When Jean-Claude Trichet retires on October 31, the euro area may lose more than just a European Central Bank (ECB) president.
Trichet has emerged as Europe’s key policy maker during the sovereign debt crisis, holding the 12-year-old monetary union together as heads of state squabble over their response. While ECB officials have sometimes split over the direction, under Trichet the central bank shown itself more willing and able to act than the bloc’s 17 finance ministers and government leaders.
“Trichet has become the de facto president of Europe,” said Marco Valli, chief European economist at UniCredit Global Research in Milan. “He is the only one who’s delivered the leadership necessary during this crisis.”
As German Chancellor Angela Merkel and French President Nicolas Sarkozy struggle to restore investors’ faith in euro-area bond markets, Trichet has taken the ECB further and further into uncharted territory to protect the euro. In his latest attempt to stop the debt crisis from spreading, Trichet convinced a majority of the ECB’s 23-member Governing Council to start purchasing Italian and Spanish government debt, overcoming opposition from Germany’s Bundesbank in a move that economists estimate could cost as much as $1.2 trillion.
While fraught with risks, the decision highlighted that “the ECB is the only institution in a position to contain the crisis,” said Joerg Kraemer, chief economist at Commerzbank in Frankfurt.
LEADING ROLE
For now, the gamble is paying off. The yields on Italian and Spanish 10-year bonds, which rose to euro-era records last week, have plunged about 100 basis points since the ECB started buying the nations’ debt yesterday. They were at 5.08 per cent and 4.96 per cent, respectively, as of 11.16 am in Frankfurt.
A lack of political cohesion in Europe has forced Trichet to take the lead role in tackling a crisis that began with Greece’s financial meltdown more than 18 months ago.
As heads of state disagreed first over whether to bail out Athens, then over the establishment of a rescue fund for the region, then over private-sector involvement in a second bailout for Greece, they increasingly turned to Trichet for guidance, and to win them time.
While leaders have agreed to allow the European Financial Stability Facility (EFSF) to buy bonds on the secondary market, as requested by the ECB, individual parliaments must still ratify the change, leaving the central bank to deal with the situation in the interim. Sarkozy and Merkel want this done by October.
“Trichet has found himself between a rock and a hard place,” said Julian Callow, chief European economist at Barclays Capital in London.
