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Sat, Dec 24, 2005 - Page 12 News List

Europe's central bank facing leadership shift

NY TIMES NEWS SERVICE , FRANKFURT, GERMANY

The European Central Bank faces a potentially crucial change in its senior leadership, as German officials confirmed on Thursday that Juergen Stark, a prominent central banker, would be nominated to the bank's executive board.

Stark, whose nomination is subject to approval by European leaders, would succeed Otmar Issing as the German representative on the six-member board, which runs the bank's daily affairs. Issing, who also functions as the bank's chief economist, will retire at the end of May.

The shuffle is drawing scrutiny here because Issing, 69, is an extremely influential figure -- an intellectual heavyweight whose dedication to fighting inflation has left a deep imprint on the institution.

On paper, Stark promises continuity. Economists describe him as an inflation fighter in the same tradition as Issing. He is the vice president of the Bundesbank, the German central bank, which made controlling prices its credo when it was Europe's most powerful monetary authority.

But Stark, 57, is unlikely to inherit Issing's research portfolio, according to several analysts who watch the bank. Without Issing's army of economists and statisticians, these observers said, Stark may not be able to exert as much influence over policy debates.

"Issing is the last legacy of a monetarist approach that can trace its roots back to the 1970s," said Allan Saunderson, the chairman of Eurozone Advisors, a consulting firm in Frankfurt. "Now there will be a break, and that's a good thing because the world has changed."

The timing is significant because the European Central Bank interest raised rates this month for the first time since 2000, and its governing council is debating how much further it should tighten policy.

The council -- comprising the six board members and the 12 national central bankers in the monetary union -- is divided as to whether Europe needs tighter credit to curb inflation. Some members worry about strangling fragile economies in Germany, Italy and elsewhere.

Issing, analysts say, lines up squarely on the side of those who worry more about rising prices. And because he makes a presentation to the governing council before each monthly meeting at which it sets interest rates, his voice carries considerable weight in the deliberations.

"You'll see continuity until the end of May, which probably means they'll raise rates by another quarter-point in March," Saunderson said. "But then the next guy will change things."

The board will not reassign Issing's portfolio until after he leaves, according to a spokeswoman.

But speculation is already coalescing around the bank's vice president, Lucas Papademos. A US-educated Greek who once worked for the Federal Reserve Bank of Boston, Papademos would bring a broader economic approach to monetary policy, according to some analysts.

"Papademos has always come across as extremely well balanced," said Thomas Mayer, the chief European economist at Deutsche Bank. "That would make him a very good chief economist for the ECB."

The European Central Bank is not nearly as dominated by a single person as the Federal Reserve has been under its chairman, Alan Greenspan. The bank's president, Jean-Claude Trichet, has a diplomatic style, and says decisions about interest rates are made by consensus.

But critics say the Bundesbank, which sits in a leafy Frankfurt suburb, still casts too much of a shadow over its downtown neighbor. Issing was previously the chief economist at the Bundesbank, and he has done much to transplant its philosophy. The Bundesbank's current president, Axel Weber, has emerged as a vigorous voice on the bank's governing council.

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