Jean-Claude Trichet: Lessons to be learned from the European
sovereign debt crisis - interview with Libération
Interview with Mr Jean-Claude Trichet, President of the European Central Bank, in Libération,
conducted by Mr Jean Quatremer on 8 July 2010 and published in French via his blog on
13 July 2010.
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Q: Is the sovereign debt crisis that has rocked the euro area since last January over now?
A: The concerns of investors and savers over sovereign debt are a global phenomenon and
have particularly affected industrialised countries. Indeed, industrialised countries were hit
hard by the financial crisis of 2008 and 2009 and, for the most part, their government
financial accounts suffered badly. In the particular case of Greece, some investors were
convinced that the Greek government would be unable to take the bold decisions that were
absolutely necessary, and that neither in Europe nor within the international community
would there be the capacity to support its recovery plan. On a more general level, the ability
of the Europeans to face up to a difficult situation seems to me to have been seriously
underestimated initially. Consider that, at the time of speaking, we have a recovery plan for
Greece that has been approved by the International Monetary Fund, by the European
Commission, in liaison with the European Central Bank (ECB), and by the European
governments of the Eurogroup. Several European countries have adopted ambitious
recovery packages. All of them have committed to stepping up their fiscal consolidation. The
euro area governments decided to support the Greek recovery plan to the tune of €80 billion.
They also decided to set up a financial stabilisation fund (European Financial Stability
Facility) for the euro area with guarantees amounting to €440 billion, and this on top of the
above-mentioned €80 billion and the €60 billion which can also be mobilised at the European
Union level. Just a few months or even weeks ago, investors deemed all of this impossible.
They are progressively taking these decisions into account.
Q: Was it the case, then, that the markets underestimated the political will of the European
Union?
A: There is a tendency among some investors and market participants to underestimate
Europe's ability to take bold decisions. In their defence, I would simply say that the
institutional structure of Europe is very different to what they are used to, especially on the
other side of the Atlantic. The decision-making processes are not the same. But it would be a
mistake to underestimate Europe, in general, and the euro area, in particular.
Q: The markets attacked Europe precisely where it is most vulnerable, in that it has a federal
monetary policy without a single economic and fiscal policy.
A: This is not how I would describe matters. Since the severe crisis that erupted in 2007,
which we countered by avoiding a recession that could have been as devastating as the one
in 1929, all fiscal policies of the industrialised countries have been vulnerable, and not only
those in the euro area. The scale of the recession has significantly weakened a number of
budgets that were already in difficulty. I do not see what happened - and what is in the
process of being gradually resolved - as a targeted attack on the sovereign risks of the euro
area, but rather as questioning the fiscal policy of industrialised countries. Some countries
have shown themselves to be more vulnerable than others. Certainly, it immediately calls
into question the quality of the surveillance of fiscal policies undertaken by the other
governments.
Q: Wasn't it the case that Europe responded too late to the sovereign debt crisis, given that
all the elements of the crisis were in place as early as January 2009?
A: It was first necessary for the countries that were afflicted by a lack of market confidence to
adopt a fiscal policy that would enable them to convince all market participants. That is what
Greece failed to do in 2009. This made all the difference for a country like Ireland, which -
despite the severity of its situation - drew up in advance and adopted a large-scale recovery
programme without waiting to find itself in extremely difficult circumstances vis-à-vis
investors. What is more, in the case of Greece, there was the unusual and very grave
problem of false data. That is why the Governing Council of the ECB and, in particular,
Christian Noyer, Governor of the Banque de France, is stressing the need for an
independent body, preferably within the European Commission, that is able to lay down the
law as far as statistics are concerned and establish a reliable fiscal assessment. This is a key
point: if the real figures had been known, it is likely that things would have turned out
differently.
Q: Why did you wait until 10 May 2010 to intervene in the secondary market for sovereign
debt by purchasing Greek bonds and those of other countries? If you had done so earlier,
you would have tripped up the speculators.
A: We acted because we saw a serious and unprecedented malfunctioning of the financial
markets of certain euro area countries in the afternoon of 6 May and on Friday 7 May. At that
moment in time and not before, we judged that we had a very serious problem with regard to
the transmission of our monetary policy in part of the euro area, and that we had to
contribute to re-establish a more normal functioning of the markets in question. Our aim was
not to change our monetary policy, which is to maintain price stability for our 330 million
fellow European citizens. Inflation is a tax on the poor and most vulnerable.
Q: So the ECB isn't there to mop up the reckless spending of Member States?
A: The central bank is certainly not there to rectify the fiscal mistakes of governments,
mistakes it constantly warned them about.
Q: Nevertheless, you have already purchased government bonds to the value of €59 billion.
That is a huge figure!
A: Those interventions are sterilised. We are maintaining our monetary policy unchanged.
We believe that the present monetary policy is appropriate in order to maintain price stability.
In order to avoid changing our monetary policy by increasing liquidity, we are completely
re-absorbing the liquidity provided as a result of these interventions.
Q: Isn't the ECB becoming a sort of "bad bank" which allows commercial banks to get rid of
their dubious sovereign bonds?
A: No, the sole aim of our interventions is to help us to improve the transmission of our
monetary policy by contributing to the better functioning of certain bond markets.
Q: Isn't there a risk that the next stage of the crisis will occur in the private debt security
market, as seen in Spain, where credit institutions are very vulnerable?
A: The calling into question of certain private debt instruments was the source of the
international crisis that we are experiencing. It is as a result of this "private" crisis that we
have been faced later with the problem of sovereign debt risk. All industrialised countries
must strengthen the soundness and credibility of all public policies, and in particular fiscal
policy. It is also essential that the overall balance sheets of certain institutions continue to be
adjusted. This is now happening through the "stress tests" which Europeans have fortunately
decided to conduct, the results of which will be published, bank by bank.
Q: Are there many skeletons still hiding in the closets of banks?
A: The purpose of the stress test is to measure the resilience of banks in especially difficult
circumstances. Transparency is very important. This is what we have also seen in the United
States, where in the past there was a general absence of confidence, which was rectified by
the publication of such stress tests.
Q: Is greater fiscal integration necessary to avoid a repeat crisis of this nature?
A: We must, in particular, be able to go as far as possible, without necessarily changing
immediately the Treaty, notably with regard to very early surveillance, almost automatic
sanctions, and the strengthening and extension of sanctions so that the euro area has the
equivalent of what we would have if we were in a fiscal federation.
Q: But wouldn't a federal budget be the ideal solution?
A: A federal solution would require a huge leap forward at the institutional level. It seems to
me that a fully fledged political federation is not, at present, wanted by the countries
themselves, speaking as a citizen, it is a matter of regret to me that the chance to take
further steps was not seized in the 1990s. In the meantime, responsibility for the economic
union itself - as part of the economic and monetary union, the EMU - rests with the Member
States themselves. They, of course, fulfil this responsibility within the framework of their own
national institutions. That being said, the "peers", namely the other governments, duly guided
by the European Commission in liaison with the ECB, should not hesitate to meet all their
own responsibilities: they should ensure that none of them adopts policies that could
undermine the stability of the euro area as a whole. They have just seen for themselves the
extent to which they share a common destiny.
Q: Why not jointly manage some of the debt of European States?
A: We have always been opposed to merging treasury operations, because this would strip
States of their responsibilities and they would lose the financial incentive for sound
governance.
Q: Do the austerity plans announced amid monumental disarray by the Member States pose
the risk of killing off the first green shoots of growth?
A: It is an error to think that fiscal austerity is a threat to growth and job creation. At present,
a major problem is the lack of confidence on the part of households, firms, savers and
investors who feel that fiscal policies are not sound and sustainable. In a number of
economies, it is this lack of confidence that poses a threat to the consolidation of the
recovery. Economies embarking on austerity policies that lend credibility to their fiscal policy
strengthen confidence, growth and job creation.
Q: Should a European rating agency be created, since the Anglo-Saxon agencies have
added fuel to the flames during this crisis?
A: Rating agencies in general have had a pro-cyclical impact. They tend to amplify upward
and downward swings in the financial markets. This is still obvious today. This runs counter
to financial stability. It is probably advisable to put an end to a global oligopoly of three
agencies. But the fundamental problem is to reduce, or eliminate, this amplifying effect that
the rating agencies contribute to.