Geoff Cutmore - Morning Thoughts

Splits Over the Euro -- Trichet Should 'Hear but Not Listen'

Geoff Cutmore

Mr. Euro -- or the late Wim Duisenberg -- would sympathize with Jean-Claude Trichet’s dilemma. Trichet is facing a hostile cabal of politicians from among the 13 euro-zone governments who want him to cut interest rates to take momentum out of the strengthening single currency.

So far he has stood resolute, and like Duisenberg, who famously answered similar calls with the line 'I hear, but I don’t listen,' Trichet has played deaf.

It doesn't help the politicians' cause that they themselves are divided. German Finance Minister Peer Steinbruck appeared to offer little support for the French and Italian position when he told waiting journalists at the Luxemburg meeting of European finance ministers that he preferred a strong euro

Germany has demonstrated in the past its ability to continue to grow its export market even as its currency has become less competitive. The mark may be history, but old habits die hard. Without support from Europe’s largest economy, the case for intervention in exchange rates looks a lost cause.

And so it should be. Markets, while imperfect, are better qualified than politicians to judge the correct rates of exchange. However, Trichet shouldn't close his ears completely. The current head of the European Central Bank should also take note of the history lesson given by Duisenberg, who was governor of the bank at the inception of the euro. Under his stewardship, the ECB eventually cut interest rates in the euro countries to their lowest level since World War II. However, Duisenberg's critics say the slowdown in the euro zone would not have been so deep if he had cut rates sooner and more aggressively. Now that is something worthy of Trichet's consideration.

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