When arch-hawk Axel Weber withdrew last week from the contest to head the European Central Bank, the euro and bond yields dipped -- a sign of how crucial markets think the ECB's president may be in shaping its policy.
The fevered speculation over who will succeed Jean-Claude Trichet as ECB president when his eight-year term ends in October seems excessive to some central bank watchers. After all, the ECB's decision-making process is designed to stress consensus and limit the power of any one individual.
ECB decisions are made by the bank's Governing Council, which consist of 23 policymakers: the six-member Executive Board plus the chiefs of the euro zone's 17 national central banks. They meet under the principle of one person, one vote.
But the markets sense that a persuasive and intellectually powerful new leader would have opportunities to shape the way in which the ECB operates -- especially during the unusual challenges that it will face in the coming year, as it seeks to wind down unprecedented monetary easing steps.
I think it depends very much on the personality of the individual, said Barclays economist Julian Callow.
The main issue is how much influence they wield over the ECB board. Someone that is forceful can have quite a strong role in driving the position of the ECB board, which then acts as a bloc vote at the Governing Council meeting.
ECB decisions follow a routine that has changed little in the bank's 12-year history. Policymakers are sent an agenda ahead of the bank's monthly meeting to give them time to think over the issues and draw up their arguments.
At the meeting, the 17 national central bank heads are given the Executive Board's interest rate recommendations and an outline of a possible policy statement.
ECB economics chief Juergen Stark then presents the analysis underpinning the proposals, before fellow board member Jose Manuel Gonzalez-Paramo gives an overview of financial markets.
Policymakers subsequently have the chance to air their own views and debate the issues, before Trichet boils down the discussions into a policy statement agreeable to the majority.
The board's recommendations are the result of pre-meeting debates between its members and are shaped by the work of the ECB's in-house economists and market experts. They are influential because they set the tone for the meeting, although ideas that end up as policy decisions can come from any corner of the council.
Internal rivalries and uniform access to information should ensure the board presents balanced recommendations. Board members Lorenzo Bini Smaghi, Stark and Gonzalez-Paramo, all strong personalities, will still be there when the new president takes over.
Nevertheless, charisma and intellect could allow the new president to adjust recommendations that come from the board, and in some cases even determine whether ideas die within the board or survive to be debated by the council.
The ECB is a collegiate body but sometimes it comes down to how charismatic and persuasive you are in your argument, said RBS economist Nick Matthews.
Testing economic times may provide more opportunity for presidents to exert influence. For example, Matthews believes Trichet was instrumental in getting agreement last year on the bank's controversial program of buying government bonds; he wonders whether the scheme would have materialized if Weber, its fiercest critic, had been in charge.
The influence of the president on decision-making is probably more important in crisis times when difficult and contentious decisions are needed than when the economy is at cruising altitude, Matthews said.
Maybe if Weber had been president we wouldn't have had a bond purchase program, but it would have been a brave man that ruled out that course of action considering it was probably the only weapon in town that could have calmed the situation.
There is no reason to expect rapid, sweeping changes of ECB staff under the next president; ECB insiders say Trichet made only gradual internal changes when he took over eight years ago. He brought with him some of his own people but kept the personal assistant of his predecessor Wim Duisenberg, while changes in the bank's key departments were done one step at a time.
But presidents can influence the ECB's thought process by setting its agenda for research, work that traditionally helps to guide its policy direction.
Trichet led a sizeable expansion of the research department. The theme of the persistence of inflation was pushed as a priority from early on; since then wage rigidity and indexation have been the focus of much work and more recently, the reliability of economic models.
Perhaps even more importantly, presidents shape the style in which the ECB communicates to the financial markets; a president leads news conferences after the bank's policy meetings and acts as the main spokesman for the bank.
In the ECB's early years under Duisenberg, it was criticized for an inconsistent and unclear communications style. Some analysts said its lack of a coherent message contributed to the 25 percent drop in the euro's value against the dollar during the first two years of the ECB's existence.
Just before Trichet took over in 2003, the ECB undertook a review of its communication tactics, which resulted in a new-look policy statement; the now-familiar economic analysis section was added.
Trichet also adopted more systematic language to describe monetary policy, including code phrases that markets came to recognize as having specific meanings. The phrase strong vigilance, for example, signaled an early interest rate rise.
The change in communications style may have helped to create a more favorable market view of the ECB under Trichet, regardless of its actual policies.
Trichet has changed a lot since he has taken over from Wim Duisenberg, and the image of the ECB has improved considerably during his tenure, said KBC economist Piet Lammens.
Now the market knows how the ECB reacts and that is very important...If you look at how the euro traded in the first two years under Duisenberg, it was not so good.
(Editing by Andrew Torchia)