Savior or Villain? How Germans View Jean-Claude Trichet's Legacy

By Engelen, Klaus C. | The International Economy, Fall 2011 | Go to article overview

Savior or Villain? How Germans View Jean-Claude Trichet's Legacy


Engelen, Klaus C., The International Economy


Mario Draghi, governor of the Bank of Italy, takes over the presidency of the European Central Bank from Jean-Claude Trichet on November 1, Europe's financial and economic crisis will probably be worsened, dragged down by the global slump.

The new man at the helm of the ECB will take over an institution seriously damaged by the worst crisis that has hit the euro common currency area since its formation. Like his predecessor, Draghi will be under heavy pressure from the European Commission and EU governments to maintain or even expand the central bank's crisis support. He will be under attack from different comers, especially from Germany's conservative monetary establishment that has been fighting against the ECB's bond-buying program as if it were the devil's machinations.

Just before starting his new job in Frankfurt, Draghi made a big mistake. In a joint secret letter with outgoing ECB President Trichet to Italy's Prime Minister Silvio Berlusconi, dictating a detailed economic policy agenda, Draghi demonstrated that he is ready to use his new position as Europe's most influential central banker to assume a key political role in his home country of Italy. He should have avoided that trap.

For those who accuse outgoing ECB President Trichet of pushing Europe's central banks too much into the "fiscal realm" of governments and thereby damaging the whole European system of central banks, Draghi's signature under the joint letter to Berlusconi offers the dark specter of more ECB politicization and more blurring of monetary and fiscal responsibilities in the euro area in coming years. The confidential letter raises the fundamental question of whether the ECB--without any parliamentary legitimation--could act as a European Commission or an International Monetary Fund, dictating to a euro-area member country the details of an austerity program. The Trichet-Draghi letter reads like the conditionality list of an IMF standby arrangement: Increase economic growth, strengthen competition through privatization and liberalization, open the labor market, reform and modernize the pension system, reduce the public deficit, and balance the budget by 2013.

In effect a quid pro quo for the ECB buying the country's sovereign bonds in order to push down the interest costs of such securities, it is not the governance expected from a new ECB president.

On the other side, the legislative backing by Germany and other important euro countries of the new 440 billion [euro] European Financial Stability Facility bailout fund could open windows of opportunity for Draghi to wind down or even to stop the highly controversial Securities Market Programme, through which the ECB under Trichet spent at latest account the staggering amount of 156.5 billion [euro] over the past five months to "conduct interventions in the euro area public and private debt securities markets."

When Draghi takes charge in Frankfurt, the political battle over leveraging EFSF and how its voting mechanism will be structured may have moved to the center of the euro crisis debate, especially in Germany. Being overruled on the issue of bond purchases in the ECB Governing Council, in spite of the largest general voting share of 18.94 percent and a 28 percent voting share on ECB balance sheet matters, has given Germany's monetary conservative establishment a sinking feeling. Fears are growing that the trusted Bundesbank has been taken over--through the ECB Governing Council by Club Med central bankers.

German Finance Minister Wolfgang Schauble is under considerable political pressure to secure an EFSF voting mechanism that is more reflective of financial and economic realities. The key question is whether Germany, which contributes by far the largest share and the strongest international credit standing to the EFSF, will concede to a voting mechanism of "one country, one vote," with the added constraint of "unanimity" where most of the eurozone states could be blocked by smaller countries. …

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