The ECB and the Common Currency Jean-Claude Trichet's Lonely Fight to Save the Euro

Jean-Claude Trichet's term as president of the European Central Bank will soon be coming to an end. But his final months in office may end up being his most difficult. His task is to save Europe's common currency -- and to do that, he must convince rich EU countries to cough up even more money.
Jean-Claude Trichet has made saving the euro his life's work.

Jean-Claude Trichet has made saving the euro his life's work.

Foto: Olivier Hoslet/ dpa

Jean-Claude Trichet rushes through the 36th floor of the Eurotower in Frankfurt. A dozen officials are gathered in a conference room awaiting the arrival of the 68-year president of the European Central Bank (ECB). Each has a green notebook on the table in front of them.

Trichet, from France, is wearing a dark-blue suit, a lilac tie and a thin smile. He greets each person at the table with a quick handshake. In front of his chair lies the thickest green folder, which is overflowing with documents.

As the first order of business, the director general of European relations goes over Trichet's appointments for the next few days. The next hour is spent discussing the ECB's financial positions with the heads of the directorates of economics and financial stability. "Mr. Euro," as Trichet is called at ECB headquarters, is convinced that the next two weeks will see a decision made on the future of the euro.

The euro crisis, after all, is by no means over. With each passing day, it becomes increasingly likely that Portugal will be forced to ask for help from the euro rescue fund. Already, Lisbon has to pay interest rates of well above 7 percent on sovereign bond issues.

Trichet has dispatched ECB experts to Lisbon to advise the Portuguese government. "Whenever a group of the bank's experts are on an official mission," says Trichet adviser Christian Thimann, "he has the head of the delegation report to him daily." Last Friday, the Portuguese government announced it would significantly expand its austerity program -- which came as welcome news to Trichet.

'Penalty for Repeat Offenses'

On Monday, finance ministers from the 17 euro-zone countries are to discuss the situation in Portugal and will also focus on beefing up the euro rescue fund. Then, on March 24-25, EU heads of state and government will meet in Brussels to decide on how the billions in risk will be divided. Disciplinary measures for euro-zone members are also to be agreed on.

In the long run, after all, one multi-billion-euro aid package after the other will hardly help if they aren't accompanied by credible sanctions to prevent countries from running into problems in the first place. Indeed, Trichet would like to see highly indebted countries penalized much sooner. "Member states," he says, "should be forced to make a payment following the first violation of the criteria and pay a penalty for repeat offenses."

While French President Nicolas Sarkozy and German Chancellor Angela Merkel announced their largely toothless "pact for competitiveness" in January, the stability pact's sanctions became even weaker in the run-up to the summit. Trichet recently warned government leaders that the European Commission's proposals, already excessively weak, have been watered down yet again.

"We register our opposition to slack rules on all levels," says Jürgen Stark, the ECB's chief economist. At EU finance minister meetings and during summits with government leaders, Trichet plans on being uncharacteristically blunt.

Trichet's eight-year tenure as ECB president comes to an end in October, and he intends to fight for his life's work, the euro. He is calling for more efficient sanctions to counterbalance billions in aid for heavily indebted countries. If the euro-zone governments do not decide to back such sanctions, he intends to make a direct appeal to the members of the European Parliament when he travels to Brussels two Mondays from now.

'The German Frenchman'

Indeed, Trichet does not like to do things halfway. His behavior has led one member of the board of directors of the Bundesbank, Germany's central bank, to approvingly refer to him as "the German Frenchman."

Trichet will also have to defend his course within the ECB's governing council, the bank's supreme decision-making body, which now includes the heads of the central banks of the 17 euro-zone countries and the six members of the ECB's executive board. The discussions promise to be extensive. "Everyone considers themselves implicated and involved," says outgoing Bundesbank President Axel Weber.

Still, the council is not a debating club but, rather, one that's called upon to make decisions every two weeks. At its most recent meeting, Trichet argued for the interest rate to be adjusted. The inflation rate has risen to 2.4 percent, and Trichet is concerned, even if the US Federal Reserve and the Bank of England are dismissing it as merely a one-off effect.

"According to the EU Treaty, price stability is our top-priority," Trichet says. "And it's also what the citizens of Europe expect from us." He fears that union representatives will demand significant wage increases during upcoming contract negotiations out of fear of higher inflation rates. Were that to happen, inflation could rise above the 2 percent maximum foreseen by the ECB.

At the end of the recent ECB governing council meeting, Trichet eloquently summarized what had been said -- and then proposed raising the interest rate. "It takes someone with very firm authority to lead such a heterogeneous board," says Stark, who lays the foundation for such decisions with his economic analyses. Stark said that the financial crisis has given Trichet a charisma boost and that his power has become formidable.

The End of Innocence

In fact, Trichet has only experienced one spectacular failure when trying to get the council's members to reach consensus. On May 9, 2010, the ECB council voted to begin buying up sovereign bonds from heavily indebted euro-zone member-states. It was, say critics of the decision, the moment with the ECB "lost its innocence."

Bundesbank President Weber voted against the decision -- and made sure the public knew about it. Indeed, his misgivings about the strategy were so strong that they ultimately led him to announce he would step down from his position as well as withdraw himself from the running to succeed Trichet at the helm of the ECB. In an interview with SPIEGEL in February, Weber said that his positions "might not always have served to increase my acceptability as an individual with certain governments." Within the Bundesbank, it is said that Trichet was under intense pressure from French President Nicolas Sarkozy.

In the days preceding that dramatic weekend in May, the financial markets had started betting not only against individual euro-zone members, but against the euro itself. Trichet succeeded in convincing EU heads of government to agree to a rescue package worth billions; but, in doing so, he also forced his own hand.

Shortly beforehand, on the sidelines of an EU meeting in Lisbon, the ECB council had made informal statements about possibly purchasing the sovereign bonds of troubled euro-zone countries. On that weekend in May, during a teleconference with his ECB colleagues, Trichet voiced his strong support for doing so. A long term strategy to counter speculators must be found, he said, if they wanted to prevent a disaster on Monday when the markets opened.

Weber versus Trichet

This time, however, Weber and a handful of other ECB council members did not want to follow the president's lead. Although Trichet said that "an overwhelming majority" of the members had voted to begin purchasing the bonds, one member of the executive board claims that four other council members joined Weber in voting against the proposal. Other ECB executives strongly deny that there were so many dissenters -- an indication of just how sensitive the affair is in this consensus-oriented institution.

"At the time, we had to make a necessary decision," Trichet says today. Still, the ECB president is aware that it casts a shadow over his tenure. Since then, the ECB has bought up €77 billion ($107 billion) in sovereign bonds, primarily from Greece, Ireland and Portugal. The move has been one of the reasons that Europe's central banks have had to sharply increase the amount of funds they set aside to hedge against risks. As a result, Bundesbank profits fell from €4.1 billion in 2009 to just €2.2 billion in 2010.

Trichet is determined not to let himself get caught up in such a predicament again. Indeed, he would likely prefer to put an immediate stop to the bond purchases. "We won't do this forever," he says. "Like all special measures, this measure is only temporary."

Trichet warned against excessive member state debt as early as 2005, when German Chancellor Gerhard Schröder and French President Jacques Chirac teamed up to push through amendments to the Maastricht Treaty allowing euro-zone members to take on more sovereign debt. "That was the root of the evil," Trichet says. Since the larger countries continued taking on debt, smaller countries could as well, without paying any penalties for doing so.

Repeated Warnings

Trichet has repeatedly warned heads of euro-zone governments. In a mid-February letter to government heads, Trichet criticized the European Commission for not making sanctions automatic when debt limits were transgressed. EU finance ministers, Trichet feels, should have less freedom to block sanctions against effected countries. He also thinks the EU should repeal the changes made to the Stability and Growth Pact in 2005.

On March 3, when announcing that the ECB might raise the interest rate in April for the first time since the outbreak of the financial crisis, Trichet lashed out against what he saw as overly cautious attempts at reform. He said the Commission's proposals "fall short of the necessary quantum leap in the surveillance of the euro area."

"More stringent requirements, more automaticity in the procedures and a clearer focus on the most vulnerable countries with losses in competitiveness are required to ensure that the new framework will indeed be effective in the long run," he said in conclusion.

Likewise, Trichet argued that the rescue package for potential problem countries should be drastically enlarged. Every additional billion coming from EU member states, he argued, would make it less likely that the ECB would have to step in.

At a meeting of euro-zone heads of government last Friday, Trichet pushed for the European Union's rescue fund, the European Financial Stability Facility (EFSF), to increase its lending capacity from €250 billion to €440 billion. The ECB would also like to see the establishment of a permanent, €500 billion rescue fund, armed with strict conditions -- and is likewise in favor of allowing debt-ridden countries to buy back their own debt with EU aid money. Although the ECB's governing council has yet to establish a final position, the majority of its members would support such a move, say central bank sources.

'Moral Hazard'

Weber, once again, is opposed. "The purchase of bonds on the secondary market has the potential to undercut the conditionality set down by the stability fund," he says. In other words, if countries like Greece can use money from fiscally healthy euro-zone countries to buy back their own bonds, then there is little need to reform.

Economists like Weber call this scenario "moral hazard." And it is a concern which he has shared with the German government in his role as advisor. Still, he likely won't be able to convince many others on the ECB council of his position. Most are simply eager to do whatever necessary to make debt-ridden countries more stable.

As a result of his views, Weber had become increasingly isolated on the ECB governing council. One member says Weber "has always wanted to have the first and the last word." The member added that sometimes it's better to keep your mouth shut when the opinion of the majority is headed in the opposite direction.

In the end, Weber even managed to turn Trichet against him, a man with considerably greater diplomatic skills than Weber's own. The ECB president is also just as confident in his positions as Weber is. Trichet's views are based on real-world experience with crisis rather than monetary models. In September 1992, for example, currency speculators forced the Italian lira and the British pound to withdraw from the European Exchange Rate Mechanism (ERM) before going on to attack the French franc.

Big Bill

"At the time," Trichet recounts, "I sat down with my German friends Tietmeyer, Waigel, Köhler, Issing and others in Washington. We found a solution." Germany and France made it clear that they would fight together.

But can Trichet win the battle this time as well? Most bond managers think he can't. Yields on some Greek bonds have climbed to 18 percent because markets assume that a restructuring of Athens debt is imminent.

Having spent years managing debt-relief negotiations for developing countries as part of the so-called Paris Club, Trichet warns against a domino effect -- first Greece, then Ireland or Portugal -- and says that speculators must be quickly checked.

Still, the ECB is completely willing to make significant accommodations to render the debt burden bearable to debtor countries. Interest rates could be lowered, aid packages could be extended and the periods of existing loans could be lengthened.

The bill for such measures, however, is expensive -- and would have to be paid by countries like Germany. Berlin and the capitals of other well-off European countries, say some within the ECB, failed to properly monitor their colleagues in problem countries. And now they must help out.

But the ECB and its president consider themselves obligated to serve the interests of all Europeans. But providing advice to the German government in Berlin is the job of the Bundesbank.

Translated from the German by Josh Ward
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