Wednesday, January 12, 2011

The Rise of General Trichet

The writing is on the wall for Europe's political leaders this week, and so far they have done nothing. The consequence of this is that the ECB is taking over areas of policy out of necessity.

It is not as if the warnings have not been made. One after the other this week and last, the key economists who played a role in establishing the euro have warned that the Stability Facility is woefully inadequate and in need of support. Willem Buiter warned last Friday that the war to defend the euro was running out of ammunition because the Facility was too small. Today, on Wednesday, European Commission President Manuel Barroso, made the plea for member state governments to funnel more resources into the fund. Ottmar Issing underlined yesterday, in contrast, that no solution would ever be sufficient unless euro zone member states addressed the need to impose budget discipline on all of its members. Meanwhile, Jean-Claude Trichet, President of the ECB, confirms that the European Central Bank will continue to purchase government bonds for the foreseeable future from countries that cannot place them on the market to avert even greater catastrophe. 

In the meantime, Germany is denying that it needs to do anything, bondholders are denying they will have to take a haircut, Portugal is pretending that markets have confidence in its bonds, and Greece is pretending it will not default on its debt this year. This is reckless denial on a catastrophic scale. Economists may not always be right, they may not agree, and they are rarely popular, but in this case, Europe's political leaders would do well to listen to the list of choices they have at their disposal. 

An ominous warning in Buiter's statement to the press was that if the governments of the euro zone could not sufficiently fund the Facility, the ammunition to fight the war would have to come from elsewhere. For unless the euro zone admits defeat and ejects its weakest member states, or admits that they are bankrupt, someone will have to fight the war that the politicians haven't been willing to wage on their own behalfs.

Enter Trichet. Under his leadership, the ECB is purchasing government bonds from the euro zone's weakest member states. The Bank is far from happy about doing this, but sees no alternative for the time being. As the politicians fight one another and refuse to face the enemy, it is up to the bank to save Europe.

Trichet's position today resonates with the historical development of his own country of origin. The French Fifth Republic was the creation of General De Gaulle, a necessity for a country that lay in political shambles in the 1950s and could not govern itself. It required strong, centralised political authority that ordinary politicians were incapable of providing. That was not so much a statement of De Gaulle's authoritarian character as of France's polarised, fragmented political class that was allowing the country to collapse without his intervention.

Trichet's position is not the same as De Gaulle's, but his potential importance is at least as great, and arguably, immensely greater. In a world where the greatest challenges to public welfare are economic, and where decisions have to be made to harden and mobilise the country to keep it strong, the ECB is the only institution with the overview and the means to act where politicians have failed. And Trichet is the General.

There has been some speculation about what will happen when Trichet's existing term of office ends in late 2011. His term cannot be renewed under the terms of EU law. There await blistering divisions within Europe about what candidate should replace him. Nothing less will be at stake than what kind of single currency survives 2012.

But. The member states of the EU are busy negotiating changes to the Treaties to allow the Stability Facility to be funded. They could, and should amend it as well to allow Trichet's reappointment if he were prepared to serve on, at least until the crisis is over and calmer political temperaments prevail. In a highly polarised environment, that is probably the best thing that could happen to Europe.

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