The most important domestic contest before the general election reaches its climax. Soon George Osborne will announce the next Governor of the Bank of England. Only two candidates are thought to have a chance and the outcome of their discreet campaign is far more important than those political battles that attract such feverish attention. Whether or not a near powerless Chief Whip survives is trivial compared with who becomes the next Governor, a position that is often more powerful than that of Chancellor. As Osborne prepares to make his decision some of his Cabinet colleagues plan to be more than passive onlookers. Nick Clegg in particular is taking an active interest. He does so with good cause. The stakes are extremely high.

Sometimes it is extremely difficult to measure where power lies, but in the case of the Governor it is fairly straightforward. Take the case of the current occupant, Sir Mervyn King. When his first term was drawing to a close in the midst of the tumultuous financial crisis, Gordon Brown and Alistair Darling, Prime Minister and Chancellor at the time, contemplated briefly not offering him a second term. They had disagreed with some early responses to the emergency, regarded some of his public statements as deliberately or naively provocative and were wary of his apparent closeness to Osborne, the then shadow Chancellor.

Power

But they felt too weak to remove him. Brown was being subjected to various attempted internal coups. The two of them had fallen out on other matters. The economic crisis was too frighteningly unpredictable. They gave King a second term, after which he was more powerful than both of them, utterly secure for another four years. In contrast a mere Prime Minister and Chancellor wondered whether they would still be in office by the end of each week.

The duo also faced a general election which they were expected to lose while, once appointed, King could act without worrying about justifying his exalted position. Now, fleetingly, the Chancellor is the one with the power. Osborne will choose King’s successor. Meanwhile King’s mighty authority fades as his rule draws to a close.

The appointment matters so much because his successor will acquire extraordinary power over economic policy. Very quickly he will become more secure than the Chancellor, partly because, like Brown and Darling previously, Osborne soon faces an election he might lose. More immediately the Coalition has chosen to give the Bank of England the task of stimulating the economy and regulating the banks. Senior ministers are, or have become, fiscal conservatives and monetarist activists. They pull few levers in relation to tax and public spending, but look to the Bank to do so, most recently by printing money in the form of Quantitative Easing.

No wonder senior Liberal Democrats keep a keen eye on the appointment. Remarkably, Clegg has kept his party more or less united in favour of the Coalition’s austerity programme, an underestimated success in terms of his leadership. The unity is not forced but genuine, spanning the so-called Orange Book Liberals and social democrats such as Vince Cable and the party’s president, Tim Farron. But this support is dependent on more radical activism from the Bank of England. Farron has explicitly called for more ambition from the Bank while, as senior Cabinet ministers, Cable and Clegg are more discreet but equally keen.

Daring Adair

They have a candidate for the next Governor, although they would not put it as crudely as that. The current head of the Financial Services Authority, Adair Turner, has made a series of speeches expressing doubt on the effectiveness of Quantitative Easing and put forward some more daring options. He has urged “still more innovative and unconventional policies” that include direct lending to businesses and, it was implied, using money created by the Bank to finance government borrowing.

As a candidate Turner has his critics, including the current Governor. Part of the critique is unfair. As the FSA’s head he is associated with a failed regulatory regime in relation to the banks. But the transfer of FSA powers to the Bank of England is largely a political move, giving Osborne more ammunition to blame the last government for failing to control the banks. The regulatory structure established soon after 1997 was never the cause of the financial crisis. More valid criticism comes partly from some who have worked with Turner in the past.

They doubt whether he can be the titanic policy maker and team builder the post now demands. Indeed some wonder whether anyone has the heroic qualities for the job as newly defined. But I have heard some outside the Conservative Party, who suggest that the safer, less radical alternative of Paul Tucker, a deputy of King’s, is the more appropriate choice.

What the appointment will tell us is how bold Osborne dares to be in seeking economic recovery and whether the Lib Dems can persuade him that his and their monetary activism would be assisted by the appointment of a more radical Governor.