FRANKFURT (Reuters) - After keeping his cool for almost eight years, European Central Bank President Jean-Claude Trichet exploded last month.
The Frenchman, renowned for his nuanced and composed answers to journalists’ questions, launched into a passionate defense of the ECB’s record when asked about calls from some in Germany for a return to the Deutschmark.
“I would like very much to hear the congratulations for an institution which has delivered price stability in Germany over almost 13 years,” he said, visibly angered at his monthly news conference, the penultimate one of his reign.
He then turned his ire on France, Germany and Italy for weakening Europe’s budget rules, saying the ECB only bought the bonds of countries mired in the euro zone debt crisis because of the fiscal indiscipline the big three countenanced.
“It was because the governments in question had not behaved properly,” he said in a six-minute tirade, the likes of which reporters covering his ECB presidency have never seen before.
Trichet, 68, had good reason to get worked up: Juergen Stark, one of the ECB’s most experienced policymakers, had just decided to quit the central bank in protest at the bond-buying program — the second German to do so this year.
Trichet’s decision last year to take the ECB on its bond-buying adventure was the pivotal moment of his presidency. In doing so he led the bank beyond its core inflation-fighting mandate and into the fiscal arena.
The controversy has been all the greater because the decision was not simple or by any means unanimous at the ECB.
Asked in May last year whether the bank would consider buying euro zone sovereign bonds to help tackle the debt crisis, Trichet said ECB policymakers had not even discussed the option. Other ECB officials had publicly denounced the idea as violating the principles of strict monetary management.
Four days later, the ECB said it would start buying bonds.
Trichet, who presided over his last ECB policy meeting on Thursday, only made the U-turn after securing a pledge from euro zone governments that they would set up a bailout fund to aid the crisis-hit states.
For some, this quid pro quo marks him out as a European visionary who stepped quickly into a policy void that governments were too flat-footed to fill, acting purposefully to save the euro zone project of which he sees himself as guardian.
Whether history judges Trichet as a savior of the euro project or an irresponsible central banker whose ego took the ECB into risky new territory depends on the fate of the currency bloc, which is still playing out.
Guntram Wolff, deputy director of the Bruegel think tank, said under Trichet the ECB has fully discharged its primary mandate for maintaining price stability and deservedly received praise for responding quickly to the 2007-2009 financial crisis.
“But Trichet’s legacy is unfinished,” Wolff wrote in a report ‘Changing of the guard — huge challenges ahead for the new ECB president’. “We still have to see whether he will be the ‘man who saved the euro’.”
The decision to begin buying sovereign bonds to lower spiraling government borrowing costs has proved especially controversial in Germany, where the resignations of Stark and Bundesbank chief Axel Weber have shaken faith in the ECB.
“The ECB didn’t have to do that,” said Manfred Neumann, emeritus economics professor at Bonn University. “I would even say it was a playing field that Trichet took to gladly.
“I think he is the first of the Bundesbank presidents and the two ECB presidents who has stepped beyond the confines of his post, and thereby endangered the bank in the long-term,” added Neumann, who was doctoral adviser to Jens Weidmann, Weber’s successor as Bundesbank chief, and remains close to him.
Even German President Christian Wulff has questioned the legality of the bond-buy plan, which the ECB says smoothes the transmission of its monetary policy in the markets.
In reality, the transmission argument is just a fig leaf that has failed to hide the discomfort the German-led minority at the ECB feels over the plan. Stark held out longer than Weber, but also ultimately left in protest.
Weber voiced his objection to the program from the start, earning a public rebuke from Trichet who realized the need for the Governing Council to stand square behind the plan for it to convince markets — and hold down government borrowing costs.
Paul de Grauwe, economics professor at Belgium’s Catholic University of Leuven, said the half-hearted approach to the plan that resulted from the Germans’ objections doomed it to failure.
“This bond-purchase program is a shambles,” said de Grauwe, himself once a candidate for an ECB board position.
“It reflects the split within the ECB and also within the euro zone about what exactly should be done. He (Trichet) has been a victim of Germany and the satellites of Germany. That has made effective action very difficult.”
Economists polled by Reuters rate Trichet’s handling of the financial crisis at seven out of 10.
News of Weber’s resignation, which Reuters broke in February of this year, shook the ECB to its core. Stark’s resignation has rocked it further.
Weber was in pole position to succeed the Frenchman but felt he could not represent the 23-member Governing Council when he was in the minority on the bond-buy issue, which he worried exposed the ECB to risks it should not be taking.
The rift did not heal with Weber’s departure and the news that Stark is resigning turned it into a full-on institutional crisis, with many in Germany concerned that the ECB is losing its Bundesbank-style grounding and may go soft under the leadership of incoming president Mario Draghi, an Italian.
“If Draghi reshuffles (jobs within the board), the battle really is on,” said Neumann. “Then the Germans really would have to rethink whether they can accept the central bank as it is.”
The internal divide at the ECB, which Weidmann is left spearheading on Germany’s side, has arisen despite Trichet making considerable efforts to take a German-style approach to monetary policy.
This has even been at the cost of his relations with his native France. Trichet has a fractious relationship with French President Nicolas Sarkozy, who early in his presidency leant on the ECB to cut interest rates.
Trichet brushed off this French push in 2007, telling reporters in Portugal: “France has a culture of protest. If you want to be seen as intelligent, you have to protest.”
Trichet has shown little tolerance of dissent at the ECB — especially this year, when he became increasingly worried the bank could be forced to finance an insolvent Greek state and its banks.
Trichet was one of very few policymakers dealing with the crisis to be born during or before World War Two. German Finance Minister Wolfgang Schaeuble is another — both were born in 1942. Growing up in the shadow of the war marked them, and made them willing to set aside narrow national interests for the good of the European project that they see as a means to secure peace and prosperity on the continent — perhaps more so than younger leaders like Sarkozy and Germany’s Angela Merkel.
This personal background made Trichet almost obsessive about finding a solution to the crisis. He became more commanding this year, euro zone insiders say.
Described by some as “controlling”, he came down hard on dissenters and “hit the roof” when one stepped out of line.
On one occasion, the ECB issued a new version of comments made by the bank’s vice president, Vitor Constancio, on a Greek rescue plan. Just weeks later, another ECB policymaker, Ewald Nowotny, made a rapid about-turn after he said a rescue deal could involve a short-term default by Greece — a scenario Trichet opposed. Last year, he slapped down Weber after his public criticism of the bond-buy plan.
“Trichet-era autocracy has to end,” said David Marsh, co-chariman of think tank OMFIF, arguing Draghi should allow other board members to speak at the monthly news conferences.
Trichet’s iron-fist leadership style is aimed at delivering a clean, consistent message. Here he has largely succeeded.
His use of code words such as “strong vigilance” — usually indicating a rate rise is one month away — has endeared him to financial markets after the erratic performance of his predecessor, Dutchman Wim Duisenberg.
“Jean-Claude Trichet has, in some very difficult and turbulent times, delivered a decisive contribution to securing the stability of the euro and the financial system,” said Deutsche Bank Chief Executive Josef Ackermann.
But for all Trichet’s talk of delivering price stability, his legacy hangs on the May 2010 decision to begin buying bonds to prop up debt-laden euro zone nations.
Otmar Issing, one of the euro’s founding fathers and a career-long monetarist hawk, told Reuters earlier this year that in buying government bonds the ECB had “crossed the Rubicon”.
The question for Draghi, who takes over the ECB presidency on November 1, is can the ECB get back to the other side?
Trichet led the ECB deeper into uncharted territory this year, presiding over a decision to reactivate the bond-buy program after a 19-week pause to prop up Italy and Spain, despite opposition from Weidmann, Stark and two other Governing Council policymakers.
The decision was announced in a statement issued in Trichet’s name, unlike the ECB’s announcement last year that it was beginning the program, which was in the name of the whole Governing Council.
Reactivating the plan may have prevented Italy from succumbing to the crisis — a scenario that could have triggered the end of the euro zone — but the Germans’ fears appear to be materializing.
In the absence of intense market pressure, Rome had made haphazard progress in implementing austerity measures, which the ECB apparently demanded before intervening to buy Italy’s bonds.
In a thinly veiled attack on the bond plan, Weidmann said last month the lines between monetary and fiscal policy had been blurred. “In the long run this strains the trust in the central banks,” he said.
For some, the Bundesbank takes too narrow a view — one that could have pushed the euro zone over a cliff if adhered to.
“I don’t think the Bundesbank-style, 110-percent focus on austerity and inflation fighting would have served Europe well,” said Sassan Ghahramani, president and CEO of U.S.-based SGH Macro Advisors, which advises hedge funds.
“In the fullness of time, I think Trichet will go down as one of the great economic leaders in Europe,” he said.
Additional reporting by Annika Breidthardt and Philip Halstrick, editing by Mike Peacock