Last week Room for Discussion had a pleasure to have as a guest the former President of the European Central Bank in years 2004-2011, Jean-Claude Trichet. As for the President of a non-political institution, which Mr Trichet has plenty of times emphasised the ECB to constitute, he has demonstrated a stereotypically political tendency to expatiate the question without strictly giving the answer. However, it has to be admitted that the analysis of the responsibilities for past and current events as well as pieces of advice for the general course of the European area policies was extensive and enriching.
Worst financial crisis since the First World War.
The very first thing stated by Mr Trichet was the idea, that the financial crisis which started in 2007 after the Lehman Brothers’ collapse, and at the same time the period of his presidency of the European Central bank, constituted the worst financial crisis since not even the Second World War, but the World War One. It was really ‘a close call to a total catastrophe at a global level’.
The case of Greece is a very complex one and the papers are booming with the titles about it, nevertheless the former ECB president does not consider the Greek situation to be the most dramatic one. For him it was ‘the episode in 2011 when Italy and Spain were under the stress, when the rest of the world was expressing no confidence in them.’ At that moment he undertook a very unusual action for the ECB: he wrote letters to the Prime Minister of Italy and to the PM of Spain advising on directions to follow in order to regain credibility and confidence. To indicate how serious was the threat Mr Trichet stated that ‘40% of euro area GDP was at stake back at the moment’.
Responsibilities are clear!
To some extent total destabilisation of those countries was avoided thanks to the actions undertaken by the ECB. Even though, the suggestion was made from the public that message created by the ECB caused an inopportune situation. National governments had to argue with the monetary authority about issues that could have been outside of the legal mandate, even the technical competence, of the ECB. It could have even not been democratic and legitimate to act for the authority. Answering to that Mr Trichet emphasized ‘the crucial role of understanding the drama in which those countries were’. He has also explained that ‘The letters were in no respect instructions, it was rather a situation analysis. If the Spanish government took excellent decision, it was not because they ordered it.’
The responsibility was for Mr Trichet immense. He was faced with a lot of stress and was forced to ‘take extraordinary decisions on a crisis mode’ as he described it himself. However, it is not a question to European Central Bank if or by what means the crisis could have been avoided. According to Mr Trichet ‘It would be a good question to the Commission, to the Council and to all national governments.’ The responsibilities were stated clearly by the former President of the ECB: the institution is not responsible for the fiscal economy of particular countries’ governments or of the Europe area as a whole. The Central Bank cannot substitute for government and cannot take political decisions. Their responsibility is the currency and ensuring the price stability.
As Mr Trichet claimed ‘During the crisis euro zone had a currency that was credible in the eyes of the rest of the world and which kept the price stability. The ECB has always tried to meet its responsibility: to be as open and candid as possible when telling European institution and the national governments what they have seen, analysed, diagnosed.’ What was pointed out really perceptively is the fact that understanding a global crisis as a whole is not easy if you look from a nation’s perspective. Federal institutions like the ECB have a privilege of a global vision.
Mr Trichet indicated in his speech that European governments have shown a surprising naivety. They believed that the market and economy would function easily, without permanent cost control and that if any country lost, the correction would come naturally. ‘If any country is losing market share and has competitiveness problem, then entrepreneurs and the unions will say: we are going into a wall at a 100mph/h, we will have a lot of problems and unemployment we don’t want, so let’s practice moderation. This is pure common sense and it is not the way it operates.’ comments Mr Trichet.
What went wrong and how to make it better?
It is always very difficult to be definitive when stating if a certain event could have been avoided. However looking back at the beginning of Euro crisis Mr Trichet would not change his decisions. According to him ‘If we had respected the Stability and Growth Pact as was written in the second re-legislation of Europe, we would probably have avoided the major problems at least in Portugal and in Greece. Had we embarked on the appropriate monetary policy of unitary cost, we would have probably avoided a lot of problems in Spain and Ireland. But if the blame is to be put on anybody, it is for sure not on the governments, who have to regress the situation; it’s on the ones that let the situation to shift dramatically. ‘
Mr Trichet had concluded the interview with a few remarks on how the situation in Euro area can be improved and what actions and attitudes should be undertaken in the future. He divided it into three main points:
- A message about fiscal and economic governance of Europe.
‘All the responsible entities should apply fully by the rule.’ Stated Mr Trichet. Created after the crisis, SGP and MIP are important pillars of today’s economy. It obviously was a mistake to think that market and economy will practise spontaneously all kinds of adjustments and corrections. To avoid the mistakes of the past governments we have to be as responsible as possible. Not even the changes undertaken to stabilise the global financial market will be able to keep the economy calm and peaceful at all times, so we have to remain cautious. The price stability is a necessary condition for growth and job creation. As far as the ECB is concerned, the most important issue according to Mr Trichet is ‘the continuity with adaptation to the constantly changing circumstances’.
- Essentiality of Banking and Capital Market unions.
Structural aspect of growth, not the shorter conjuncture, is fundamental according to what Mr Trichet said. Comparing to the USA we have a lot of structural impediments in Europe, which are terribly hampering our goals. ‘We have been very poor in implementing structural reforms and in the terms of creativity, innovation, and financing start-ups.’ he comments. There are probably numbers of various reasons to explain that, but the main one seems to be that we have less flexible markets than the US, as we have not yet achieved a single one in Europe. This is our goal.
- Need for reflection on the future of Europe and trust for European Parliament.
It is undeniable that Europe has a lot of hard work to do in many aspects. Regardless of that, the former President of the ECB tries to encourage us to believe in the resilience of European area, as its history indicates that it is much stronger than what the newspapers say. ‘In the articles you read that we are about to collapse, that the currency and Euro single market is about to evaporate. Look at the facts. We were in the worst financial crisis since WW2. Was euro out of order? The main defect of euro was that it was too strong all the time. We were in the number of 15 at the moment of the collapse of Lemon brothers. All of us stayed and we are even 19 today. So the entity that was supposed to be dissolved, to evaporate, extended itself with four new countries. I will let you decide whether it means something.’
Mr Trichet warned that we will be judged in the long run on the basis of growth and jobs’ creation and that is why we have a lot of work to do. Even if part of that work remains at the level of Europe as a whole, a lot depends on the single nations themselves. The answers of Mr Trichet were sometimes really vague, but I believe that out of all what he said one important conclusion could be drawn for sure. Central Banks and governments can shift responsibility, blame each other for failures, but in the end work needs to be done and decisions need to be taken. So we should better all feel responsible for the situation rather than believe that it is going to be fixed by some kind of a magic power. As we say it in Poland: Nothing will make itself.