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SPIEGEL Interview with ECB President Trichet

"You Can't Stop History"

Jean-Claude Trichet, president of the European Central Bank, discusses the risk of inflation in the euro zone and the challenges of globalization. He also takes a swipe at Germans' economic pessimism and says Europeans should be more confident.

SPIEGEL:

Monsieur Trichet, as Europe's top central banker, all you have to do is utter a concrete sentence to cause mayhem in the world's financial markets. Isn't it practically a foregone conclusion that this conversation has to be a nightmare for both sides?

Trichet: (laughs) Naturally the spokesmen of the European Central Bank (ECB) and all members of our decision-making bodies must be conscious of the fact that their statements could hold great significance for many people. After all, what we say affects 311 million citizens in the euro zone. And when I say something in an interview with SPIEGEL, I'm essentially addressing more than 82 million Germans. But this isn't just a great responsibility for us, it is one for all those in positions of great responsibility ...

SPIEGEL: ... who are rarely in a position to influence entire economies. About the only other person whose words carry so much weight is your US counterpart, Alan Greenspan. To which question can we expect not to receive a clear response from you?

Trichet: On the contrary! We must take unambiguous positions and give clear answers. In doing so, we are not just thinking about 311 million fellow European citizens, but also investors and people with savings in Europe and worldwide.

SPIEGEL: Well, then let's give it a try. In early December, the ECB raised the key interest rate for the first time in more than five years -- to its current level of 2.25 percent. Is this the first step in a series of increases similar to what the Americans have already done?

Trichet: With respect to future monetary policy, I will reiterate what I said on behalf of the ECB Council after our last monetary policy decision: "We did not decide beforehand that we were planning to embark on a series of interest rate hikes. In the future, we will make decisions that are necessary to ensure price stability, to remain credible when ensuring price stability over time and to continue to keep inflation expectations at a level consistent with price stability!" That is the position of the ECB Council.

SPIEGEL: That isn't much.

Trichet: Once again, that is the position of the ECB Council. I believe that European citizens and market players understand it quite clearly.

SPIEGEL: Luxembourg Prime Minister Jean-Claude Juncker called your key interest rate increase "overly hasty" and said that economic growth is more important than price stability.

Trichet: I am firmly convinced that these two things fit together quite well. Price stability is a necessary condition for continued growth and creating jobs. Stable prices serve as the basis of purchasing power, increase consumer confidence, keep medium- and long-term market interest rates at low levels and encourage investment. All of this is good for growth and for creating jobs.

SPIEGEL: Nevertheless, many Germans are still mourning their deutsche mark.

Trichet: When we took office, we had to promise 12 nations that the new currency would be at least as good as their old currencies. In other words, the euro had to be at least as good as the best of those currencies. At the time, there were a few "bests," including the deutsche mark. We kept that promise. It is a sign of great success that we can now say to German journalists that long-term market interest rates -- thanks to our long-term credibility -- are lower than they have ever been since the establishment of the German Bundesbank. I am proud that the euro is just as reliable as the deutsche mark was.

SPIEGEL: Nevertheless, politicians throughout the euro zone have criticized your decision to raise the key interest rate. When adjusted for skyrocketing energy prices, the inflation that everyone fears isn't really that bad.

Trichet: I believe that the Europeans understand us very well. Our fellow citizens want price stability. They also understand that prevention is better than having to fix things. This is especially applicable to possible second-tier effects.

SPIEGEL: You mean the fact that increases in the price of energy can also boost wages and the cost of goods?

Trichet: This is a risk that could, in turn, permanently affect future inflation. If we were to wait until such effects came about before making our decisions, it would be too late. This is why it's always better to prevent such effects than to have to fix them at a later date.

SPIEGEL: Aren't you yourself afraid that the slight recovery in the European economy is stalling once again?

Trichet: No, on the contrary. By stabilizing inflation expectations, our decision generates a financial environment that promotes continued growth and job creation. However, monetary policy cannot solve all problems. We also need radical structural reforms to increase our growth potential.

SPIEGEL: Are further reforms the most important goal for the European Union in 2006?

Trichet: We must allow and, indeed, demand greater adaptability and more flexibility within our economy and within society in general. For industrialized countries, the three most important challenges, which require permanent adjustments, are the aging of the population, globalization and advances in science and technology. All three, by the way, are the result of tremendous successes.

SPIEGEL: What's so great about an aging society? Or about the fact that globalization is driving thousands of jobs away from France, Great Britain and Germany and into Eastern Europe?

Trichet: The tremendous advances in medicine are reflected in the continuing rise in life expectancy. Globalization shows that a free market economy has spread throughout the world and, in countries we were still calling the "Third World" only a few years ago, has already produced tremendous progress. The successes in leading technologies and sciences speak for themselves. Precisely because they are so important, all of these successes require change in societies.

SPIEGEL: But unlike the United States, for example, Europe has yet to grow together into a single entity.

Trichet: That's correct. We, the Europeans, are changing in fundamental ways, both economically and politically. That's the fourth challenge. And the fifth is the constant stretching of our borders, the phenomenon of expansion. Like the first three, these two additional challenges for Europeans stem from the success of the concept of the European Union itself.

SPIEGEL: Perhaps this Europe is simply growing too quickly.

Trichet: I don't think so. The collapse of the Soviet Union was partly the result of Western Europe's success. And you can't stop history. We must constantly explain to people in Europe, especially in the countries that formed the original core of the EU -- Germany, Italy, the Benelux countries and France, for example -- that the territory at issue today is far, far larger than the Europe of Charlemagne!