French resistance: Jean-Claude Trichet

France’s Jean-Claude Trichet is one of Europe’s most experienced bankers, having led the European Central Bank through the midst of the financial crisis from 2003 to 2011. While he doesn’t believe we are out of the worst of it yet, he is quick to defend the Euro currency from its many detractors
French resistance: Jean-Claude Trichet
By Shane McGinley
Wed 23 Jul 2014 07:38 PM

Jean-Claude Trichet has something he wants to get off his chest. The affable 71-year-old Frenchman, who led the European Central Bank from 2003 to 2011 and is often referred to in the media as the guardian of the euro — or “Monsieur Euro” — is sick of all the negativity and wants to set a few things straight about the performance of Europe’s much-debated single currency.

“I would say most of the external observers, from New York or Asia, would have said... the new currency will not hold. That would have been the main diagnosis,” he says, his voice rising and a tinge of anger in his French accent.

“What happened? Firstly, the currency was not put into question. Second, during all the time of the crisis, the value of the euro to the dollar was superior to the entry value of the euro — which was $1.17 — during all of the crisis, from Lehman Brothers to today.

“It was totally underestimated and there was an absence of correct analysis of what was going on. The currency is ok,” he says vehemently, eager to brush aside the doom mongers constantly writing obituaries for the 12-year-old currency.

“The 15 countries that were in the Euro area at the moment of the Lehman Brothers [collapse] all remained in the Euro area without any exception, contrary to all forecasts. Three new countries got in — Slovakia, Latvia and Estonia — so we are 18 now.

“Again when you look at the facts and compare with the rhetoric how it compares, the rest of the world cannot understand the resilience of the European endeavour,” he says in a rousing Napoleon-style call to arms to defend Europe’s rival to the dollar.

Of course, he is right: as we go to press the Euro is worth $1.35, 15 percent above its opening rate when it was officially adopted on 1 January 2002.

Many forget that in the early days it fell to $0.82 after just two years, before bouncing back to peak at $1.60 in July 2008, two months before American investment bank Lehman Brothers filed for bankruptcy and shook the financial world to its core.

That said, Trichet, who was educated as an engineer before rising through the ranks of the French financial system, has been far from optimistic and was warning bankers and economists about the impending financial crisis as far back as 2005. He claims he had been telling European governments, notably France and Germany, that they could no longer ignore the debt mountain building up on among member states’ balance sheets.

“I have to say that in my own career recently since 2003 I was particularly keen on mentioning to the Europeans that they were very poorly inspired in not respecting the stability of the banks.

“In 2005 I was making the point that it was necessary to monitor the imbalances and competitive indicators in the EU in particular and this was something that was not perceived by governments at the time.”

For example, in 2009 official Eurostat figures show that Greece was running a deficit of 15.6 percent and had a debt-to-GDP ratio of 130 percent. Also in the critical zone were Ireland, Spain, Portugal and the UK. Something needed to be done but no-one was listening.

“I was repeating this analysis on behalf of my colleagues and I went public many times with these warnings. It was my own understanding and conclusion and largely shared within the constituency of central bankers,” Trichet continues.

“There were the global threats and it was one of the central bank’s messages. I had the privilege of being the chair of the global economy meeting of central banks and our own understanding of the situation was that there was an under pricing of risk and under assessment of the volume of risk, which was dangerous.”

While Trichet’s warning signs were falling on deaf ears, the subprime mortgage crisis was festering in the US. Within a few short years European countries were lining up to receive bailouts, with the largest going to Athens when it received $332bn in 2010.

Looking back at that time, Trichet refers to the crisis as the AEC, or the advanced economic crisis, and he pinpoints three main stages in the timeline of events.

“We had three episodes of the AEC,” he says. “The first was in August 2007 up to mid September 2008. I call this the final short term crisis; it was triggered by the subprime crisis and the Central Bank of Europe was the first to take unconventional measures. On the 9 August 2008, supplying liquidity at an unfixed basis at a fixed rate, we gave at the time €95bn, which was an enormous amount of liquidity.

The cash injection was the biggest in the ECB’s history, exceeding the €69bn it pumped into the system the day after the September 11 terrorist attacks in New York in 2001.

The move was made in an effort to shore up the European banking system after liquidity in the interbank market started to dry up, threatening banks’ access to short-term funds. In a further bid to soften the blow facing banks, the ECB also made a one-day pledge to meet 100 percent of all funding requests from financial institutions.

“The second episode of I would call the collapse of the financial sector in the advanced economy that came after Lehman Brothers. Lehman Brothers triggered a phenomenon of extreme gravity and could have turned out to be the Great Depression, worse than 1929/1930.

“It was a moment where you had extraordinary decisions taken by central banks and extraordinary decisions taken by governments so we avoided the collapse of the house of cards and we could recover in the second half of 2009.”

Unlike some analysts and observers, Trichet does believe Lehman Brothers should have been saved, but he also points out that it was the catalyst for countries to move to save their ailing banking institutions, which maybe shouldn’t have been saved.

“History says that with Lehman Brothers collapsing all other commercial banks were put in question. There was no real choice. All governments had to say... there will not be another financial institution collapsing in my country... They all said that.

“Whether the US Treasury could have saved Lehman Brothers seems to me not that interesting a question. I don’t think they had the political capacity to do that after the criticism of the rescue of [mortgage providers] Freddie Mac and Fanny Mae.”

The third episode Trichet describes as the sovereign risk crisis, which is where Europe currently still finds itself, he believes.

“We are in a phase of maturing but still in difficulty,” he says. “We know a number of advanced economies still have budget problems... hard work still remains to be done in my opinion in the advanced economies both in their public sector and private sector. Markets have to continue to be improved, in the US and Europe and everywhere, and budgets have to be improved.”

Improvements certainly are needed as figures coming from European statisticians show that while the governments in the 18-nation Eurozone cut their budget deficits to an average of 3 percent of their overall GDP, down from 3.7 percent in 2012, debt is still a major challenge.

Across Europe, the 28-nation European Union has an average deficit-to-GDP ratio of 3.9 percent, while the EU treaty only allows governments to run budget shortfalls of not more than 3 percent per year. But it could be worse, in 2010 the average was 6 percent, so matters have improved somewhat.

Luxembourg is the only EU country that had a budget surplus last year, up slightly by 0.1 percent, while Germany pretty much balanced its books. Recession-hit Greece had a shortfall of 12.7 percent of its GDP, but, again, this wasn’t as bad as that predicted by EU experts.

On top of the deficits, most countries in the 28-nation EU also still have huge mountains of debt. Sixteen member states have accumulated sovereign debt higher than 60 percent of their GDP, which is the threshold allowed under the EU treaty. Not very shockingly, Greece has the highest, with a massive debt-to-GDP ratio of 175.1 percent.

Italy is at 132.6 percent, Portugal on 129 percent and even Ireland, which received around $80bn in bailouts but successfully exited the programme late last year, has debt to the tune of 123 percent of its GDP.

For the entire EU, the figure for last year was 87.1 percent, which was higher than the 85 percent recorded in 2012. It’s a figure that gives weight to Trichet’s concern that the crisis is still not over.

“The fact that we are still in post-crisis is a major challenge and appears to be confirmed by the fact the central banks are still engaged in measures of extreme importance, certainly in the UK, Japan and Europe. Therefore the private sector is still not functioning normally... There is a need for central banks to practise mediations... there is no time for complacency.

“All countries did a lot and it was painful and the main lesson was never again put yourself in that situation... It calls for individual countries to understand liquidity, which is overdue.”

So who does Trichet blame for the whole mess? “The US crisis started that thing; in mid-2009, global investors said we do not want to continue financing these budgets and current-account deficits of these countries, we have no confidence in them. So what do you do, do you have a choice? No, you have no choice. The choice is yes, I have to adjust.

“The European central bank decided to do it in an orderly fashion with the help of the international community and other European countries. What you call a bailout is not exactly what has been done. It is helping countries to go progressively and orderly back to balance. Five countries have been attached, Greece, Ireland, Portugal, Spain and Italy at a certain moment.”

As European countries set about financing their debts and deficits, “Monsieur Euro” has now retired and now spends his time looking at the bigger global issues. He sits on the board of the Bank for International Settlements, a sort of big bank for central banks, and is a member of the steering committee of the Bilderberg Group, a fairly secretive organisation made up of politicians, leaders and big businessmen and which meets each year to discuss the important issues of the day.

Now he has more time on his hands, he admits he is looking more and more at the Gulf with fascination. “I think I have been working in my own domain in finance for the last 40 years and I could of course observe with fascination the development of the Gulf in particular. It is so amazing when you compare the UAE to the old country 30 years ago.

“I think it is extraordinarily impressive to see the construction from scratch of a hub that is in between Africa and Asia and is north and south. I am impressed by the vision which was in a very short space of time. It is a real hub, it is not artificial and it really is a place where trade is happy to go. It’s a remarkable success... a symbol of the new world.”

While Trichet may see the Gulf as the new world, he still won’t let anyone say a bad word against his beloved euro.

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