* Visco is surprise nomination as compromise candidate
* Highly respected economist, not seen as inflation hawk
* Eyes on whether Bini Smaghi meets French calls to quit ECB board
By Gavin Jones
ROME, Oct 20 (Reuters) - Prime Minister Silvio Berlusconi on Thursday unexpectedly nominated Ignazio Visco, the number three at the Bank of Italy, as the new governor, setting up a potential diplomatic spat with France.
Visco, 61, who is the Bank of Italy’s sherpa for G-7 and G-20 meetings, emerged as an 11th hour compromise candidate to replace Mario Draghi after months of squabbling within Berlusconi’s centre-right coalition.
Berlusconi’s office said he had sent a letter to the BOI’s governing council saying the government wanted Visco to be appointed governor when Draghi leaves to become president of the European Central Bank on Nov. 1.
The nomination is now expected to be rubber-stamped by President Giorgio Napolitano, who formally appoints the Bank of Italy chief.
A distinguished academic and former chief economist of the Paris-based Organisation for Economic Cooperation and Development, Visco won out over Fabrizio Saccomanni, Draghi’s deputy at the BOI, Treasury Director General Vittorio Grilli and Lorenzo Bini Smaghi, Italy’s member of the European Central Bank’s executive board.
Bini Smaghi had until the last minute been the frontrunner to replace Draghi, at least partly because of pressure from French President Nicolas Sarkozy to avoid Italy having three voting members at the ECB against one for Paris.
“Visco’s appointment is a surprise because this will create quite an issue with France if Bini Smaghi still declines to resign from the ECB board,” said Gilles Moec, chief euro zone economist at Deutsche Bank.
There was wide praise in Italy for the choice of Visco, in contrast to adverse reaction earlier on Thursday to the potential nomination of Bini Smaghi—seen as pandering to France.
“I’m surprised, this is the first good thing the Berlusconi government has done,” said Giacomo Vaciago, economics professor at Milan’s Cattolica University. “He is highly qualified, has great international experience and has been Draghi’s most widely admired colleague”.
Visco’s nomination was also greeted by positive comments across Italy’s political spectrum, a rare example of unity among normally bitterly divided political parties.
Stefano Fassina, economics spokesman for the main opposition Democratic Party, called it “an excellent outcome,” and described Visco as “a top quality economist with recognised international experience”.
Visco prides himself on being an open-minded economist who shies away from rigid dogma and is likely to be one of the less hawkish members of the ECB’s governing council.
His most challenging task will probably be as the ultimate arbiter of Italy’s banking system, where he must follow in Draghi’s footsteps in shielding the country’s lenders from a mounting sovereign debt crisis and possible credit crunch.
Visco joined the Bank of Italy in 1972, worked his way up through the research department where he drew up economic models still in use today, and became chief economist in 1990.
A good English speaker and well connected internationally, he left to take the OECD job for five years from 1997-2002 and was appointed to the BOI’s executive board by Draghi in 2007.
As well as representing the BOI in international forums, he often gives parliamentary testimony on government economic policies and has a good relationship with Economy Minister Giulio Tremonti — no doubt a factor in getting him the job.
He has a relaxed manner and a lively sense of humour, but had been widely considered to be too close to the centre-left opposition to have any chance of being nominated by Berlusconi.
Grilli, considered the early favourite, saw his chances wither because Tremonti, his main sponsor, became isolated in the ruling coalition as Italy was embroiled in the euro zone debt crisis.
Napolitano was also thought to be reluctant to accept someone so close to Tremonti and from a government ministry, for fear of compromising the central bank’s independence.
Bini Smaghi emerged on Wednesday as the apparent frontrunner compromise between Saccomanni — Berlusconi’s first choice — and Grilli. But newspaper reports on Thursday that he was the choice were accompanied by hostile comments suggesting he had been imposed on Berlusconi by Sarkozy.
The French president has given Berlusconi an ultimatum that Bini Smaghi must leave the ECB to avoid Italy being over-represented at the expense of France following the replacement of Jean Claude Trichet by Draghi.
The government now faces the difficult task of finding a job which is acceptable to Bini Smaghi, who has refused so far to leave the ECB.
Visco and Saccomanni had been expected to resign from the BOI’s executive board if Bini Smaghi had been given the job.