As he gets set to hand over to the Italian Mario Draghi, his bond-buying policy remains his most contentious legacy
JEAN-CLAUDE Trichet chaired his final rate-setting meeting of the European Central Bank in the Berlin outpost of the mighty Bundesbank, an institution instinctively opposed to some of the ECB’s most radical initiatives in the debt crisis.
The departing governor of the bank declined two opportunities afterwards to say whether he had any regrets at the end of his eight-year tenure. However, he made it clear that the job was never easy.
“We were never in calm waters. But, for more than four years now, we have been experiencing turbulent waters, storms, unexpected hurricanes,” he told reporters.
“All our decisions are difficult to take, particularly when you have a very difficult time, a very demanding time. I am confident that . . . we were trying to do our best in a very difficult environment and in an environment where governance was not at the level of what was required.”
That was as near as he came to any overt criticism of anything in the euro zone.
Trichet, one of the euro’s founding fathers, leaves the Frankfurt-based bank in a time of unyielding tumult. The world’s worst financial crisis since the second World War is worsening. As he hands over next month to Italian central bank governor Mario Draghi, the single currency and the wider global economy remain stuck on an excruciating treadmill of peril and woe.
The relentless upheavals have seen Trichet forge a radical expansion of the ECB’s operations, stoking damaging tensions within the top echelon of the bank itself and divisions with arch-traditionalists in the German economic establishment.
At the same time, his readiness to increase interest rates at moments of economic weakness has led to criticism that he is overly dogmatic in his application of the bank’s inflation-fighting mandate.
Trichet’s restless independence on this front sparked political conflict early on. France and Germany pressed for a rate cut in 2004 but the bank refused. Similarly, a push by France, Germany and Italy to weaken Europe’s stability pact in 2004 and 2005 drew a very frosty response the former governor of the Banque de France.
When the ECB increased interest rates for the first time under Trichet’s leadership in December 2005, it was in defiance of pressure from the governments of 10 of the 12 countries in the euro zone at that time. It was more or less the same yesterday. The governing council’s decision to not to cut rates – taken by consensus, not unanimously – was at odds with demands from the IMF.
As befits this most Germanic of Frenchmen, Trichet is adamant that inflation remains the enemy of the people and that it is the poorest and most vulnerable who suffer most when prices rise. Very early in his tenure, he declared that the bank’s duty to keep inflation “below but close to” 2 per cent was “written in stone”. He’s been saying the same thing ever since, increasing rates twice this year even as the turmoil in the euro zone intensified.
Indeed, he is fond of saying that the bank’s extraordinary interventions in sovereign bond markets and its huge support schemes for the banking sector are designed merely to facilitate the effective transmission of its monetary policy. If this is something of a conceit, the reality is that such interventions were undertaken to prevent the euro system from collapsing into chaos.
It is that serious, and few officials are under any illusion that it is not. In the corridors of European power, senior figures still whisper about fraught, fateful weekends at the height of the disruption in the banking sector when the authorities were confronted with the danger that there might not be money in cash machines come Monday morning.
Emergency action to prevent the currency system imploding, however, has led the ECB to take on ever-increasing risk on its own balance sheet. Trichet might have preferred to hold back, but the bank’s operational independence gave it a freer hand than governments to intervene in markets.
This, however, has stoked tension with political leaders, lots of it. Trichet repeatedly argued that the central bank cannot replace the duties of governments and did so again yesterday, urging member states to finalise an agreed overhaul of their bailout fund swiftly. He wants the fund to quickly make use of its new powers to intervene in sovereign debt markets, something that would take some of the pressure off the ECB.
Whenever the euro zone emergency escalates, the bank is left carrying the can. On his watch, however, the ECB was not averse to sweeping schemes to contain the turmoil. The decision yesterday to resume long-term bank liquidity operations – a move which means emergency support for the financial sector will continue into 2013 – is a case in point.
In the finance ministries of the euro zone, officials describe particular manoeuvres as being in the mode of “classic Trichet”. By that, they refer to the abrupt deployment of heavy financial weaponry, an element of surprise and a certain boldness in the face of escalating market pressure. A prime example is a recent move to provide dollar liquidity to addled euro zone banks in co-ordination with global central banks.
The figures involved in ECB’s support for the euro zone are eye-popping. Since the bank started buying sovereign bonds 17 months ago, it has accumulated some €140 billion in paper issued by the likes of Greece, Ireland, Portugal and, latterly, Spain and Italy. By way of further example, Irish banks alone are being supported to the tune of €150 billion with emergency liquidity.
Even if it is a given that Ireland’s financial system would have collapsed long ago without the ECB lifeline, the bank’s increasing involvement in Irish affairs is contentious. Trichet remains resolutely opposed to the imposition of losses on senior bondholders in Anglo Irish Bank – something which would ease the burden on taxpayers – and he has voiced frustration at the frequency with which the question is raised by Dublin.
In the face of criticism from the late Brian Lenihan that the ECB bounced Dublin into a bailout last year, he said the facts showed the bank sided with Ireland in its difficulties. He could not have been clearer: “The level of commitment of the euro system to Ireland has absolutely no precedent.”
But Irish criticism of the ECB does not stop there. While saying primary responsibility for the economic disaster rests in Ireland, former taoiseach John Bruton has long held that the institution and other EU bodies could have done more to prevent the Irish credit bubble. This did not win him acclaim in Frankfurt or Brussels.
As Trichet prepares for his retirement, it is the bond-buying campaign which remains the controversial policy of his tenure. At a time of waning confidence in the ability of the public authorities to assert control over the crisis, the policy led to the departure of the two top-ranking Germans in the ECB. The first to go was former Bundesbank chief Axel Weber, long Trichet’s heir apparent on the ECB governing council. To Trichet’s great annoyance, Weber took issue publicly with the initiative – loudly and repeatedly – before taking his leave of the Bundesbank and the race to lead the ECB. Virtually all senior Bundesbank figures shared Weber’s concerns, it is understood.
The second to leave was executive board member Jürgen Stark, who resigned last month. Stark was a much quieter critic than Weber and he loyally stood by Trichet until last month. While Stark’s sudden exit suggests the bank’s headquarters in Frankfurt’s Eurotower is not a happy place, Trichet made a point yesterday of applauding his commitment to Europe.
Will Draghi be any different? Here we enter the realm of speculation and religious metaphor. In political and diplomatic circles, there is little expectation that he will. Given his Italian pedigree, expectation remains that he will have to be “more Catholic than the Pope” to prove his credentials in Germany.
Still, senior bankers who have observed both Trichet and Draghi at close quarters say the new ECB chief may prove to be a mite more flexible. In the eyes of one, Trichet’s dogmatic approach to his task sometimes carries echoes of the “rigid Catholic”. Draghi, though he will be under intensive international scrutiny, is said to be a little more stealthy and pragmatic. Only time will tell if that proves to be the case.
After all, the ECB remains on red alert for contagion in markets.
For months and months, Trichet fought against the pressure from German chancellor Angela Merkel for private creditor participation in the ailing Greek rescue. While his supporters would argue that the present escalation in tension has proved him right, European debate is still turning in the direction of an orderly default. Trichet might recoil at the prospect, but he didn’t mention it at all yesterday.
