Jean-Claude Trichet: Interview in Frankfurter Allgemeine Zeitung (FAZ)
Interview with Mr Jean-Claude Trichet, President of the European Central Bank, in
Frankfurter Allgemeine Zeitung, Germany, conducted by Messrs Gerald Braunberger and
Stefan Ruhkamp on 19 May 2010 and published on 21 May 2010.
* * *
FAZ: Mr President, many Germans are asking themselves whether our money is still safe.
What do you have to say to them?
Trichet: The European Central Bank has a track record of successfully meeting its objective
of keeping inflation below, but close to, 2% over the medium term. For over 11 years since its
establishment - including the current period - the ECB has succeeded in doing just that.
Over this entire period, we have achieved an average annual inflation rate of less than 2%,
but close to 2%, in the euro area. And in Germany it is even significantly lower. The facts
speak for themselves. No central bank in Europe - not even the Deutsche Bundesbank -
has achieved such a low rate of inflation over such a long period of time.
FAZ: But the fear is that the ECB is getting itself into a situation where it no longer has
complete freedom to act.
Trichet: We have full freedom to act, and we will never shy away from our responsibility for
delivering medium-term price stability, also in difficult circumstances. In France I was at times
called the "Ayatollah of Franc fort" (a play on words on "strong franc") or a "clone" of the
President of the Deutsche Bundesbank at the time, Hans Tietmeyer. In 2004 the German
and French governments tried to pressure us into cutting interest rates. I said on behalf of
the Governing Council that the ECB refused to do this. In December 2005 we increased
rates against the publicly expressed sentiment of ten governments! In 2008 we did not
hesitate to raise interest rates, even in a period of financial turbulence. We don't allow
ourselves to be influenced by any government, any social partner or any kind of pressure
group. We act always fully in line with our own responsibilities. And that is the reason why we
have delivered price stability.
FAZ: But by purchasing government bonds, you've crossed a red line. Has the credibility of
the ECB suffered as a result?
Trichet: There has been no crossing of any line. Our line is price stability, and our credibility
is derived from achieving this objective over the medium term. The Governing Council of the
ECB observed that the effectiveness of the transmission mechanism for our monetary policy
was being severely hampered. We are not increasing the money supply. By contrast with
what other major central banks have done, we are not purchasing government bonds in
order to inject liquidity into the markets. What we are doing is fundamentally different: we
sterilise. We ensure an unchanged stance of monetary policy. This is why the liquidity
supplied is immediately being absorbed again in its entirety. We have to do whatever we
consider appropriate in order to ensure price stability. If we always listened to the criticism
directed at us by politicians, social partners and financial pressure groups, we would be
unable to fulfil our mandate.
FAZ: What does the functioning of the market for Greek government bonds have to do with
the functioning of monetary policy?
Trichet: Markets are strongly correlated with one another. A failure in the bond market would
have raised doubts everywhere else. Moreover, government bond yields are benchmarks for
the financing conditions in the real economy - i.e. for firms and households. The crisis that
we've been facing since 2007 has been the worst since the Second World War. And had we
not acted, it could have been the worst since the First World War. There are doubts
regarding the industrialised world's ability to put its public finances in order. That being said,
the euro area as a whole is on a solid footing within the industrialised world. Unfortunately,
however, the same cannot be said of all individual euro area countries at present. That is the
problem, and it had to be - and is being - addressed.
FAZ: The ECB is buying bonds that banks and investors want to get rid of. Do you risk taking
on the role of a European "bad bank"?
Trichet: No. We are only aiming to stabilise those markets that stopped functioning normally.
But the first - and absolutely necessary - condition for success is that governments
accelerate fiscal consolidation and are unwavering in their implementation of the tough
measures that are indispensable.
FAZ: What will happen if the market failure that you observed continues and the ECB is
forced to purchase more and more bonds? Will it not then become increasingly difficult to
stop the process?
Trichet: We don't want to create an artificial situation. We just want the markets to function
more normally, to allow our monetary policy to be effective throughout the euro area.
Otherwise, there would be instability, and that would have a negative effect on all member
countries. All governments have committed themselves to being ready to accelerate fiscal
consolidation. We are following this very closely in liaison with the Commission.
What happens if, for example, the Greek people refuse and the government breaks its
FAZ:
austerity promise? Do you not need a Plan B?
Trichet: Let us look back. Since the euro was launched, the ECB has been preaching that
the Stability and Growth Pact is a cornerstone of EMU. I repeat this at least once a month.
The governments of Germany and France in particular wanted to get rid of its rigour in 2004
and 2005. We rigorously defended the Pact and avoided its de jure dismantling, against the
wishes of the Heads of State and Government of large euro area countries. Now, the ECB
has demanded a very serious adjustment programme from Greece, an adjustment
programme that is very much in the country's own interests.
FAZ: However, there is a risk that one of the countries whose bonds you are buying will not
be able to service its debts. What then?
Trichet: We are in the field of governments. There are three levels of government
responsibility. First, accelerate the necessary and indispensable fiscal consolidation. Second,
exert strict surveillance of peers within the Eurogroup - i.e. euro area governments. Third, if
tensions emerge despite the first two levels of responsibility, stand ready to intervene
through the Financial Stability Mechanism.
FAZ: If that is the case, why is the ECB propping up the bond markets? Would it not be
better for an institution to be created which the governments finance and are responsible for?
Trichet: We are not propping up the bond markets. That is not our objective. We are
ensuring the effectiveness of monetary policy. On 6 and 7 May, the days immediately prior to
the decision to purchase bonds, the markets were massively disrupted, and market
participants all over the euro area and the rest of the world observed this situation, which
was deteriorating extremely rapidly. This was a very serious situation, in which we had to
intervene in order to preserve, as I said, the integrity of the monetary policy transmission
mechanism.
FAZ: So why has the President of the Bundesbank, Axel Weber, distanced himself from the
purchase programme and voted with other members of the Governing Council against it?
Trichet: I never comment on the statements of other members of the ECB's Governing
Council. I will only say this much: an overwhelming majority were convinced that the decision
was right under the circumstances.
FAZ: In comparison with almost every other major currency, the euro has fallen sharply this
year. Is this a risk for price stability?
The euro is a credible currency. The fact that it is a currency whose rate of inflation
Trichet:
has been below 2% for over 11 years demonstrates its trustworthiness. Price stability is a
key feature of the euro and a major asset for domestic and international investors.
FAZ: So there is no need for intervention?
Trichet: I never comment on interventions.
FAZ: The crisis stems from excessive debts. We are now fighting the crisis with even more
credit and even more money. How do we get out of this spiral?
Trichet: We have a number of ways of providing the banks with additional liquidity support,
which will automatically be discontinued when the situation improves. Owing to the serious
tensions observed very recently in the markets, we have now reintroduced some of these
support measures. But you can be sure that we will exit those measures in a timely fashion in
line with improvements in the functioning of the markets. We will never lose sight of our
primary mandate of ensuring price stability over the medium term, with the right monetary
policy stance. There is a clear separation here. By the way, note that the growth of the
monetary aggregate "M3" is currently negative. I have been committed to price stability all my
life. For me, inflation is a tax that would mainly hit the poorest and weakest in our society.
FAZ: The purchase programme seems like a second major bailout. Are we rescuing the
banks again?
Trichet: We are constantly urging the banks to live up to their responsibilities. All our support
for the banking sector is geared to stabilising the real economy in the financial crisis in order
for price stability to be ensured and, by way of consequence, for jobs to be retained. We are
therefore calling on the banks to strengthen their balance sheets and lend. They should not
use their profits for huge bonus payments or excessive remuneration packages, which are a
disgrace in the current environment, nor to massively distribute their profits. Instead, the
banks should do everything they can to strengthen their capital base in order to be able to
better provide credit to businesses.
FAZ: The fact that you keep repeating this gives me the impression that banks are not
sticking to it. Do we therefore need new and stricter rules for banks and the markets?
Trichet: We need better regulations for banks. We also have important financial institutions
that are not banks, for example highly leveraged institutions such as hedge funds, and they
can also potentially be problematic in some circumstances. In the financial sector in general,
not only in banks, certain types of behaviour have developed which are a long way from the
values of our democratic societies. We need to change the dominant values in the financial
sector. Greed, which is too often the dominant value, must be replaced by a sense of
responsibility vis-à-vis the real economy. That is one of the lessons learned from the financial
crisis and is something that the ECB is taking to international fora.
FAZ: Is it only a question of morals, or is it also a task for regulation?
It is a question of values and also a question of rules. The Financial Stability Board
Trichet:
has developed principles for guiding recommendations, for instance. In any case, we cannot
afford to save the financial system a second time at taxpayers' expense. The system must
become much more resilient.
FAZ: It is being claimed that the speculation on the markets is also responsible for the
weakness of the euro. Is that right?
Trichet: Let us be clear, it is not the euro that is in danger, but the fiscal policies of some
countries, which have to be - and are being - addressed, and, by way of consequence, the
financial stability of the euro area, which has to be - and is being - consolidated. In any
case, market developments are always a combination of the mood of investors and the
influence of speculative investors, such as hedge funds.
In the ECB, there is talk of reducing the influence of rating agencies. Why do you think
FAZ:
that a credit assessment by the ECB would lead to better results?
Trichet: That must be discussed globally. The functioning of the credit assessment system is
currently highly pro-cyclical. It is certainly not necessarily optimal that we only have three
major rating agencies for the entire world. But we have still not concluded our analyses.
FAZ: Is there any chance of a stable financial system as long as the economy and the
Member States are so heavily dependent on credit?
Trichet: We must improve very significantly the functioning of the entire financial system. We
definitely cannot afford to find ourselves in a situation like 2008 again. With your question,
you seem to doubt that there is the political will. It is the task of independent institutions, such
as the ECB, to tell politicians that they have to adopt a responsible financial policy. I do not
underestimate the difficulties that democracies face in taking painful decisions. But it is
obvious that several industrialised countries have been living on credit. The richest countries
in the world have made the less rich and poorer ones finance them, which is not sustainable
and, in the end, will not be sustained! That applies to a number of industrialised countries on
both sides of the Atlantic.