Europeans Put Hope In Farseeing Banker
Tuesday, October 7, 2008; 11:06 PM
BRUSSELS, Oct. 7 -- With European lawmakers still bickering over how to respond to a string of bank failures and a fading economy, expectations are rising that a clairvoyant French banker will come to the rescue.
Jean-Claude Trichet, president of the European Central Bank, has been playing a key behind-the-scenes role in recent days as elected leaders and finance ministers from across the 27-nation European Union have held emergency meetings to deal with the credit crisis. Although politicians have struggled to present a united front, analysts said odds were high that Trichet will intervene soon with a cut in interest rates -- something that his bank hasn't done in more than five years.
Last Thursday, after a regular meeting of the central bank in Frankfurt, Germany, Trichet hinted that a cut was forthcoming, though he didn't say when. With global stock markets tanking, some analysts said the bank could make an announcement this month in what could be a coordinated rate cut with the U.S. Federal Reserve and the Bank of England.
"The ECB should not be stubborn," said Wolfgang Gerke, a banking expert and director of the Bavarian Center of Finance, a private advisory group. "Now is the time to act and to use the means it has to make a strong statement."
Trichet had warned of big troubles looming in the banking sector and, unlike many European leaders, had predicted that local banks were vulnerable to the collapse in subprime loans plaguing the U.S. market. "We have to look very carefully at the business model of banks," he warned last January.
Trichet, however, has also consistently resisted political pressure to cut rates and has fiercely defended the independence of the European Central Bank, which was created nearly a decade ago to oversee the creation of the euro as the continent's common currency.
Unlike the Federal Reserve, which is also legally bound to fight unemployment by stimulating growth with low rates, the European Central Bank has a single mission: to maintain price stability by keeping inflation low.
As a result, it has been far more reluctant to cut rates than the Fed. In the face of a dragging economy, the Fed has slashed its benchmark rate since last year from 5.25 percent to 2 percent. In contrast, despite a similar slowdown in Europe, its European counterpart raised its benchmark rate by a quarter-point in July to 4.25 percent -- citing inflationary risks from high commodity prices and rising wages.
Some European countries, in particular France, have long complained that Trichet's strategy as president has been too conservative, hampering growth.
Christian de Boissieu, chairman of French Prime Minister François Fillon's Economic Analysis Council, said a rate cut was overdue. He said that inflation risks had subsided and that Europe badly needed the boost in liquidity that a rate cut would provide. "This would not solve everything," de Boissieu added. "But it would help."
Unlike Federal Reserve chief Ben S. Bernanke, who worked side-by-side with Treasury Secretary Henry M. Paulson Jr. to fashion a $700 billion bailout fund, Trichet and the European Central Bank have been careful to remain at arm's length, at least publicly, from politicians trying to come up with a fiscal solution to the banking crisis.
He attended an emergency summit of European leaders in Paris on Saturday, however, as well as a gathering of finance ministers in Luxembourg this week. On Monday, he took the rare step of inserting himself into the proceedings by holding a late-night news conference to urge the private sector not to overreact to falling markets.
"My own appeal would be for all actors at this stage to shoulder their responsibilities, be calm and have trust," he said. "We were amongst the first, if not the first among the central banks . . . to make it clear that we were underestimating the risk on financial markets. I think it's fair to say that we've now reached the stage in this development where the pendulum may have swung too much the other way."
While the European Central Bank oversees monetary policy for the 15 countries that use the euro, each member of the European Union is responsible for regulating its own banks. That has made it difficult to forge a common strategy in Europe for helping troubled banks, many of which operate across national borders.
Miguel Ángel Fernández Ordóñez, a member of the governing council for the European Central Bank, said Europe had no choice but to find a way to coordinate a solution among its many finance ministries and national banks. "Even the biggest countries are too small to resolve this problem" on their own, he told reporters in Madrid.
Trichet, however, has defended the effectiveness of the European response. Despite the complexities involved, he said Europe has acted as responsibly as the United States in addressing the credit crisis. "Who can say we've done worse than the other side of the Atlantic?" he said Monday. "There is no lack of coordination. There is a European spirit. We have different governments and they have different means of intervention."
Some analysts said Trichet was likely using a potential rate cut as an inducement for European finance ministers to take more aggressive action. "If the finance ministers do something, then it would make a rate cut much more effective," said Daniel Gros, director of the Center for European Policy Studies in Brussels. "But the ECB should not go first. The prospect of a rate cut is what gives it leverage."
Other analysts praised Trichet's handling of the situation but said he was far less likely than the Fed to favor a drastic cut in interest rates just to stimulate markets.
Inflation, while declining, remains significantly above the European Central Bank's target rate of 2 percent. And inflation hawks remain firmly entrenched in Europe, where central bankers for decades have vigilantly guarded against the hyperinflation that decimated Germany's economy in the 1920s and helped bring on World War II.
Wolfgang Filc, a professor of finance and credit policy at the University of Trier in Germany, noted that Europe's powerful labor unions are pushing for steep wage increases to adjust to rising living costs. While falling stock markets may make headlines, he said, the European Central Bank is unlikely to ignore any inflationary threats.
"This economic situation is the most serious crisis we have had in 50 years," he said. "But fighting inflation is the ECB's primary task. That is law."
Correspondent Edward Cody in Paris and special correspondent Shannon Smiley in Berlin contributed to this report.