October 29, 2020

Trichet to Leave a Difficult Legacy at Central Bank

Time and again the bank and its president, Jean-Claude Trichet, have applied pressure when they thought heads of state were not acting responsibly. As a result, when Mr. Trichet’s eight-year term expires at the end of October, he will leave behind an institution that has grown substantially in stature and influence.

He also leaves behind a difficult legacy for his most likely successor, Mario Draghi, the governor of the Bank of Italy. Mr. Draghi appears to share Mr. Trichet’s ability to negotiate cordially with European leaders — and to browbeat them when necessary. But Mr. Draghi, already an influential member of the central bank’s governing council, will also inherit an institution that has become deeply entangled with the banking system, financial markets and the political process.

“The E.C.B. so far has done an admirable job, all things considered,” said Dennis J. Snower, president of the Kiel Institute for the World Economy in Kiel, Germany. “But it has found itself in a very uncomfortable place not of its own choosing. This place may become more uncomfortable as time goes on.”

In May 2010, Mr. Trichet and others pushed leaders to recognize that there was a crisis in the first place, and then to fashion a rescue package for Greece. The bank did its part by buying Greek government bonds.

This year, the bank has used its influence in the banking system to insist that Portugal and Ireland accept bailout loans. Mr. Trichet has also pushed governments, with limited success, to adopt tougher sanctions against euro countries that run up too much debt, with the goal of averting future crises.

In recent days, as the idea of allowing Greece stretch out its debt payments gained traction, the bank set itself up as the main opposition. It is not clear whether the bank will succeed in blocking a restructuring that many economists see as inevitable.

Mr. Trichet and others argue that a Greek default could disrupt financial markets in ways that would be unpredictable and impossible to control. But in recent weeks the bank has faced criticism that it has a conflict of interest.

In May 2010, the bank began buying Greek, Portuguese and Irish debt in an effort to stabilize markets for those bonds. The bank acted with the national governments, which at the same time set up a 500 billion euro, or $715 billion, bailout fund for the distressed countries.

As a result, though, the bank now holds 75 billion euros in bonds from those countries and would lose money if any of them defaulted.

In May, Mr. Trichet walked out of a meeting with leaders of euro zone countries in Luxembourg. He was upset that the politicians were toying with the idea of a Greek debt restructuring.

Yet the bank’s venture into politics also created strains in its own governing council. Axel A. Weber, the president of the German Bundesbank and a member of the council, argued that the bank was making a mistake by intervening in government bond markets.

Based on public statements Mr. Weber made later, it appeared that he thought the bank was moving too far into fiscal policy and letting governments off the hook.

“Primary decision-making over wide areas of economic and finance policy remains with member states,” he and two Bundesbank economists wrote in a March commentary published in The Frankfurter Allgemeine newspaper.

The ideological split had lasting consequences for the bank. Mr. Weber, who had long been seen as the front-runner to succeed Mr. Trichet, resigned as Bundesbank’s president at the end of April to avoid defending polices he disagreed with.

Even though European politicians seem to resent meddling, they have been glad to allow the central bank to deploy its financial resources at crucial moments, propping up commercial banks with cheap credit and intervening in bond markets.

In many respects, the bank is better equipped to deal with the crisis than national governments. It is a pan-European institution able to act quickly — and independently.

Liz Alderman contributed reporting from Paris.

Article source: http://www.nytimes.com/2011/06/01/business/global/01trichet.html?partner=rss&emc=rss

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