FRANKFURT — Jean-Claude Trichet, the president of the European Central Bank, has spent much of his career building and defending the euro. But now, in a bitter twist, it looks as if his career may well end with the common currency in shambles.
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Jean-Claude Trichet
Mr. Trichet, 68, will retire at the end of October after an eight-year term. Yet markets are crashing, bond investors have turned on Italy and Spain, and it appears certain that when Mr. Trichet returns to civilian life on Nov. 1, the European sovereign debt crisis will be far from resolved.
Indeed, the euro area threatens to become the epicenter of a global financial crisis to rival the one that followed the collapse of Lehman Brothers in September 2008 — a horror sequel that Mr. Trichet himself has said the world cannot bear.
“Our democracies would not be ready to provide once again the financial commitments to avoid a great depression in case of a new crisis of the same nature,” he told an audience in Madrid in May.
A lifelong civil servant who wraps his sangfroid and political toughness in French courtliness, Mr. Trichet generally gets high marks for the way he has managed the central bank. He may be the most influential public official on the Continent, the person who most embodies the dream of a single coin for the European realm.
But recent days have also highlighted what some critics say are policy mistakes by Mr. Trichet, or at least the institution he leads. And just as Alan Greenspan went from being lionized to lacerated after his years at the Federal Reserve were quickly followed by the global financial collapse, these missteps threaten to tarnish Mr. Trichet’s legacy.
Mr. Trichet may be remembered “as a charming and talented leader who failed to grasp the gravity of the crisis,” said Charles Wyplosz, a professor of economics at the Graduate Institute in Geneva.
Some critics, including Professor Wyplosz, say the bank made a fatal error when it began buying Greek, Irish and Portuguese bonds in May 2010, a decision that has left the bank holding more than 74 billion euros worth of questionable debt. Greece should have been allowed to default and restructure under the guidance of the International Monetary Fund, Professor Wyplosz said.
Other analysts say the bank had no choice other than to intervene in dysfunctional markets, but sabotaged its own efforts by moving too hesitantly. The bank should have shown a willingness to buy Spanish and Italian bonds as well, they say.
“What isn’t helpful is if you stop halfway,” said Frank Engels, co-head of European economics at Barclays Capital in London, who generally holds Mr. Trichet in high regard. “Either you would have abstained entirely, or you would have gone all the way.”
The bank’s interest-rate policy has also drawn scorn, with critics calling it deeply inconsistent.
The bank has raised the benchmark interest rate twice since April to prevent inflation in fast-growing countries like Germany and the Netherlands. At the same time, the central bank has pursued a loose monetary policy in weaker countries like Greece and Ireland by allowing banks there to borrow central bank funds cheaply. On Thursday, amid signs of serious tension in the interbank markets, the central bank expanded the availability of low-cost loans to banks.
“If this is all part of a single objective, then how can you turn one lever toward the right and one to the left?” asked Marie Diron, an economist in London who advises the consulting firm Ernst & Young and previously worked at the central bank.
Same mistake?
With European economies slowing and the debt crisis intensifying, critics say, the central bank is making the same mistake this year that it made in July 2008. Then, the bank raised the benchmark interest rate to 4.25 percent from 4 percent even as the financial crisis was gathering force.
After the collapse of Lehman Brothers only two months later, the bank was obliged to throw monetary policy into reverse, lowering the rate to 1 percent by May 2009. It has been at 1.5 percent since July.
To be fair to Mr. Trichet, who declined through a spokeswoman to comment for this article, he has a more limited arsenal of policy tools than Ben S. Bernanke, his counterpart at the Federal Reserve. The bank charter would not allow it to flood the economy with money the way the Fed has done through its huge purchases of securities.
In addition, Mr. Trichet’s power is more diffuse. Policy is set by the bank’s governing council, which consists of the 17 heads of euro area central banks plus the six members of the executive board, which includes Mr. Trichet. Each member has one vote.
Divisions among the members have spilled into the open during the past two years, including this week. The split highlights the difficulty Mr. Trichet faces in presenting a unified front and ensuring that markets remain in awe of central bank power.
On Thursday, after the central bank resumed buying bonds on open markets for the first time since March, Jens Weidmann, the president of the Bundesbank, Germany’s central bank, objected and was joined by several other members, an official with knowledge of the proceedings said. The official asked not to be identified because of the delicacy of the matter.
At a news conference Thursday, Mr. Trichet conceded that there was not unanimous support for the bond purchases. The internal divisions raised doubts about the bank’s resolve, and led bond investors to conclude that the bank would not intervene to support Italy and Spain. A selloff of both bonds and stocks ensued.
Mr. Trichet has also had to contend with governments that have been focused on pleasing their domestic electorates and in the process slow to respond to the crisis. Almost since taking office in 2003, he has been badgering leaders to cut their budget deficits and deregulate to encourage entrepreneurship and growth.
He still boasts about how in 2004 he stood up to French and German leaders who wanted to loosen rules on government borrowing, part of the Maastricht Treaty for the currency union that Mr. Trichet helped write. Almost every euro area country, including Germany, has violated the debt limits.
Unlike the politicians, Mr. Trichet stuck to his part of the bargain. As he never tires of reminding journalists, since the introduction of the euro in 1999, the central bank has held inflation below the official target of about 2 percent — a better record than the Bundesbank in the heyday of the German mark.
That no doubt was the legacy Mr. Trichet hoped to leave in October. Fiscal prudence was in many ways the theme of a career that began in elite French universities and later included high-level posts in the French government, before he was appointed governor of the Bank of France in 1993. In that job, Mr. Trichet earned a reputation as a hard liner who helped restrain the spendthrift impulses of French politicians, winning the admiration of German leaders who backed him as Europe’s central banker.
After all, fighting inflation and preserving the integrity of working citizens’ hard-earned euros is the bank’s No.1 task.
Though Mr. Trichet has only three months remaining on the job, that time could be crucial. He has made a point of not discussing his plans for retirement and appearing as vigorously engaged as ever. With spreads on Italian and Spanish bonds reaching the point where officials in those countries would have trouble issuing debt at sustainable interest rates, the central bank may be the only institution powerful enough to intervene convincingly in markets.
The bank would probably have to violate its own charter and effectively print money through big purchases of Spanish and Italian bonds. But some economists predict the bank will have no choice. For Mr. Trichet, it may prove the only way to preserve his life’s work.
“Only the E.C.B. can do something,” Professor Wyplosz said. “We are in a such a dangerous situation that I don’t worry about legalities. Now they have to go to the bitter end and do what they have to do to prevent a breakup of the euro area and a world crisis.”