Jean-Claude Trichet: We still live in an abnormal situation
PARIS — After helping steer the eurozone through its worst existential crisis, Jean-Claude Trichet, now seven years into retirement, is still preoccupied with the state of the worlds finances. “Im seriously worried,” he says.
We still live in an “abnormal situation,” according to the former president of the European Central Bank. Global debt — both public and private — has increased unabated even after a massive crisis triggered by the same type of high leverage. Asset prices have never been higher, and fears of new bubbles are rising. The roots of financial instability are there for all to see.
Mulling about the consequences of the era of cheap money he helped initiate, Trichet reflects on the “high price” the global economy had to pay for the monetary loosening conceived nearly 10 years ago as the best response to the financial crisis.
These days, Trichet travels the world from California to Singapore for lectures at universities and speeches in front of professional audiences. Since his retirement in November 2011, he has also joined the board of Airbus, the European aircraftmaker, and become the chairman of Bruegel, the Brussels think tank. He is also a member of the Group of Thirty, a Washington-based exclusive club-cum-think tank made up of current and former government officials and central bankers from the U.S. and Europe.
In his Paris office overlooking the quiet Palais Royal gardens at the Banque de France, which he headed for 10 years before taking helm at the ECB in 2003, Trichet worries that the global economy is suffering from the unintended consequences of central bankers policies.
The extraordinary steps taken by central banks during the crisis were “surely” necessary, and the continued loosening in the subsequent years “probably” so, he says, quickly adding that he is not “criticizing” the current ECB trajectory.
The Frenchman has always been careful not to criticize his Italian successor Mario Draghi, who in 2014 took the ECB into uncharted territory with a massive bond-buying program (or “quantitative easing”) thats still ongoing and scheduled to last at least until September.
European Central Bank President Mario Draghi | Sean Gallup/Getty Images
As soon as he took over in November 2011, Draghi reversed earlier ECB decisions taken under Trichets watch: the controversial interest rate hikes in April and July 2011, just a few months before the eurozone fell into a major recession (the blocs GDP shrank in 2012 and 2013). With two symmetrical decisions in November and December that year, Draghi and the governing council put rates back down to their January levels.
Trichet remains unapologetic about the decisions he took at the ECB, noting that they were taken collectively and they were justified by the information available then — notably the possibility of an inflation surge.
But in a recent discussion at the European University Institute in Florence, he said he approved the famous “whatever it takes” line that Draghi uttered in the summer of 2012 to signal that the ECB wouldnt let the eurozone implode. To that end, Draghi would use all the tools at its disposal — and then some.
A dangerous world
Trichet, however, reckons that central banks and governments are far from being able to claim mission accomplished. Listening to him, its clear he thinks the financial world remains a dangerous place.
Central banks, according to the former ECB chief, shouldnt forget that they have an important role to play not only with monetary policy but through “the power of the word.” Notably, they can recommend to governments and other regulators so-called macroprudential measures to limit financial risks and the amount of debt companies or individuals can take on.
Trichet was often criticized during the euro crisis for his strict approach to monetary policies. He exhorted governments to exert fiscal restraint, even though many economists argued that the eurozone recession justified fiscal stimulus.
Trichet, when he was head of the French central bank, had been called the most German of the French, because of his defense of a strong currency, as well as monetary and fiscal orthodoxy. He knows what its like to face down governments, including his own. Back in 1995, conservative candidate Jacques Chirac made him the straw man of his presidential campaign because of his advocacy of fiscal restraint.
Ten years later, as head of the ECB, Trichet fought — unsuccessfully — both Chirac and former German Chancellor Gerhard Schröder, who together managed to loosen the EUs stability and growth pact on budgetary discipline. “That set a bad example,” he insists, not buying the argument that the fiscal reprieve gave Germany space to reform its economy, whereas France did nothing.
And at the height of the euro crisis, Trichet publicly took on Nicolas Sarkozy and Angela Merkel, who had agreed at a meeting in Deauville in 2010 that sovereign debt could be restructured in a bailout to make private investors pay their share. That was anathema to the French central banker. He publicly criticized the deal, which was never implemented.
Former French President Jacques Chirac (L) and former German Chancellor Gerhard Schroeder at the Elysee Palace in Paris on October, 2005 | Stephane de Sakutin/AFP via Getty Images
Asked about his defense of fiscal orthodoxy, Trichet acknowledges that “in a monetary union like the eurozone, the center cannot dictate similar policies for every country.” He insists that the countries that are “over-competitive” must also do their part to correct the imbalances that threaten the eurozones stability, such as massive current account surpluses.
“We have the tool to deal with this, called the macroeconomic imbalance procedure; it is not being used properly,” he says, implicitly criticizing the European Commissions reluctance to force surplus countries — such as Germany and the Netherlands — to address the problem.
Raising the alarm
Reflecting on missed opportunities, Trichet remembers the time back in 2005 — two years before the global financial crisis struck — when he decided to raise the alarm about the diverging paths of eurozone economies.
“From 2005 on, every month at European meetings I used to come with charts showing governments the path of labor costs and competitiveness in their respective countries. And to implicate the finance ministers themselves, I showed them numbers on wages in their own public sectors.”
At one such meeting in 2009, Trichet showed ministers that public servants pay had increased 117 percent in Greece since the euros creation 10 years before. Corresponding numbers were 110 percent for Ireland, 66 percent for Spain, and 36 percent for the eurozone as a whole. In Germany, meanwhile, public-sector pay had only increased 20 percent over the same period.
Greece, Ireland and Spain all hit the wall soon after.