A Governess for the Old Lady? Surely not!

On why the next Governor of the Bank of England might be a woman

Here's an intriguing possibility. The next Governor of the Bank of England will be a woman. I've no inside track on this but I do know that the idea is regarded as an appealing one by Treasury ministers, including the Chancellor. For the time being, the race for the Governorship is still wide open. Eddie George, the present incumbent, has won plenty of backing for his campaign for a second term, but his position is still far from assured.

The possibility, floated in the summer, that he might be given an extra half term of two to three years when his contract expires in July, as a compromise solution between the case for continuity and the case for change, seems to have gone away, and it's now all or nothing. What does seem clear is that the undisputed success of the Government's decision to grant limited independence to the Bank of England has made the task of selling the case for change, if that's what the Chancellor wants to do, that much easier than it was six months ago.

The new Government desperately needed Eddie George when it swept into power, despite the overwhelming size of its majority. Eddie could provide continuity and assurance to markets in a way that the comparatively unknown Gordon Brown could not.

Mr Brown had said a lot of reassuring things while in opposition, but what would he do in power? We now know the answer to that question and it is that he's made of rather sterner stuff than his predecessor, Kenneth Clarke. Mr Brown no longer has a problem with the markets. His need for Eddie George is therefore diminished.

Furthermore, the Chancellor's need for continuity is also now much reduced. The Bank's position and role in the economy has been so profoundly changed over the last six months that it might now be a positive advantage to change the skipper as well. Responsibility for banking supervision has been handed to the Financial Services Authority, so that traditionally very large part of the Governor's job, which can be broadly described as playing God in the City, has gone.

Giving the Bank of England control over interest rate decisions has worked in exactly the way intended. Since the election, interest rates have gone up five times, or 1.25 per cent in total, but the Chancellor has had to make only one of these decisions, the first. Blame for an unpopular but necessary policy is thus deflected on to the Bank, and the Chancellor appears, if not quite the warm and cuddly person he might like to be seen as, certainly unblemished by it all.

There have been one or two mutterings from Old Labour, expressed unattributably through the columns of The Guardian, about the idiocy of ceding political control of monetary policy, but on the whole, everyone's happy. Take away responsibility for difficult decisions from ministers and place it with a group of experts and nobody complains too much, seems to the lesson.

So the Chancellor could, if he wanted, now accomplish a change of Governor without upsetting the forces of international and domestic capital - assuming he appoints somebody suitable, that is.

As always, there is another side to the argument. The case for keeping Eddie George is this. If Gordon Brown gets his way, there will be a referendum soon after the next election to take us into the single European currency. Mr George is already known, well liked and respected in the clubbable world of European central bankers, and would make an obvious choice for the task of defending Britain's corner in preparations for the new European Central Bank while our formal position remains on hold. By the time Britain gets its automatic position as a member of EMU on the court of the ECB and its inner executive committee, Mr George's second term would have expired.

So which is it to be? Take the money or open the box? By inclination, the Government would tend towards change. It is easy to forget that Mr Brown still has a political constituency to play to, as well as the capital markets. For evidence of these very different audiences, just look at the way the story about changes in the constituency of the Court of the Bank of England played in two national newspapers this week.

Because of the way contracts are expiring and the creation of new non executive positions on the Court, the Chancellor will have seven appointments to make this spring. This was written up in The Guardian as a grand plan from the Chancellor to pack the Court with his own people. If you are a Guardian reader, this must have seemed like a highly satisfactory outcome. Trade unionists, women, and regional representatives, will all get guaranteed positions on the Court.

The next day, the same story was written up in The Daily Telegraph with an entirely different spin. The Telegraph reported that the Chancellor intended to reappoint all Court members whose contracts did not expire, in order to provide continuity. The effect of this will be that three- quarters of the existing Court survive. If you are a Telegraph reader, this must have seemed an equally satisfactory outcome. Both versions of the story are correct. Mr Brown accomplishes change and continuity, all at the same time.

The decision on the governorship is obviously a tougher call, but my guess is that the Chancellor will want to try the same trick. He'll want to play to the gallery by changing the governor, and he'll attempt to play to the City by making the choice someone obviously acceptable. It is important to get the decision right, because even after we join the single currency, this is going to remain a highly influential position.

The governor will be Britain's representative on the ECB, where he/she will be an entirely free agent. Moreover, because of the City's position as Europe's leading financial centre, the Bank of England ought to rise above that of other agency central banks to a status of real importance in monitoring and providing financial stability in capital markets.

Appointing a woman might achieve the double purpose of establishing the Chancellor's "right on" credentials and clearing out a few dusty old Bank of England cobwebs all at the same time. Who might square this circle? Two obvious candidates - Baroness Hogg, a former head of the Number 10 Policy Unit under John Major, and Ruth Lea, chief economist at the Institute of Directors - are probably both too much Tory grandees and Eurosceptic to be considered. Carol Galley, chief executive of Mercury Asset Management, may be too associated with City fat cattery to be acceptable, even if she wanted to do it. And Rachel Lomax, Permanent Secretary at the Welsh Office, has already turned down an offer of one of the deputy governorships. Who knows? Eddie may end up with the prize after all, if only by default.