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ECB Did All It Could to Stem Crisis: Trichet

Lionel Barber HKSCKPVIamp; Ralph Atkins, Financial Times

For 30 years, whenever economic crises hit the world, Jean-Claude Trichet was at the centre of action. As his career draws to a close – his eight-year term as European Central Bank president ends in three weeks – the former French finance official and Banque de France governor is in the midst of his biggest crisis yet. “It is a historical event of the first magnitude, the worst crisis since the second world war,” he exclaims. “It could have produced a great depression had appropriate decisions not been taken at the appropriate time.”

Jean-Claude Trichet
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At its epicentre is Europe’s 17-country euro zone. The bloc’s leaders are scrambling to assemble a rescue package that will finally restore the stability of Europe’s 13-year old monetary union. In an interview with the Financial Times, however, Mr Trichet sees the crisis as broader – as a crisis of the west. “All advanced economies are being x-rayed by the present crisis and revealing their skeletons and the weaknesses in their skeletons. It’s true for all of us – for Japan, for the US, for Europeans.”

Drawing lessons in his final days in office, Mr Trichet is convinced the long term result will be that Europe is propelled towards greater economic integration – extending the European “project,” for which he has pushed for much of his life. “I think that we are experiencing history in the making. My sense is that no country, no individual, no leader will take the responsibility of going backwards. That’s the reason why I am confident.”

The burden on Mr Trichet, especially over the past four years, has been enormous. At endless global meetings, he has helped coordinate - or at least avoided clashes between - the world’s central banks. In Europe, he has pushed for action at emergency summits that have sometimes descended into haranguing matches. In Germany, the ECB has faced fierce resistance over the massive extension of its lending to banks and intervention in government bond markets.

Resting his glasses on his iPad in the Financial Times’ London offices, his silver-hair neatly trimmed, Mr Trichet looks tired. But in an hour long discussion he is as combative as ever. For Europe, he says,, “X rays” have exposed, not weaknesses in the euro as a currency – the ECB president insists its future is “evidently not in danger” – but in the euro zone’s governance.

The region’s crisis after Greece and other countries pumped up their economies on cheap credit and allowed international competitiveness to plunge. Euro zone fiscal rules were blithely ignored, including by Germany, while financial markets had encouraged a pre-crisis period of “benign neglect” – for instance, by demanding the same interest rate on Greece government debt as on Germany’s.

Euro zone policymakers, says Mr Trichet, now have to break a vicious cycle in which governments’ debt woes are fuelling investor nervousness about banks. Their responsibilities are twofold. Attention has focused in recent days on the urgent need to strengthen banks’ balance sheets. But the ECB president also wants steps “to restore as completely as possible the credibility” of sovereign debt.

In the ECB’s eyes, politicians have escalated the crisis dangerously by undermining perceptions about the security of euro zone government bonds. Germany has led demands that when countries such as Greece are bailed-out, private sector investors should take a hit. As early as a European summit in October last year, Mr Trichet warned Angela Merkel, German chancellor, and Nicolas Sarkozy, French president, that they risked simply driving up borrowing costs. Since then, his warnings have been vindicated – but gone unheeded. In July, euro zone leaders agreed on a “private sector involvement” in Greece’s bailout which would have led to a 21 percent notional “haircut” on Greek debt holdings. Now Germany and others are pushing for more.

Whatever his private thoughts, Mr Trichet – always disciplined in his communication - chooses his words carefully. He is clearly anxious not to add public spats to the euro zone’s problems. Its political leaders “have said very clearly that Greece is a special case and that as regards all other countries, the goal was to fully honour the signature of governments. I would say it is important to avoid any ambiguity in this respect,” he says calmly.

The ECB, itself, has reached the limits of what it can do, Mr Trichet argues. If Greece is pushed into default, the central bank would no longer be able to accept its governments bonds as collateral from Greek banks seeking its live-saving liquidity. As a result, other euro zone governments would have to backstop its financial system to avert economic catastrophe.

For the eurozone as a whole, Mr Trichet stresses measures it has taken to support banks – last week it announced two offers of unlimited one-year loans, on top of the unlimited weekly, monthly and three monthly liquidity already available. But he makes clear that the ECB will not act as a “lender of last resort” to governments. Its government bond buying program – which has seen it buying more than 160 billion euros mostly in southern European government debt – is aimed simply at ensuring its monetary policy decisions are “transmitted” via functioning bond markets into the real economy.

“I think that the ECB has done all it could to be up to its responsibilities in exceptional circumstances…The ultimate backstop is, of course, the governments. To do anything that would let governments off their responsibilities would be a recipe for failure.” The governments have an instrument in place – the 440 billion euros European Financial Stability Facility which, Mr Trichet says, could be leveraged to provide a firewall.

In seeing a restricted role for the central bank, Mr Trichet is in line with the tradition of Germany’s famously-conservative Bundesbank, on which the ECB was modelled. When he arrived in Frankfurt, Germany’s financial capital, in November 2003, he was seen – especially by his countrymen – as an inflation “hawk” and as much of a “Bundesbank-er” as was possible for a Frenchman.

The crisis, however, has re-written the ECB’s relationship with Germany. The country’s conservatives fear its bond-buying program has already set the wrong incentives for governments and that its support for banks had piled up dangerous risks on its balance sheet. Earlier this year, Axel Weber resigned as Bundesbank president and from the ECB’s governing council after voicing public opposition to bond buying. In September, his compatriot Jürgen Stark announced his resignation from the ECB’s executive board for similar reasons.

Asked if he has lost Germans’ support for Europe’s economic integration, Mr Trichet is, again, diplomatic. “I don’t know what ‘the Germans’ means…We are living in cultures that are very deep, very profound and very complex, obviously, and where you have a lot of different opinions.” He pays tribute to Mr Stark, who has not spoken out publicly against ECB policy, as “a very close friend” and committed European – although noticably fails to mention Mr Weber.

What about the view, widely-held in continental Europe, that governments should not be pushed around by markets. There is a moment’s light relief as Mr Trichet laughs. “I think we are proud to live in market economies because they have proved the right way of producing wealth, and all other experiments have proved catastrophic. That said market economics have to be disciplined. You must have rules. You cannot rely too naively on the spontaneous functioning of markets.”

Unfortunate lessons were drawn from the dotcom bubble crash at the start of the century, however. “The idea was that financial markets were extraordinary resilient – which was plain wrong. I must say, I never shared the view that we were in a world where there was no risk.”

Now his concern is that politics of the euro zone’s rescue are being complicated by those driving financial markets - the private sector bankers - continuing to pay themselves excessive pay and bonuses. “We have a real problem of values. Our democracies to not understand some behavior,” he warns

Steps have already been taken to buttress the euro zone over the longer term, Mr Trichet points out – including the better monitoring of fiscal policies and competitiveness, the latter being an issue on which the ECB president says he has long campaigned. But he wants to go further with introduce European Union treaty changes empowering European institutions to impose decisions on miscreant euro zone countries.

Earlier this year, in a speech in Aachen, where he was awarded Germany’s Charlemagne prize, Mr Trichet proposed the eventual setting up of a European finance ministry. It is an idea on which the ECB president is happy to expand. Broadly, he sees a future finance Tsar as having three main tasks. The first would be economic “surveillance” with powers to impose decisions where necessary. Second, he or she would oversee the euro zone financial sector – ensuring that the fate of banks in individual countries was not linked, as now, to the strength of their government’s finances. Thirdly, they would represent the euro zone in global financial institutions.

Ultimately, Mr Trichet sees this as a project for the whole of the 27-country European Union, including those members, such as the UK, which remain outside the euro zone. “Of course, the possibility of imposing decisions would not apply outside the euro area – that goes without saying,” he hastens to add.

Is it a realistic agenda? Are not Europeans tired of economic integration – and, in countries such as Germany, increasingly worried about its cost? Mr Trichet is adamant. “There are more reasons today for the Europeans to unite in economic, financial and monetary fields than there were at the beginning of the 1950s, at the time of Robert Schuman [the French statesman considered one of the EU’s founding fathers]. I really think that the transformation of the world…the emergence of China, India, of Latin America, calls for the Europeans to unite much more. One of the lessons of the crisis is precisely that they need more unity. In my opinion, this is not necessarily communicated appropriately to the public, but I think that these truths are there.”