March 8, 2021

News Analysis: Euro Builder Ends His Career on a Bitter Note

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 sang froid and political toughness in French courtliness, Mr. Trichet generally gets high marks for the way he has managed the E.C.B. 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 Mr. Wyplosz, say the E.C.B. 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 worth of questionable debt. Greece should have been allowed to default and restructure under the guidance of the International Monetary Fund, Mr. Wyplosz said.

Other analysts say the bank had no choice but to intervene in dysfunctional markets, but sabotaged its own efforts by moving too hesitantly. The E.C.B. 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 E.C.B.’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 or the Netherlands. At the same time, the E.C.B. 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 E.C.B. 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?” said Marie Diron, an economist in London who advises the consulting firm Ernst Young, and previously worked at the E.C.B.

With European economies slowing and the debt crisis intensifying, critics say, the E.C.B. 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 E.C.B. 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 E.C.B. charter would not allow it to flood the economy with money the way the Fed has done through its huge purchases of securities.

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