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Analysis

The OMFIF Conversations: Jean-Claude Trichet

Jean-Claude Trichet, president of the European Central Bank in 2003-11, has elaborated on key episodes in development of the Europe’s single currency in a wide-ranging OMFIF interview. He acknowledged the risks taken with his ‘tough as possible’ 2011 private letters to crisis-hit euro governments, blamed financial markets for failure to ‘discipline’ errant euro members before 2010, and outlined the evolution of his thinking on ECB independence.

He said European countries such as France should have supported political union at the time of the 1991 Maastricht conference, and spoke of an earlier ‘extraordinarily difficult’ rift over pan-European banking supervision, repaired only in the last four years with agreement on banking union.

Regarding debt relief for Greece, Trichet expressed confidence that loans would be restructured, provided Greece complied with reform conditions. ‘Friendly taxpayers,’ from creditor countries, he predicted, would ‘make the additional big efforts in terms of net present value [adjusting the size and terms of loans] through different forms.’

In his private warning letters – since published – as ECB president to the Irish, Spanish and Italian governments over corrective economic action at the height of the euro debt crisis, Trichet said, ‘My approach was to be as tough as possible in the messages I was sending to governments, but not always to carry out public posturing. I considered it my duty to convey... observations, diagnosis and possible recommendations from the ECB that could help their country return to normal.’

He pointed out that some had accused the ECB of intruding into democratic process: ‘Do not forget that it was not in the [Maastricht] treaty that we had to launch recommendations or warnings to any particular country.’

Trichet took a pragmatic line on the possibility of a country withdrawing from monetary union – but stressed he did not expect it to happen. ‘The treaty does not foresee the possibility of any country leaving... But it is clear that, for any country, there is always the strategic and political possibility that it could leave. My own understanding was that the euro area was much stronger and more resilient from the very beginning than most observers outside continental Europe would guess, say or advertise.’

Trichet provided background to his critical position in 1989 – when he was director of the French treasury – regarding the viewpoint of Jacques de Larosière, then governor of the Banque de France, for having supported central bank independence in the Delors report (published in April 1989) that paved the way for monetary union.

‘This [the view that the planned central bank should continue to be, as was the Banque de France, dependent on governments] was the French government position. As negotiator [in the pre-Maastricht talks] of the French government, I could not and should not depart from what was the position of the French executive branch.’ French recognition that the new central bank would be independent came later in the negotiating process, Trichet pointed out.

He added, ‘Jacques de Larosière was right in taking into account his own standpoint: he was not negotiating on behalf of the government but in his own capacity as governor.’

Commenting on political union, which Chancellor Helmut Kohl said at the time of the Maastricht treaty was a precondition for the euro to work properly, he said, ‘I believed that we would go much more actively in the direction of political union. I have to recognise, with some sadness as a French citizen, that Germany was ready for much more progress in this direction. France... showed, at least partly, some UK-style attachment to sovereignty.’

On the position now, Trichet said, ‘If we want the new economic and fiscal governance to function correctly, we really need an independent new individual, a minister of finance of the euro area, who would be presiding over the Eurogroup [of euro area finance ministers]... After the British vote to leave the European Union, the need for such a reform becomes even more significant and pressing.’

On negotiations over cross-border banking supervision in the 1990s – now implemented with the ECB-run single supervisory mechanism - Trichet said, ‘We [within the European central bank governors – he was at the time governor of the Banque de France] were very strongly divided. There were two schools... One believed that you should have a strict separation between the central bank and the banking supervisory authority. Another school believed in the central bank having a direct responsibility for supervision.’

Up to the financial crisis, Trichet publicly supported the convergence of euro members’ bond yields around German levels, despite significant differences in inflation rates – a factor that the ECB’s current leadership says contributed to ‘moral hazard’. Trichet now says: ‘It was a sign that something was going plainly wrong in the functioning of financial markets. We could not count on market discipline – an additional reason for strict implementation of economic and fiscal governance of the euro area.’

To request a copy of the Conversation, please email editorial@omfif.org