European Central Bank in a Squeeze
Whether he likes it or not, Jean-Claude Trichet is not just the president of the European Central Bank. Mr. Trichet, 67, is also the de facto president of Europe, at least for the 16 nations that rely on the euro as their common currency.
On paper, the European Union has just established a new president in Brussels, and the central bank’s sole responsibility is to keep inflation in check. Moreover, the bank, based here, has almost no formal policy tools to help an ailing member country like Greece.
But as investor alarm about Greek, Spanish and Portuguese indebtedness increases, the crisis has highlighted the fundamental weakness of the European monetary union. With no strong political arm to ensure that members observe debt limits set by treaty, the responsibility falls to Mr. Trichet to try to resolve the crisis.
In the current situation, said Jörg Krämer, chief economist at Commerzbank in Frankfurt, only the bank’s president “has the authority and the expertise” to manage the situation.
On Saturday, Mr. Trichet told reporters at a meeting in Canada of the Group of 7 finance ministers and central bank presidents that he was confident that Greece would meet tough new belt-tightening goals.
“We expect and we are confident that the Greek government will take all the decisions that will permit it to reach that goal,” Mr. Trichet said, according to Reuters.
Just a couple of days earlier, Mr. Trichet lectured European governments on the need to swiftly pare their budget deficits. “When you share a single currency with others, the counterpart is that you have to have a sound fiscal policy,” he said during a briefing in conjunction with the bank’s monthly policy meeting.
But then, in a gesture that did little initially to calm nervous investors, Mr. Trichet pointed out that the overall deficit level among euro countries, at about 6 percent of gross domestic product, was still well below that of the United States and Japan, which are each set to borrow more than 10 percent of their GDP’s this year.
Mr. Trichet delivers such comments in excellent English with a distinct French accent. Though he can be stern, he sometimes displays a dry sense of humor. Before the G-7 meeting on Saturday, he joked that by gathering in frozen Canadian territory, “we will have just the right environment to be as cool as possible in judging the situation.”
Mr. Trichet sometimes maintains that problems with individual euro nations should be of no greater concern to Europe’s central bank than the fiscal problems of an individual state are to the Federal Reserve in Washington. After being peppered with questions about Greece on Thursday, Mr. Trichet responded: “I doubt that, in a press conference, Ben Bernanke would have a question on Alaska or Massachusetts.”
In fact, Mr. Trichet needs to be more outspoken than Mr. Bernanke because Mr. Trichet operates with many more constraints.
The lack of a strong central government to back up the euro is the most obvious difference. Since last month, the European Council, the body that represents the 27 national governments in the European Union, has had a president for the first time, Herman Van Rompuy. But he has few powers to discipline the 16 euro members.
“The ultimate problem is the nonexistence of a political union,” said Mr. Krämer, the Commerzbank economist. “This is the big, big reason behind all the problems we are talking about.”
The other big difference is that the central bank, unlike the Fed, is prevented from buying government bonds or offering direct support to troubled banks within its sphere. During the recent financial crisis, however, the bank showed it was able to find creative ways of bolstering the European banking system. It vastly expanded the volume of lending to banks, thus helping to avoid a more serious credit crisis.
In the current situation, the bank is aiding Greece by accepting Greek bonds as collateral that banks in Greece can use to borrow money. As long as Greece maintains its current credit ratings, the bonds qualify under central bank rules.
If the crisis worsens, it would fall to European governments to arrange a rescue of Greece or any other ailing country, like Portugal. While wanting to avoid anything that encourages further reckless borrowing and excessive government spending, they have indicated they will do whatever it takes to prevent a sovereign default of a euro member.
But the European Commission, the union’s executive body, lacks the expertise to manage the delicate mixture of carrots and sticks that would be involved in any bailout, economists say. Last year, when growth collapsed in countries in Eastern Europe like Latvia, Hungary and Romania, Brussels essentially outsourced the rescue to the International Monetary Fund.
European leaders do not want to turn to the IMF for help rescuing a member of the euro zone, its core unit.
That probably leaves them with the alternative of advancing aid funds, issuing bonds on behalf of Greece that would be backed by other European countries or guaranteeing Greek bonds.
While the central bank itself cannot supply the money, Mr. Trichet is bound to play a discreet but influential behind-the-scenes role. He has the advantage of being able to speak his mind without worrying about being elected.
That becomes a greater concern as European taxpayers become aware of how much a rescue may cost them.
Many seem resigned to some sort of bailout. Martin Mann, a proprietor of a Frankfurt wine shop, said that he expected the European Union to pay for Greece one way or another.
Asked if that made him angry, Mr. Mann shrugged. “As a taxpayer, I already have to pay the bill for so many messes created by other people,” he said. “I would have to be mad every day.”