x Abu Dhabi, UAETuesday 25 July 2017

Trichet's contentious leadership of an EU in crisis

European Central Bank chief's buying of bonds was controversial but ultimately helped the euro zone.

BERLIN // If the euro survives in its current form, much of the credit will be owed to Jean-Claude Trichet, the president of the European Central Bank, who chaired his last ECB policy meeting on Thursday and retires at the end of this month.

If the ECB under Mr Trichet had not purchased the bonds of ailing euro-zone nations to shield them from speculators over the past 18 months, the euro zone's problems would have spun out of control.

Mr Trichet showed leadership when it was lacking in Europe. Government leaders, especially Angela Merkel, the German chancellor, have been seen as sluggish and inconsistent in response to the crisis. And some of Mr Trichet's most vociferous critics are in Germany.

The ECB's initial dogmatic focus on price stability was aimed at allaying German fears that the euro might not be as rock solid as the Deutschmark. Mr Trichet's pragmatic, deeply controversial firefighting approach has changed all that, and it has overshadowed the end of an eight-year term during which he kept inflation in check.

No one can deny that he embarked on a high-risk operation with the ECB's bond-buying programme. Some German economists have warned that the ECB has so many toxic assets that it is now effectively Europe's "bad bank".

The ECB has become a lender of last resort to high-debt countries, turning it into a fiscal policy player when its role in that area was intended only to be that of an outsider lecturing governments on the need for budget discipline.

If the euro zone has anything approaching a true economic government, it is not the European Commission, not the Eurogroup of finance ministers, and not the European Council of heads of government - it is the ECB.

Two top German officials have resigned from the ECB leadership this year in protest at the policy of purchasing bonds: Axel Weber, the Bundesbank president who also gave up that post; and Jürgen Stark, the ECB's chief economist. And Jens Weidmann, Mr Weber's successor at the Bundesbank, has made plain his doubts about the ECB's direction.

But Mr Trichet had no choice. Last year, he was far-sighted when euro-zone leaders were at a loss for solutions. He agreed to buy euro-zone sovereign bonds to help tackle the crisis, but only after securing a pledge from euro-zone governments that they would set up a bailout fund to aid the states in crisis.

Two months ago, when Italy's bond yields were rising to unsustainable levels on financial markets, Mr Trichet acted again. He sent Silvio Berlusconi, the Italian prime minister, a strong letter.

The message was simple: get your house in order or the ECB will not buy your bonds. The notoriously intransigent Mr Berlusconi quickly complied, and the ECB reinstated its bond-purchasing programme after a 19-week break.

Only time will tell whether Mr Trichet's strategy worked or whether he signed away the ECB's independence and took on more risk than the bank can handle. But he kept a lid on the crisis.

Everything is still in flux. Greece looks certain to default at some stage, and the question is whether the euro zone will be able to contain that bankruptcy without the crisis engulfing other nations and the bloc's entire banking system.

The ECB on Thursday returned to full crisis mode, reinstating longer-term refinancing operations to provide banks with liquidity.

Mr Trichet could have gone further. The ECB kept its key interest rate unchanged at 1.5 per cent on Thursday, after two increases this year that in hindsight were a mistake, and Mr Trichet stopped short of giving a clear signal for an imminent interest rate cut, even though the euro-zone urgently needs one.

Maybe he did not want to put too much pressure on his successor, Mario Draghi, until now the head of the Italian central bank. After all, Mr Trichet's legacy is difficult enough. The ECB governing council is divided, and its policy mandate has become blurred - an inevitable consequence of the debt crisis.

For the sake of the single currency, Mr Draghi must show the same kind of leadership for which the euro zone, and even the Germans, may thank Mr Trichet one day.