidency.