Today in the Financial Times there is a very interesting interview with Jean-Claude Trichet, the former President of the European Central Bank.
In the interview Jean-Claude Trichet recalls his eight years running the ECB and explains his own understanding of the current crises.
According to Trichet, we are currently in the third episode of the crisis. The first episode was the financial turbulence from mid-2007 up to the collapse of Lehman Brothers in September 2008. This phase was was the last moments of hope for the continued upward spiral while there was still a belief the international financial system could handle the market turbulence.
The second episode started with the Lehman Brothers collapse. During the second phase, the central banks of the advanced economies had to embark on very bold, non-standard measures and the governments had to step in massively. A dramatic great depression was avoided.
The epicenter of the two initial stages was the United States. The epicenter of the currently ongoing third episode, the sovereign debt crisis, is in continental Europe, in the euro area.
Reading the interview I recall the the later years of the 1990s, when I was Director of EMEA in Trema (currently Wall Street Systems) and we participated in the preparations to set up the ECB.
The European Central Bank (ECB) started to operate in January 1999, with a responsibility to define and implement the monetary policy of the European Union.
Already in 1997, the European Monetary Institute (EMI), the forerunner of the ECB, initiated a project to select and implement a software system to manage the ECB´s foreign reserves. The system chosen was the one we provided, TremaSuite, and we ran a highly complex and high pace project to adapt the software for the needs of the ECB.
In the interview, Trichet explains that “today, if a country misbehaves, risking the stability of the euro area as a whole, as well as its own, it is supposed to be subject to sanctions, namely fines. These fines have proved to be largely ineffective. He suggests a new concept: what he calls an “economic and fiscal federation, by exception”. “Instead of imposing fines, binding measures on countries would be taken directly, at the level of the European institutions, with ultimate decisions democratically voted by the European Parliament.”
Reading the interview with Trichet, I recall that the main task of the ECB is to plan and run monetary policy to keep inflation low. The ECB is also supposed to pursue economic growth and job creation, as well. But only if that does not get in the way of its mission to control inflation.
That means the ECB has less flexibility than other central banks, such as the U.S. Federal Reserve, which treats inflation control and job creation as equally important missions.
I think this is one reason why the sovereign debt in the United States, which is substantial, has been easier to keep in check than the sovereign debts of the European Union member countries. This means that one of the core problems still to address by European politicians is the set of core tasks assigned to the ECB, and their order of priority.