un moyen, pas une fin---but punish deficit sinner Father Trichet

Interview with Bild am Sonntag

Interview with Jean-Claude Trichet, President of the ECB,
conducted by Walter Mayer and Michael Backhaus on 27 October 2011

Mr President, your term of office comes to an end on Monday. The euro is in stormy waters and the captain is leaving the ship. How hard is that for you?

It has been an immense honour and responsibility to be President of the ECB for the last eight years, and to have been able to maintain price stability since the inception of the euro. The last four years have been a very challenging period for all the staff of this institution. This global crisis has presented all of us – both governments and central banks – with considerable and thoroughly unexpected challenges. In any case, this eight-year mandate, which is not renewable, is an essential feature of the independence of the ECB.

In recent weeks and months you’ve spoken forcefully about this being the most severe crisis since the Second World War. Can you now give the all-clear, following the decisions taken by the Heads of State or Government this week?

The global crisis began in the United States, before spreading throughout the industrialised world. The crisis is not over. It has laid bare the weaknesses of advanced economies. We are now seeing the weaknesses of the US and Japanese economies – but also, of course, Europe’s weaknesses. Europe’s governments have made serious mistakes, such as failing to comply with the Stability and Growth Pact. And they did so despite the fact that the ECB was emphatic in warning them of the importance of complying with the requirements of the Pact. In addition, some countries failed to pay sufficient attention to their own competitiveness. The critical issue now is for the rules of the Pact to be comprehensively tightened up and implemented. The European Council was in full agreement on this point.

What would be the worst case scenario were all of the Member States’ precautionary measures to fail?

The decisions taken at the summit meeting need to be implemented with great precision and speed. The euro area’s Heads of State or Government have a plan, and national governments and the European Commission now have some hard work ahead of them. Swift and full implementation of those decisions is now absolutely critical. We will monitor this process very carefully. Now is the time for action.

What kind of future would Europe have without the euro?

We have to be very careful to distinguish between the euro as a currency and the problem of financial stability in the euro area. The first 13 years of the euro have seen the currency retain its value, both domestically and externally. Annual inflation currently averages 2.0% – and just 1.56% in Germany. That is lower than in the previous 50 years. Inflation will, in all probability, remain very low for the next ten years – at around 1.8% according to current expectations. So, we have price stability in the euro area. We are rightly proud of that fact, as we have achieved what was expected of us: we have secured price stability and ensured that the euro is a credible and trusted currency. The financial stability of the euro area is a different story. This has been undermined by mismanagement on the part of certain governments. However, following the decisions taken this week, I am confident that governments can succeed in restoring financial stability. A critical issue in this respect will be the will of the people. I was very impressed by the decisiveness displayed by the German parliament this week.

The euro’s rescue fund is being significantly strengthened, with its total firepower set to reach €1,000 billion. Does this mean that the ECB will, in future, be able to do without its controversial purchases of stressed countries’ government bonds?

We have adopted special measures during the crisis because they were necessary in order to correctly transmit our interest rate decisions to the economy. In August 2007 we supplied banks with liquidity at fixed rates of interest in order to stabilise the markets. Second, we took the decision to buy covered bonds. And third, we intervened in some government bond markets to help improve the transmission of our monetary policy. Such actions are only justified in the exceptional circumstances of a major global crisis. Once national governments’ new tools to restore financial stability are up and running, we will have no reason to continue with these special measures.

Does the ECB really have complete freedom as regards government bonds, or is it under political pressure?

The ECB takes its decisions in full independence. We have consistently demonstrated this, taking controversial decisions on interest rates and other matters. Under the Treaties, members of the ECB’s Governing Council are not permitted to take instructions from anybody – neither from governments nor from interest groups. Indeed, they are not even allowed to ask for instructions. It was for monetary policy reasons that the Governing Council, in full independence, adopted all the non-standard measures.

The crisis is being caused by excessive debt in euro area countries. Do we need a political union, or is a return to the Stability and Growth Pact of Maastricht sufficient in order to prevent such events from recurring in the future?

What is important at the moment is to monitor compliance with the now considerably stricter stability requirements. We had initially called for these to go further – calling, for example, for more automatic sanctions against “deficit sinners”. Significant progress has been made, and that now needs to be rigorously implemented. That includes strengthening the presidency of the Eurogroup and the body of staff which is to monitor economic developments. In the medium and long term we need to strengthen Europe’s political structures, which will not be possible without amendments to the Treaty. I would say – as a citizen of Europe, not as President of the ECB – that we could proceed in the direction of significantly stronger European governance with well-defined responsibilities. With that new governance, it would be possible, in countries that consistently fail to comply with stability requirements and thereby threaten the financial stability of the euro area, to directly implement appropriate measures. In the long term, therefore, we will need to go further in the direction of political union. But the decision on that will lie with the people of Europe.

What was your most important decision, your greatest success?

As a central banker, you are constantly taking important decisions – for example on interest rates. All of these decisions are taken with the aim of ensuring price stability, which is a prerequisite for sustainable growth and job creation. As a result, it is difficult to say that a particular decision was the most important. But the greatest challenge for the ECB’s Executive Board was to recognise in 2007, in real time, that something very significant – something very dangerous – was happening. We were the first central bank in the world to recognise the reality of the situation and quickly implement comprehensive measures in response.

Horst Köhler, with whom you negotiated the Maastricht Treaty, describes the markets as “monsters”. Is he right?

I would not necessarily go as far as Horst, for whom I have great respect, but I can see what he could have meant by that. Supervisory authorities need stronger means of monitoring the rapid development of new technology and need to ensure that all innovation in the financial markets continues to serve the real economy and is not to its detriment. Realisation as to what was happening in the markets came somewhat late. We are currently seeking to correct that. Authorities the world over agree that we need to discipline the markets and the financial system as a whole and make them much more resilient in all circumstances.

Jesus drove the money-changers – i.e. the bankers – out of the temple. How do you, as a man of money, feel about this parable?

Central bankers are guardians of monetary stability, which is a public good. So, when the markets run riot, whether on the upside or on the downside, we ensure that there is a return to discipline. Wisdom needs to discipline “animal spirits” – excessive greed or fear. On the other hand, I would certainly warn against making it difficult for banks to carry out their functions. In Europe, banks finance 75% of all economic activity. The real economy needs banks to finance investment, and we should not mistreat or ignore them. We would be shooting ourselves in the foot if we did that.

You experienced the occasionally violent protests of the 1968 movement at close quarters – from ministries in Paris with people demonstrating in front of them. How seriously do you take the “Occupy” movement, which has spread from Wall Street to cities around the world?

I think we should always be very attentive to the signals coming from society. They are manifold and complex. People are asking themselves how it was that first the financial markets and then the real economy turned out to be so vulnerable. We now need to make our market economies much more robust, as only they are capable of creating wealth and employment. And banks need to strengthen their resilience and avoid behaviour – including excessive bonuses – that is not compatible with the values of our societies. These are the messages that I would take from public opinion. We are all working hard to strengthen the financial system, both at the European and at the global level.

To what extent has the greed of the financial markets damaged the notion of the market economy and freedom in Europe and beyond?

We should be very conscious of the fact that certain behaviour in the markets has caused considerable irritation. That includes the size of certain bonus payments. This has shocked the public on both sides of the Atlantic. We therefore need a change in values and a change in behaviour in this respect. We are all living in democracies, and for that reason it is very important that society accepts the values and behaviour observed in the economy.

You’ve spent the last 40 years working in the public sector in the area of monetary policy – first in Paris for France, and now in Frankfurt for the euro area. Can you tell us something: what is money, the nature of money?

Money has an essential function. It acts as a store of value, it is a means of exchange and it allows people to calculate the price of everything. Money is an inseparable element of civilisation, as it allows the division of labour. It is only thanks to money that we have cities at all. I would compare money to a poem, since a poem always retains its structure, just as a gold coin always retains the image stamped on it. Once formed – whether written or minted – these two things should not and cannot be altered. Goethe gave considerable thought to this issue, as you can see from reading Faust.

To what extent are you personally fascinated by money?

I, personally, am not fascinated by wealth.

In Germany we say that money rules the world. Would you, as a man of money, confirm that?

No, I would not say that at all. Ideas rule the world – hopefully. Money is a means, not an end; an instrument, not the ultimate goal; un moyen, pas une fin.

Your wife recently said on German television that the question of whether she was pleased that her husband’s work was coming to an end was a “delicate and difficult question”. She also said that she hopes you find something to occupy yourself with as soon as possible. What does Madame Trichet mean by that?

Did she really say that? She knows me well. I will certainly remain active. But I will wait until I have left the ECB before deciding what exactly I will do.

Does she perhaps mean that Jean-Claude Trichet cannot be happy without work?

You can trust my wife on that!

Mr Trichet, why is your signature on the euro banknotes?

The euro banknotes are issued by the ECB. I therefore sign the euro banknotes as President of the ECB, on behalf of the Governing Council. Currently there are around 14 billion euro banknotes in circulation.

Tomorrow and the day after tomorrow: a vision for Europe : Jean-Claude Trichet

Speech by Jean-Claude Trichet, President of the ECB, 

at the Humboldt University,
Berlin, 24 October 2011

Ladies and gentlemen,

It is a great pleasure to be invited to speak here at the Humboldt University this evening. One can only be honoured to be in the university of Hegel, Heinrich Heine and the Nobel prize-winning physicists Albert Einstein and Max Planck – not to mention 27 other laureates. But it is with the ideas of the university’s founder – Wilhelm von Humboldt – that I would like to begin my remarks.

As a Frenchman who has lived in Germany for the past eight years, I note with interest that the mother of the university’s founder – Marie-Elisabeth Colomb – came from a French Huguenot family who also made that eastwards move. Her family had emigrated to Berlin following the Revocation of the Edict of Nantes, a reminder that European integration is a process that has been with us for centuries.

Wilhelm von Humboldt himself was deeply engaged with the question of how to create the conditions for individuals to flourish within a society. His answer involved removing the conditions for mutual harm.

In some ways, this speaks to the challenges of European integration.

The individual Member States of the European Union (EU) also seek to flourish. Their actions are interdependent and can both benefit and damage each other. Removing the potential for mutual harm is essential for collective prosperity.

This dialectic between the individual and the community is at the core of the European project. It is the dialectic between the individual nation states and the community of nations. And it presents some of Europe’s most fundamental challenges.

I would like to reflect today on how to address these challenges – to look forward and offer a perspective of where Europe could go.

In particular, I would like to develop three propositions.

First, while the reasons for European unity have often been presented as deriving from past conflicts and past divisions, forward-looking motivations are in my view decisive.

The unique construction of Europe – with strong local identities and large, integrated markets – is a source of great strength in the new, globalised world we face. It allows Europeans to plant deep roots and build strong communities. At the same time, we can fully benefit from economies of scale and the free flow of trade and investment.

For this reason, European integration is profoundly in the interests of all Member States and deeply connected to their future prosperity.

Second, for Europe to realise fully its future potential, it needs the right rules and the right institutions.

Europe requires a solid form of governance to ensure that the actions of individual countries are oriented towards the common good. Our current arrangements have not yet fully met this standard. They are now being improved. It is a continuous process which will call for Treaty changes if necessary.

As this process will take time, we need to start planning today for the Europe of tomorrow and the Europe of the day after tomorrow.

Third, the underpinning of a more integrated Europe is the emergence of a true European public debate.

As one would say in German, die Schaffung einer europäischen Öffentlichkeit.

Europeans today are highly interconnected via economic and social linkages. Yet our fragmented national public discourse does not necessarily permit citizens to understand fully these connections.

A true European public debate would help us deepen our interest in each other, bridge our linguistic differences and care more about what is happening across our borders.

These are the three main themes on which I will focus tonight.

But before I talk about the Europe of the future, I would like to talk about the Europe of today. To reflect on the relationship between member countries and Europe. And to touch on the challenges we collectively face in tackling the crisis.

1. Europe and Germany

Building deeper union between France and Germany in the service of Europe has been an important theme of my own working life. In this time, I have been profoundly influenced by the German commitment to a stability culture.

In the 1980s, I was seen in my own country as the strongest advocate of the ‘franc fort’ policy. This policy was designed to be part of the modernisation of the French economy through a “competitive disinflation” policy.

In the 1990s, I worked side-by-side with Hans Tietmeyer and Horst Köhler to contribute to the foundations of the euro in the Maastricht Treaty. This work was to ensure that, among other things, the European Central Bank (ECB) would be based on the principles of independence and the pursuit of price stability.

Then in 2003, I had the honour of moving to Frankfurt to become President of this institution.

It was a great personal satisfaction to join an institution that embodied my deep-seated beliefs in central bank independence, price stability and economic discipline.

Over this period I have developed a strong admiration for Germany and its people, and also for the way that Germany conducts its economic policies.

The German economy has often been thought of as the engine of the European economy. But less than 10 years ago, Germany was seen by some observers as the “sick man of Europe”.

Let me cite some books and newspaper articles from that time:

“Can Germany be saved?”, asked one of this country’s most well-known economists in 2003, noting that “Germany provides something of a case study of what not to do in designing a prosperous future”.

“How the mighty are fallen”, said a major international magazine also in 2003, well representing the mainstream economic analysis. "After the German economy was seen as an exemplary model of successful capitalism for decades,” the magazine went on, “ today it is Germany that economists point to with a mixture of contempt and alarm.”

“Vom Meister zum Mittelmaß”, wrote a major German newspaper in 2005, speaking of “absteigende Staaten wie Deutschland, die in ihrer Bedeutung schrumpften und ihren Haushalt nicht in den Griff bekämen. ”

Thankfully, these gloomy forecasts proved mistaken, and today, Germany is in the lead in rebounding from the crisis.

Since the trough of mid-2009, German real GDP has grown by 6.9% compared with the euro area as a whole by 3.8%. Employment in Germany has increased by 2.1%. Exports have grown by 25.6%. This performance is no accident. Neither is it based on cyclical, unsustainable factors. It is the result of sound fiscal policies, permanent attention to unit labour costs, and bold reforms that have been rigorously implemented over a prolonged period. And it sets an example that is very important for the current situation.

First, it demonstrates how sound policies can lead to prosperity within economic and monetary union.

By encouraging industries to embrace the opportunities of globalisation. By maintaining technological excellence. By prioritising cost and price competitiveness. And by ensuring flexibility in the labour market.

Second, it proves that it is possible to regain competitiveness within monetary union.

Germany after the post-unification boom had a very serious competitiveness problem itself. It took a sustained effort to become competitive again.

This gives encouragement to euro area countries that have lost competitiveness and now must regain it. It also underscores the fact that the adjustment effort must begin immediately.

But there is also a third lesson from the German example.

Would the German recovery have been possible without the euro and Germany being in the euro area? Without Germany benefiting from a vast single market of the size of the United States with a highly stable currency?

The German recovery has taken place in the context of the best inflation record achieved by a major central bank for over 50 years. The ECB has delivered an average rate of inflation of 2.0% since beginning operations in 1999. In Germany it is even lower with an average yearly inflation rate of 1.57%.

Such a low rate of inflation over a comparable time period is actually the lowest in Germany for over 50 years. Moreover, expectations of future inflation remain firmly anchored in line with our definition of price stability.

Financial markets and euro area citizens expect the ECB to deliver on its mandate. The German public can rely on our steadfast commitment to do so.

The euro has extended the zone of monetary stability to Germany’s main trading partners in the euro area. As more than 40% of Germany’s exports go to other euro area countries, this is very important for German prosperity. The stability of the euro has also helped German companies remain competitive vis-à-vis the rest of the world.

2. Europe and the crisis

Let me now turn directly to our current challenges. As you are all well aware, we continue to face the most serious economic and financial crisis since World War II. Tackling the crisis has required unprecedented action from public authorities to maintain economic and financial stability.

Inevitably this has produced diverging views. This is not surprising. The euro area is responding to events of historical importance and it naturally takes time to forge consensus on the right way ahead.

But it is very important that people do not misconstrue these debates. They are about policies, not about principles, because in the euro area our principles do not change.

Our principles are the foundations on which we rest. Stability. Responsibility. Independence.

But our policies must adapt. No two crises are the same. It is precisely because we want to defend and reinforce the principles we cherish, that we have to shape our policies appropriately.

I am fully aware that in this country people have genuine concerns about the single currency. They seek assurance that it remains a community of stability. That it is founded on rules and responsibilities. And that the rules are respected and the responsibilities are taken seriously.

I would like to use this occasion to explain the way the Governing Council of the ECB is deciding on monetary policy.

Our standard measure for fulfilling our mandate of maintaining price stability – avoiding both inflation and deflation – is interest rate policy. But effective interest rate policy requires that our policy decisions are transmitted to the real economy. If that is not the case, our monetary policy cannot achieve its objective.

In this transmission, both banks and financial markets play an important role. They are crucial for the financing of the real economy – of firms and households. Yet the crisis has damaged banks and at times severely disrupted the functioning of financial markets.

Addressing these problems needed to be done through non-standard measures. The ECB has decided such measures, for monetary policy reasons, since the very start of the global crisis. It has been offering liquidity to financial institutions at a fixed rate and with full allotment. It has also provided this liquidity over an extended period of time, up to 12 months, so that the euro area banking sector, Germany’s banks included, could continue to be as correct as possible a vehicle for the transmission of our monetary policy.

With additional liquidity demanded by the euro area banks, our balance sheet has expanded during the crisis. But we have been prudent. Our balance sheet has expanded by about 80% since the beginning of the crisis. Only for the sake of comparison the balance sheet of the Federal Reserve increased by about 230%, that of the Bank of England by 205%, and that of the Swiss National Bank by 235%. The crisis hit all of the economies concerned, but you can see that all our non-standard policies have been measured.

Of all our non-standard measures, the policy of full liquidity allotment at fixed rates has been the most important one in my view. Yet it is the bond market interventions that have received the greatest attention, and the most scrutiny.

But just as our measures of enhanced credit support have been necessary to ensure that banks continue to extend credit to the real economy, our bond market interventions have been necessary to help foster a more appropriate transmission of our policies to the real economy. The government bond markets are crucial for our monetary policy transmission. They largely determine the prices of loans and mortgages and thus affect, indirectly, the transmission of monetary policy to all firms and households.

The ECB’s government bond market interventions are not inflationary. Unlike the bond purchase programmes of other major central banks our aim is not to inject additional liquidity. We actually absorb all liquidity injected by these purchases on a regular basis – euro for euro, week by week.

There is no fuelling of money growth in the euro area. M3 growth is less than 3% currently and inflation expectations have remained firmly anchored by all standards.

So let me emphasise this point. It is very important to understand that all the ECB’s policy decisions during the crisis have been made fully in line with our mandate to maintain price stability.

They have been taken in full independence and we have established a solid track record for our independent decisions. Both inflation and inflation expectations in the euro area demonstrate the value of independent deeds, not just words.

Last week in Frankfurt, at the occasion of my official farewell as President of the ECB, Prime Minster Juncker, the longest-serving prime minister in Europe and chair of the Eurogroup, said that discussions of government pressure on the ECB lacked any basis in fact, that such pressure would have been completely futile and that the ECB always acts completely independently.

3. Europe and the future

I have talked about where Europe has come from. Let me turn now to where Europe is going.

When people seek a justification for European integration, there is a tendency to look backwards.

European integration has banished the spectre of war from our continent, is always stressed. European integration has delivered the longest period of peace and prosperity in European history.

This perspective is entirely correct. But it is also incomplete.

There are many more reasons for striving towards “ever closer union” in Europe today than there were in 1945. And these are entirely forward-looking.

65 years ago the distribution of global GDP was such that Europe had only one role model for its single market: the United States of America.

Today, Europe is faced with a new global economy, reconfigured by globalisation and by the emerging economies of Asia and Latin America.

It is a world where economies of scale and networks of innovation matter more than ever. By 2016 – that is, very soon – we can expect the euro area in terms of purchasing power parity to be below the GDP of China and over and above the GDP of India. Together, these two countries would represent around twice the GDP of the euro area.

Over a longer horizon, the entire GDP of the G7 countries will be dwarfed by the rapid development of the systemic emerging economies.

Europe has to cope with a new geo-political landscape very profoundly reshaped by these emerging economies.

And Europe is also faced with new global challenges, such as climate change and migration, where effective solutions are possible only at the European and international levels.

In this new global constellation, European integration – both economic and political – is central to achieving prosperity and influence. For an outward-looking, export-oriented country like Germany, this is profoundly in its interests.

The challenge is to set the correct path for European integration. Getting this right is essential to realise fully our continent’s tremendous potential. Let me therefore lay out a vision for the Europe of tomorrow.

The Europe of tomorrow

The creation of Europe’s economic and monetary union is unique in the history of sovereign states. The euro area constitutes a “society of states” of a completely new type.

Like individuals in a society, euro area countries are both independent and interdependent. They can affect each other both positively and negatively.

Good governance requires that both individual Member States and the institutions of the EU fulfil their responsibilities.

First and foremost, every country in the euro area needs to keep its own house in order.

This means responsible economic policies on behalf of governments and rigorous mutual surveillance of those policies by the Commission and Member States – going beyond the indispensable surveillance of fiscal policies to encompass all aspects of the economy.

In a society, the institutions of law enforcement can ultimately compel a citizen to abide by the rules. In the euro area, our framework based on surveillance and sanctions depends on the willingness of offending states to comply.

I am aware that many observers wonder what can be done if a Member State simply cannot deliver on its promises.

That is why, when I had the deep honour of receiving the Karlspreis, I suggested a new approach to the policing of economic governance.

For countries that lose market access, the current approach of providing aid against strong conditionality is justified. Countries deserve an opportunity to put the situation right themselves and to restore stability.

But as I suggested in Aachen, this approach should have clearly defined limits. A second stage should be envisaged for a country that persistently fails to meet its programme targets.

Under this second stage, euro area authorities would gain a much deeper and more authoritative role in the formulation of that country’s economic policies.

This would move us away from the present concept where all decisions remain in the hands of the country concerned. Instead, it would be not only possible, but in some cases compulsory, for the European authorities to take direct decisions.

Implementing this idea of the second stage would evidently require a Treaty change. It would also imply a new concept of sovereignty. This is necessary given the complex interdependence that exists between euro area countries. And it is ultimately in the interests of all citizens of the euro area.

In my view, it was important to launch such reflections as soon as possible. I am very happy that the European Council, at its meeting yesterday in Brussels, has indicated in its conclusions: “The European Council notes the intention of the Heads of State or Government of the euro area to reflect on further strengthening of economic convergence within the euro area, on improving fiscal discipline and deepening economic union, including exploring the possibility of limited Treaty changes.”

The Europe of the day after tomorrow

Let me now look even further into the future. A vision that can stabilise expectations needs to address not just tomorrow, but also the day after tomorrow. And as it takes time to implement such a vision, we must start thinking about it today.

It is my firm conviction that the Europe of the day after tomorrow will be of an original type – a new type of institutional framework.

In Aachen, on a personal basis, I began to reflect on some elements of this new possible framework.

I asked the question: with a single market, a single currency and a single central bank, would it be too bold to envisage a ministry of finance of the Union?

This European finance ministry would, first, oversee the surveillance of both fiscal policies and competitiveness policies, and when necessary, have responsibility for imposing the “second stage” I just described.

Second, the ministry would perform the typical responsibilities of the executive branches regarding the supervision and regulation of the EU financial sector.

And third, the ministry would represent the euro area in international financial institutions.

Since my Karlspreis address, it seems to me that the case for such an approach has strengthened.

I now hear leaders calling for a Treaty change to create stronger economic governance at the EU level. I hear euro area citizens calling for better supervision of the financial sector. And I know that our partners in the G20 look to Europe as a whole for solutions, not to individual Member States.

Increasingly, it seems that it is not too bold to consider a European finance ministry, but rather too bold not to consider creating such an institution.

This finance ministry would be only one element of the European future institutional framework. Exactly how these new institutions would eventually evolve one cannot say. As Jean Monnet once wrote: « Personne ne peut encore dire aujourd’hui la forme qu’aura l’Europe que nous vivrons demain, car le changement qui naîtra du changement est imprévisible ». ^[1]

We have several federal or confederal institutional frameworks in today’s world. To name only a few, the United States of America, the Federal Republic of Germany and the Swiss Confederation. The European Union is unique in its past history, in its present nature, in its future ambition. It will have to invent its own concept.

But one could imagine that in the future European institutional framework, the Council might evolve into the Senate of the Union, the European Parliament into the lower house, the Commission into the executive and the European Court of Justice into the judiciary – each time for the part of sovereignty that is shared.

And I have no doubt, taking into account the long and proud history of the European countries, that “subsidiarity” will play a major role in the future Europe – very significantly more than in the present models of federation.

As I said, these are personal remarks of a European citizen. The future of Europe is in the hands of its democracies, in the hands of the people of Europe. Our fellow citizens will decide. They are the masters.

In any case, whatever the future institutions of Europe will be, an essential element would be the emergence of a truly pan European public debate. As Europeans we connect deeply with our nations, traditions and histories. These are Europe’s roots. But we also need to extend our branches more widely.

To do this, the Euro area needs media, in the broadest sense of that word, that allow citizens to take a deeper interest each other. Media that provide regular information on events beyond national borders. Media that permit citizens to debate and exchange. And media that are not constrained by language barriers. All we need is a pan European public debate, a gemeinsamer öffentlicher Raum, a débat publique pan-Européen that allows Europeans to appreciate the wider community of which they are part – a community where their interests are increasingly shared and their lives more interdependent than ever before.

***

Let me draw to a close.

Twenty years ago, in 1991, my friend Hans Tietmeyer, the former President of the Bundesbank, said that “monetary union is not just a technical matter. It is in itself, to some extent, a political union”.

This condition creates mutual responsibilities.

We see that a challenge in one country can become a challenge for the euro area as a whole. Addressing it requires strong responses from all Member States, including Germany, and from EU institutions.

The global crisis has called into question the overall economic and financial strategy of major advanced economies. All have weaknesses in their economic systems. Not surprisingly, the main weakness for Europe was the nature of its institutional framework – in particular, that its economic and fiscal governance was not commensurate with the interconnectedness of economies sharing a single market and a single currency.

The question is how to confront those obstacles. We should not look back. We must look forward – to the opportunities of Europe for our collective betterment; and to the potential for every country to be stronger and more prosperous in a well-functioning union.

As far as the ECB is concerned, its Governing Council will continue to anchor solidly price stability and confidence in Europe – stability and confidence for 17 countries and 332 million fellow citizens who have decided to unite closely with a single market and a single currency. As Konrad Adenauer said in Aachen 57 years ago: “Gerade wird man die Mahnung verstehen, dass Europa uns heute Schicksalsgemeinschaft ist. Dieses Schicksal zu gestalten ist uns übergeben”. “Above all, people will understand the call: that Europe, for us today, is a community with a common destiny. It’s up to us to shape that destiny”.

Thank you for your attention.

Play by Rules : Trichet advises to European Laeders

Interview with Die Welt

Jean-Claude Trichet, President of the ECB,
Interview for Die Welt,
conducted by Jan Dams and Martin Greive,
on Friday, 7 October 2011

WELT: Mr Trichet, at the time you took up office, did you think it conceivable that you would be dealing with such a serious crisis in the currency union?

Jean-Claude Trichet: Even before the outbreak of the financial crisis, the ECB warned that it was highly likely that there would be major corrections in the financial markets. However, the fact that the crisis would call into question the whole economic and financial strategy of all developed economies was not quite so foreseeable.

You have had to take harsh criticism of your crisis management from Germany. How disappointing is that for you?

That reminds me of a Goethe quote: “ Against criticism a man can neither protest nor defend himself; he must act in spite of it, and then it will gradually yield to him.” The ECB must accept the criticism. The only thing that matters is that we are faithful to our primary mandate and take our decisions fully independently.

It is about precisely that that increasing doubts are being expressed. Under your leadership, the ECB has lost its independence because it has financed hard-up euro area countries by printing money.

This criticism is completely inaccurate. We are fiercely independent of governments and pressure groups. All our decisions are made fully independently by the 23 members of the ECB’s Governing Council. And we are totally devoted to our primary Treaty mandate of price stability. We have delivered price stability over 13 years with an annual inflation rate of 2.0% for the euro area as a whole and 1.55% for Germany. This is better than any time over the previous 50 years. For the last four years we have been experiencing the worst global crisis since World War II, and not surprisingly it is hampering our monetary policy transmission. That is why we have had to take some non-standard measures but with caution and prudence. With our decisions since the outbreak of the crisis, we have reacted appropriately to the market failures in the financial markets. We have lived up to our responsibilities.

The two German members of the ECB’s Governing Council, Axel Weber and Jürgen Stark, both resigned because they could no longer support the buying up of government bonds.

Jürgen is a very good European and a very close friend. Over the last 18 years he has been closely involved in the European construction and European unity. He has been an outstanding ECB Chief Economist. He is one of the greatest champions of the European Union that I know. When, after serving the euro for many years, such a person, who has been totally loyal to the institution, announces his resignation for personal reasons, one has to fully respect his decision.

According to opinion polls, a majority of Germans now want the Deutsche Mark back. Is the euro at risk of losing its backing in Europe’s largest economy?

There are different opinion polls! In early September Die Welt published the results of a survey in which two thirds of respondents in Germany called for “more common policies in Europe”. The citizens of Germany know how important European unification is for their country; the fall of the iron curtain would not have been possible without a united western Europe.

In that case, how do you explain the growing mistrust?

I believe there is a problem of communication. Contrary to how things are often portrayed, we do not have a crisis of the euro as a currency. The euro is a credible, stable currency. In spite of the global crisis, its external value today is significantly higher than when it began. For 13 years the ECB has provided for stable prices. And observers and markets are anticipating the same stable prices for the next ten years. This achievement in particular is not valued highly enough by some commentators in Germany, and I do not understand why that is. Of course, there are shortcomings in the financial sector, in fiscal policies, and as regards financial stability: the financial markets are too unstable, some euro area countries are uncompetitive, and reliable fiscal policy is lacking in several countries. However, none of these problems have to do with the currency. They are the responsibility of the governments of the euro area.

Do you have the impression that the Heads of Government have understood what is at stake?

I believe they are conscious of their extraordinary responsibility. They all have to make decisions in the context of democracies which, in the advanced economies, are very inward-looking, which is a real problem at the time of the worst global crisis for the last 66 years.

What will happen if the European Heads of Government do not get the crisis under control?

My working assumption is that the Heads of State and Government will overcome the crisis. Europe must realign its fiscal policy, as other large developed economies must also do. This year, at 10%, the deficits in the United States and Japan will be around twice as high as in the euro area on a consolidated basis. In spite of this, Europe is the epicentre of the government debt crisis. The reason for this is the mutual dependence of the 17 euro area countries. This is why it is so important that every euro area country plays by the rules. A few days ago in the European Parliament, I quoted what I told the Members of the Parliament in my first hearings, eight years ago, four years before the crisis, concerning the absolute necessity to stick to the Stability and Growth Pact.

At your Governing Council meeting last week you reactivated all the crisis instruments. Is the euro in serious danger?

The euro as a currency is evidently not in danger. It is the financial stability of the euro area as a whole which is at stake, and this creates difficulties for our monetary policy transmission. Taking into account the reality of the situation we have reactivated a number of non-standard measures.

Many people nonetheless fear that the continuous flooding of the markets with new money will lead to inflation in the medium term.

This fear is totally unfounded. First the Securities Market Programme (SMP), namely the purchase of Treasuries on the secondary market, is not at all a quantitative easing programme. We are rigorously withdrawing all the liquidity which is provided. As regards all our non-standard measures, the balance sheet of the ECB has expanded by 77% since the beginning of the crisis; that of the US Federal Reserve System by 226%. This gives a measure of our relative prudence in this very grave crisis. And we are fully credible to deliver price stability over the next 10 years, according to observers and market participants.

In the spring, the ECB spoke out against the restructuring of Greek debt which was being discussed at that time. Now there is again discussion of a debt restructuring. Does your opposition still stand?

In the spring, the Governing Council of the ECB unanimously made the following points. We cannot accept the securities of a state in default, even for a short period of time, as collateral for the refinancing of banks without an appropriate credit enhancement. Similarly, we said that a credit event should be avoided. Our position has not changed. In any case, we call for the full implementation of the decisions taken by the Heads of State and Government on 21 July.

Then providing funding to Greece remains the only option. How many years will Europe have to support Athens?

Greece must pursue an adjustment which must be very strong and credible under the permanent surveillance of the IMF and of the European institutions. A key element, in my opinion, is the technical assistance of Europe, now being organised in Athens by Mr Reichenbach.

Can the European safety net protect the euro area from a conflagration?

We welcome the decisions of the Heads of State and Government of 21 July through which the flexibility of the safety net was enhanced. It is now their responsibility to make the safety net operational as soon as possible.

Do you believe that the ECB will then be able, as planned, to cease its controversial buying up of government bonds?

In the future, the EFSF will be able to intervene in the secondary market. The stability of the European financial system will in the future be guaranteed by the governments via the EFSF.

How large should the capacity of the EFSF be?

The governments must first implement all the decisions of the EU summit of 21 July and provide appropriate leveraging of the fund.

Should the EFSF be granted a banking licence in order to be able to obtain money directly from the ECB?

The ECB’s Governing Council does not consider that appropriate. The governments themselves have several means to leverage the EFSF.

Yet again the banks are deeply in crisis and clearly need to be recapitalised. Can the euro area afford another banking crisis?

We have to deal with the sovereign risk tensions and we have to deal with the banking tensions. It is crucial that the banks put their balance sheets in order as quickly as possible. They need to build up a stronger equity position by retaining profits and being less generous with bonus payments. In so far as is possible, they must recapitalise in the market. If a financial institution has no access to the capital markets, the Government must stand ready to recapitalise solvent banks. In addition, where it would be necessary, the Heads of Government have decided that the EFSF can be mobilised to recapitalise banks.

How can it be prevented in future that taxpayers have to continuously save the banks?

The global financial system must be much more resilient. That is the reason why we have to apply rigorously and fully the new Basel III rules, to be sure that systemically important financial institutions do not put the sector in danger. In this regard we have to be inflexible and oppose any pressure group.

Under your leadership, the ECB has risen to become Europe’s secret government. Is it not deeply undemocratic when representatives of an unelected institution like the ECB can dictate austerity plans to an elected government like Italy’s?

We do not dictate anything to anyone. We do not replace any government. We do not take any political decisions. We are only giving messages to Governments individually, and to the Eurogroup as a whole. This has always been our tasks since the setting of the ECB. Do you not think it was appropriate for us to tell the big countries in 2004 that they should not weaken the Stability and Growth Pact?

Almost all experts agree that Europe must come closer together. How do you imagine the Europe of the future?

I would make a distinction between the immediate future, and – after a change in the Treaty – what I would call “tomorrow” and the “day after tomorrow”. Immediately we must apply completely and rigorously the new governance which has just been approved by the Parliament and the Council. “Tomorrow” we must have the possibility to impose decisions on a country that is not applying the recommendations and, in so doing, is putting the system as a whole in danger. And “the day after tomorrow” we should have a significantly stronger political union with an executive branch and, in this executive branch, a European Finance Minister. He would be responsible for surveillance of fiscal and economic policies, for the monitoring of the financial sector and for the representation of the European economy in international institutions.

At the end of the month, your term of office comes to an end and you will step down after years as President of the ECB. What headline would you like to read over your period in office?

Despite successive oil shocks and the global crisis, the ECB Governing Council has delivered greater price stability than in the previous 50 years to 332 million fellow citizens.

Do you already know what you are going to do with your spare time in future?

I have not made any specific plans, because I am concentrating fully on my last weeks in office. My greatest privilege will surely be that I will have more time for reading, for meditating on the present history of Europe and to spend with my four granddaughters: Eléonore, Diane, Anna and Marie.

Father Trichet spells the ECB's Despondency

Interview with Expansión

Jean-Claude Trichet, President of the ECB,
interview given to Daniel Badía González, Expansión on 14 September 2011,
published 20 September 2011

1. At the last meeting you said that the risks to inflation are balanced and you noted downside risks to growth. However, the ECB raised interest rates in April and July. Does this new scenario leave room for possible rate cuts in the medium term? In 2008, following the bankruptcy of Lehman Brothers, there was a major shift in your monetary policy.

At the last meeting of the Governing Council we delivered two main messages. In our assessment the outlook for the real economy has deteriorated and we think that there are downside risks to growth. This is a significant change compared with the assessment three months ago, when we thought that the risks were balanced. On the other hand, in July there were upside risks to inflation, but now they are balanced. We will continue to keep price expectations solidly anchored. This is a major asset for Europe: it protects us from the materialisation of the risk of inflation as well as the materialisation of the risk of deflation.

2. Investors are very concerned by the departure of Jürgen Stark, just a few months after Axel Weber stepped down. What are the consequences of his departure for the ECB and do you have any reassurance to offer in this regard?

The Governing Council has been totally faithful to the primary mandate of the ECB which is price stability. The track record for the first 12 years is impressive: price stability is the best it has been for the last 50 years for 332 million fellow European citizens. We will continue to fulfil our mandate with dedication. Jürgen has been a marvellous partner and colleague for me for the past 18 years. He has always demonstrated a very strong commitment to the consolidation of European unity. We have worked together for five years at the ECB and I must stress his constant loyalty to our institution. I have a deep esteem for him.

3. These two resignations were related to opposition to the purchase of sovereign bonds. What is the limit of the Securities Markets Programme?

The Securities Markets Programme (SMP) is a non-standard measure that the Governing Council decided on in order to help restore a more correct monetary policy transmission mechanism at a time when we are observing major disruptions to markets or segments of markets. Since the start of the crisis in 2007 we have applied a strict “separation of principles” between the two categories of measures. On one side are the standard measures – the interest rates – that are designed to deliver price stability, and on the other are the non-standard measures designed to be commensurate with the degree of disruption to markets. This is the case for all our non-standard measures: the supply of liquidity with a full allotment at fixed rate, the purchase of covered bonds and the SMP. In the case of the SMP, we consider that governments have the responsibility to ensure, individually and collectively, financial stability, which will re-establish a more correct functioning of markets. It is their responsibility and it is the commitment they took on 21 July.

4. Has the current crisis exceeded all your expectations?

I said myself, on behalf of the central bankers participating in the Global Economy meeting in 2006 and at the beginning of 2007, that a significant market correction was likely because risks were underestimated, insurance premia too low and volatility abnormally low. Since August 2007 we have experienced several episodes of a global crisis that is extremely demanding and calls for all authorities and entities, public and private, to live up to their responsibilities.

5. But what is the real source of the problem?

The current episode of the crisis is a crisis of the sovereign signatures, due to fiscal imbalances. The Governing Council of the ECB constantly advised governments that they should strictly respect the Stability and Growth Pact, individually and collectively. I was on record, on behalf of the Governing Council, in stating, many many times, that we have a single currency and no federal budget, meaning that the Stability and Growth Pact was fundamental for the stability of the Economic and Monetary Union (EMU). We fiercely defended the Stability and Growth Pact against the major countries of Europe when they wanted to dismantle it in 2004 and 2005. Let me also stress that it is a global crisis, hitting all major advanced economies, with its epicentre in Europe.

6. Angela Merkel sent us a very optimistic message about Greece this week. Do you think that, at present, there is a real risk that Greece will become insolvent?

Greece has to strictly implement its adjustment programme and reach all its targets. This is absolutely fundamental. All governments have to fully implement their decisions which were adopted on 21 July in Brussels.

7. Nouriel Roubini, Bill Gross of PIMCO and George Soros, among other renowned economists, have been issuing catastrophic messages about the future of the euro since the start of the crisis. Don’t you think they should be more cautious, given that their views often have an impact on the market?

One should not confuse the issue of financial stability in the euro area and the necessity to adjust fiscal policies, which are an important and pressing problem, with the euro as a currency. Since its inception, the euro has kept its value remarkably. Price stability has been ensured in a better fashion than with the previous national currencies. It is the currency for the euro area as a whole. And the euro area as a whole has a balanced current account and a public finance deficit much lower than many big advanced economies. Such a currency, with such strong underlying fundamentals, is solid and credible.

8. Do you think that Spain is implementing sufficient reforms? What else can it do to restore investor confidence?

Spain should resolutely continue to place particular emphasis on further structural reforms in order to have the highest possible level of growth potential, to improve its productivity and to restore investor confidence.

9. Most European governments have completed the process of restructuring their financial sectors, but the Spanish government will still have to inject a large sum into several financial institutions at the end of September. What is your view of the situation of Spain’s financial sector?

The situation has improved considerably, but one should remain permanently alert. Every month the Governing Council of the ECB calls upon all the banks in Europe to do all that is necessary to reinforce their balance sheets, to retain earnings, to be cautious and moderate as regards remuneration and to have recourse to a public backstop, where necessary.

10. What are the challenges facing the new President, Mario Draghi?

Every central banker faces the challenge of being the guardian of the currency, and therefore an anchor of stability and confidence in a very demanding period. Mario Draghi needs no particular advice from me. He is a long-standing member of the ECB’s Governing Council and has been closely involved in all the decisions we have taken over the years.

11. Could you give us your view of your eight years in office? Do you have any regrets or is there anything that you wish you had done differently?

I have not gone yet and I have a very demanding task ahead of me in the remaining month and a half. In any case, I can assure you that it has been very inspiring to be President of a monetary institution that is responsible for issuing the common currency for 332 million people in 17 countries, including Spain. This is a great responsibility. As you know, in the Governing Council of 23 members, we are a team, together with Miguel Ángel Fernández Ordóñez and José Manuel González Páramo. We are all very close and this is something that is very inspiring. The team’s spirit means so much to me.

12. What is it that has gone wrong in this crisis? What recommendations would you give?

Emerging economies have shown remarkable overall behaviour in the face of this crisis, unlike the advanced economies. I think the main lesson to be learnt is that we have to make a difference as regards the resilience of the advanced economies. And this requires the implementation of a very robust fiscal policy, a very strong monitoring of competitive indicators in all economies and in particular in the euro area, and bold structural reforms.

13. The markets fear liquidity problems in the European banking sector. Do you think this is an understandable concern? The ECB has just announced a joint action with the Federal Reserve System to lend dollars to the European banks. What has brought us to this situation? Could the ECB embark upon other measures, for example more twelve-month tenders? In addition, the liquidity crisis is reducing the banks’ capital. In this context, will they be able to strengthen their positions themselves or will they require external support, perhaps through the European Financial Stability Facility or some other means?

As I already said, the European banking sector has to reinforce its balance sheet and improve its resilience. As regards its access to liquidity, I think it is important for observers and market participants to know that the ECB is supplying liquidity in euro on an unlimited basis at fixed rates for durations of one week, one month and three months. And the eligible collateral in the hands of the banking sector is a multiple of the amount of liquidity we are presently supplying (around €530 billion). As regards the liquidity in dollars, we just announced last Thursday the agreement between five central banks, which has been well understood by the observers and illustrates the very close cooperation which exists, in particular between the Federal Reserve System and the ECB.

European Union defers Greece for October, differences simmer

Eurogroup president Jean-Claude Juncker, left, and European Central Bank governor Jean-Claude Trichet speak at a press conference during an informal meeting of the Economic and Financial Affairs Council (ECOFIN) in in Wroclaw , Poland on Friday, Sept. 16, 2011. Rescue partners will decide in October on a crucial payout of bailout loan money to bankruptcy-threatened Greece. Juncker and other eurozone finance ministers were discussing Europe's financial crisis at an informal meeting in Wroclaw


U.S. Treasury Secretary Timothy Geithner steps out of an informal meeting of European Union finance ministers who are discussing euro zone crisis and rescue plan for Greece, facing bankruptcy in Wroclaw, Poland, Friday, Sept. 16, 2011. It was the first time that a U.S. finance chief has attended a meeting of his European counterparts. He has been pressing the ministers to find a lasting solution to the euro zone debt crisis. 

EU Economic Commissioner Olli Rehn,from left, Eurogroup president Jean-Claude Juncker, European Central Bank governor Jean-Claude Trichet and Klaus Regling, CEO of the European Financial Stability Facility, attend an informal meeting of the Economic and Financial Affairs Council (ECOFIN) in Wroclaw , Poland on Friday, Sept. 16, 2011.
 Rescue partners will decide in October on a crucial payout of bailout loan money to bankruptcy-threatened Greece. Juncker and other eurozone finance ministers were discussing Europe's financial crisis at an informal meeting in Wroclaw

Head of Eurozone finance ministers' group, Jean-Claude Juncker, addresses the media during a news conference in Wroclaw , Poland on Friday, Sept. 16, 2011 RThe hescue partners will decide in October on a crucial payout of bailout loan money to bankruptcy-threatened Greece. Juncker and other eurozone finance ministers were discussing Europe's financial crisis at an informal meeting in Wroclaw