Geithner and Bernanke weren’t the only ones applying international pressure on the Europeans for decisive action. That same day, Britons went to the polls to vote in elections that would toss the Labour party from power after 13 years of control.
Britain’s Conservative Party didn’t win an outright majority of seats in Parliament that day, though. To take the reins of power, they would need to form a coalition with the Liberal Democrats, who had won 23 percent of the vote. And hanging over negotiations that ensued between the Tories and the Lib Dems were the words of an economist loyal to no political party: Mervyn King.
Adapted from “The Alchemists: Three Central Bankers and a World on Fire,” by Neil Irwin. Irwin, a Washington Post columnist and economics editor of Wonkblog, was the Post’s beat reporter covering the Federal Reserve and other central banks from 2007 to 2012. The book, including this excerpt, is based on reporting that took place in 27 cities in 11 countries. It tells of how the central bankers came to exert vast power over the global economy, from their 17th century beginnings to the present, and tells the inside story of how they wielded that power from 2007 on as they fought a global financial crisis. Excerpted by permission of The Penguin Press, a member of the Penguin Group (USA), © Neil Irwin.
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King had, in the preceding months, become an increasingly vocal proponent of the idea that Britain needed to immediately begin reducing its huge budget deficits, to fix its finances even as the nation’s unemployment rate was hovering near 8 percent. King saw it as crucial for risk management: Investors might shun the British pound and government bonds if they did not see a path to lower deficits. His criticism of the state of British fiscal policy had become more pointed as the election approached, leading many in the Labour party to feel he was using his authority as governor of the Bank of England to give their electoral opponents an edge; the conservatives were not shy about using his words as a cudgel.
As negotiations on the terms of the coalition commenced — Lib Dems were more skeptical of fiscal austerity, while Conservatives favored more rapid deficit reduction — King was at the ready to provide the ammunition for a push toward austerity. The deficit, wrote David Laws, one of the negotiators for the Lib Dems, “was the spectre which loomed over our talks. This was the reason that the Governor of the Bank of England stood ready to brief us on his perspective on the risks to the UK.”
So as the fateful weekend approached, and Europe’s economic future hung in the balance, so did those of Britain and the United States.
Brussels, May 7
On Friday, May 7, as Weber wrote his fateful e-mail en route to Frankfurt, Trichet was headed to Brussels to meet with the heads of European governments on the seventh floor of the Justus Lipsius building, a giant glass-and-concrete monument to European unity that looks like a convention center. Trichet’s mission was to convince them that the Greek bailout of the previous weekend wasn’t enough.
Going in, many of the prime ministers and presidents of Europe seemed not to comprehend the degree of risk. Trichet presented a chart showing the sell-off of European bonds that had accelerated over several days. “Some of you behaved very improperly and created an element of vulnerability for your own country, and by way of consequence for Europe,” he told them, as he recalled later in a television interview. “Now the situation calls for taking up responsibilities.”
The responsibilities he had in mind: creating a credible assurance that the governments of Europe would stand together, that they would act collectively to ensure none would become unable to pay its bills. Trichet was confident after the late-night meeting in Lisbon that he had the votes on the ECB Governing Council to begin buying bonds. But that wouldn’t offer a permanent solution to Europe’s dilemma. He needed to dangle the possibility of ECB bond purchases as a carrot, a reward for government action if they acted decisively.