It is likely the Government will appoint a new governor for the Central Bank of Ireland within the next few months. Although the incumbent, Mr Maurice O'Connell, was appointed to a second term earlier this year, it is understood that he will step down once the euro changeover has been completed early in 2002.
Historically, the governorship has been awarded to a senior civil servant from within the Department of Finance. This is a tradition that should not continue.
Since the advent of European Monetary Union, the predominant responsibility of the Central Bank governor has been to sit on the board of the European Central Bank (ECB). The imminent transfer of responsibility for domestic banking supervision to the new single Financial Services Regulatory Authority further simplifies the job description to contributing to monetary policy at a European level, even if the Central Bank governor retains a nominal regulatory role for legal reasons.
Together with the five executive directors, the 12 national central bank governors are responsible for deciding monetary policy for the euro zone. This is a very onerous task and the citizens of Europe are best off if those most qualified to conduct monetary policy are appointed to sit on the board.
Making monetary policy is a highly technical task, requiring a strong background in macroeconomic theory, and a capacity to absorb and process the huge flow of relevant economic information that is generated on a daily basis. The youth of the euro-zone economy and the new currency further underline the importance of appointing the most competent and trustworthy professionals to the ECB board.
A career in the Irish civil service is unlikely to provide the relevant qualifications to perform this task at the highest level. Few civil servants have the required advanced training in economic theory and most spend the bulk of their time on administrative issues rather than conducting analysis.
Rather, the experience from other central banks (the Bank of England, the US Federal Reserve) is that independent experts are often appointed to run monetary policy. These are drawn from research positions in universities, other research organisations or the financial sector, and have spent their careers analysing the national and international economies. Alternatively, a career in central banking (in the Republic or elsewhere) surely provides a more suitable background than administrative work in another government department.
It is important that the new governor be a good communicator. Effectiveness on the ECB board depends on an ability to put forward opinions in a persuasive fashion and build coalitions among like-minded individuals. This is especially true in the case of the ECB, which has a preference for making policy by consensus.
A strong existing reputation would be beneficial in establishing an influential presence on the ECB board. Peer recognition among the body of European economists and a track record of research and writing on monetary and financial affairs would lend credibility to the appointee among his/her colleagues and improve the level of confidence in the financial markets concerning the competence of the ECB board.
On this basis, it could be argued that the Government should just appoint the best-qualified European expert to the position, regardless of nationality. However, an important role for the governor is to contribute to the public communication of ECB monetary policy decisions. In particular, the governor has a special responsibility to improve understanding of the ECB monetary strategy here in the Republic. This can be done by making regular speeches, meeting the relevant interest groups and engaging with the general media.
An Irish national who is familiar with the domestic political, economic and social culture, and who could more easily command the trust of the public, may best perform this key function. Indeed, a new report by the London-based Centre for Economic Policy Research supports a continuing role for national central bank governors in making ECB policy precisely for this reason.
Appointing the candidate most capable of adding to the quality of ECB monetary policy decisions would provide concrete benefits. Over time, a more credible ECB translates into lower interest rates and a stronger currency as market confidence is raised and risk premia are eliminated.
By adopting such a pan-European perspective, the Government can do much to enhance our status as an enthusiastic supporter of the single-currency project. More broadly, it may also help to repair the damage done to the Republic's reputation among the European establishment in the wake of the Nice Treaty referendum.
In many respects, this Government has been remarkably innovative in its economic policy. Abolishing the civil service monopoly on the governorship of the Central Bank would only add to its legacy.
Philip Lane is professor in economics at Trinity College Dublin
