Matthew Lynn's London Eye: The most powerful person in the global economy

By Matthew Lynn

LONDON (MarketWatch) ? Who is the most powerful individual in the financial markets? The chairman of the Federal Reserve could make a fair claim. So could the governors of the banks of Japan and England. The chief executive of Goldman Sachs can make a lot of waves if he chooses to, and so can Warren Buffett, or the Saudi oil minister.

But measured by what they can actually do, the most powerful person will soon be the president of the European Central Bank, the Italian banker Mario Draghi.

In the last few weeks, we have seen an extraordinary expansion of the European Central Bank?s powers. It can now set interest rates, control financial markets, and effectively dictate tax and spending policies across what remains ? despite its current difficulties ? the world?s largest single economic bloc.

European Central Bank President Mario Draghi will soon have more power over the economy than anyone else.

But history suggests that when you concentrate too much power in a single pair of hands, and even worse when the person who wields that power is not limited by any form of accountability, the results are catastrophic.

In the medium term, handing so much power to Mario Draghi will end in tears.

In the last few weeks, the ECB has vastly expanded its influence over the lives of the continent?s citizens. Back in the summer, Draghi promised he would do ?whatever it takes to save the euro.? What it took, it turned out, was a series of measures to put himself in charge of everything.

Step one was the bond-buying plan, the so-called OMT, or open market transactions.

By intervening directly in the market to buy the bonds of any country that runs into trouble, the ECB will effectively have the power to turn on and off the financing of national governments across the euro zone. If they need help, countries will have to apply to the ECB for aid, and submit to strict conditions. Issues, such as labor laws, breaking up monopolies, privatizing industries, setting pension and welfare payments, and deciding on tax rates and state spending programs, will all have to be negotiated with officials from the ECB.

Step two, taken at an otherwise low-key summit of European Union leaders last week, was to create a banking union, with the ECB as the lead regulator. So Draghi and his team will now take on responsibility for controlling banks right across the single-currency area as well. Nothing will happen in the financial markets for 17 countries without it getting the nod from Frankfurt.

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Add in the task of setting interest rates, and the new powers make the ECB president by far the most powerful figure in the financial world.

Fed Chairman Ben Bernanke only gets to set rates for the United States. He doesn?t decide how much Alabama can spend on roads, or whether Boston needs to loosen up its trade union laws. Likewise, the governors of the Bank of Japan or the Bank of England are mere clerks by comparison. Neither can do anything apart from decide interest rates and print money, although the Bank of England is getting back power to regulate the City of London.

Even most political leaders often don?t have the kind of power the ECB president is being handed. They have parliaments and parties to answer to. They face regular elections. Read their memoirs, and the constant complaint is how little power they have, not how much.

But the ECB president will suddenly be able to control not just interest rates, but pretty much all the key economic variables for the world?s biggest economic area.

Is that wise?

Source: http://www.marketwatch.com/news/story.asp?guid=%7B39085726-1D31-11E2-B624-002128040CF6%7D&siteid=rss&rss=1

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