* Staff representatives issue warning to EU parliament
* Head of services says ECB fosters diversity
By Francesco Canepa
FRANKFURT, Oct 26 (Reuters) - Two staff representatives at the European Central Bank complained on Wednesday of a work environment in which dissent is discouraged, potentially hobbling the bank's ability to spot the next financial crisis.
Carlos Bowles and Johannes Priesemann told the EU parliament that job insecurity and favouritism were curtailing ECB staff's willingness to speak out and fostering the kind of "groupthink" that blinded institutions to the approach of the 2008 crisis.
"(If) only positive messages can make it to the top of the hierarchy ladder ... that has an impact, for instance, on the capacity to identify early indicators of financial crises," Bowles told the parliament's economic committee.
The hearing came days after the ECB annulled the appointment of its new Brussels representative after Bowles and Priesemann complained an adviser to chief economist Peter Praet had been handpicked for the job, denying other candidates a chance.
An ECB staff survey conducted last year showed 65 percent of respondents chose "knowing the 'right people'" as a way of getting ahead at the ECB, a higher proportion than chose any other factor.
"If it is not the best person who is picked for the job, then you can expect they won't make the best decisions," Bowles said on Wednesday. "Also, it creates an issue of group thinking."
He called for the adoption of Germany's 'Mitbestimmung', or co-determination model, where staff representatives have a voice in hirings, firings and promotions.
Speaking earlier before the same committee, the ECB's chief services officer Michael Diemer defended the institution's practices while saying they "could and should" be improved, including by working with staff representatives.
"Based on feedback we received in the staff survey and in view of the high number of applications we receive, we believe ... we offer a work environment which fosters diversity and is supportive of our staff members' needs," Diemer said.
"We know that more could and should be done," he added.
Less than half of the ECB's staff is on a permanent contract.
While more than 99 percent of those on so-called 'fixed-term convertible' contracts are eventually offered a permanent job, Priesemann said a three- to five-year wait before that happens was enough to make them "subservient".
"A three or five-year probationary period disciplines the staff and makes them subservient, and that is risky," he told the hearing.
The ECB is accountable to the EU parliament and President Mario Draghi is due to appear before the economic committee later this year. (Editing by Andrew Roche)