October 28, 2020

Trichet to Leave a Difficult Legacy at E.C.B.

Time and again the E.C.B. 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 significantly in stature and influence.

He also leaves behind a difficult legacy for his 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 browbeat them when necessary. But Mr. Draghi, already an influential member of the E.C.B. 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 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 E.C.B. did its part by buying Greek government bonds.

This year, the E.C.B. has used its clout in the banking system to insist that Portugal and Ireland accept bailout loans. Mr. Trichet has also pushed, with limited success, to get governments 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 letting Greece stretch out its debt payments gains traction, the bank has set itself up as the main opposition. It is not yet clear whether the E.C.B. 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 E.C.B. has faced criticism that it has a conflict of interest.

In May 2010, the E.C.B. began buying Greek, Portuguese and Irish debt to try to stabilize markets for those bonds. The E.C.B. moved in concert with the national governments, who at the same time created a €500 billion bailout fund, worth $720 billion at current exchange rates, for the distressed countries.

As a result, though, the E.C.B. now holds €75 billion in bonds from those countries, and would take a big hit to its balance sheet if any of them defaulted.

Last month, Mr. Trichet walked out of a meeting with euro area leaders in Luxembourg. He was upset that the politicians were toying with the idea of a Greek debt restructuring.

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

Based on public statements Mr. Weber made later, it appeared that he believed the E.C.B. 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 E.C.B. Mr. Weber, who had long been seen as the front-runner to succeed Mr. Trichet, resigned as Bundesbank president at the end of April rather than have to defend polices with which he strongly disagreed.

Even though European politicians seem to resent E.C.B. 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 E.C.B. is far better equipped to deal with the crisis than national governments. It is a pan-European institution able to act quickly — and independently.

Article source: http://feeds.nytimes.com/click.phdo?i=1f4a460d6854697f7a7e27ab1fc4b49d

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