ECB Transition Unlikely To Derail Hopes Of Finding Light in Euro Tunnel (10/6)     Print Email

As Jean-Claude Trichet gave his final news conference before stepping down as president of the European Central Bank, speculation focused on the likely stance of his successor – Italian central banker Mario Draghi – amid the euro-turmoil.

Some analysts predicted that Draghi will be ultra-orthodox in his policies – indeed all the more so he wants to dispel any stereotypical assumptions that he might share the lax monetary and fiscal reflexes associated with successive governments in his native country. This question is probed with acuity in a European Affairs article by Markus Ziener, the Washington correspondent of the German paper Handelsblatt.

His article analyzes the controversies associated with the Trichet’s tenure. Under the ECB’s mandate, he had little scope for lowering interest rates to stimulate growth because the Frankfurt-based bank has orders to prevent inflation. On the other hand, Trichet was able to stretch his marching orders – and did so – in buying up bonds from troubled eurozone countries in order to protect them from possibly predatory interest rates being charged for these governments’ bonds in the global marketplace.

Coinciding with this changing of the guard at the ECB (which has seen the departure of two key German board members), a flurry of reports suggest that the authorities in Europe have agreed to plans for bolstering key banks in the EU and also perhaps to expand the eurozone bail-out fund, the European Financial Stability Facility. Expectations along these lines were fueled by President of the European Commission Jose Maneul Barroso, who said on October 6 that the commission (which functions as the EU executive branch) has proposed “co-ordinated action” to shore up any shaky banks to the 27 EU member states.

Shaky situations at some European banks were dramatized this week when the Franco-Belgian bank Dexia disclosed that it was near collapse, mainly because of its exposure to bad euro-debt. The bank had previously passed EU-mandated "stress tests" that were supposed to reinforce confidence in the system's stability but now, in retrospect, may be sowing more doubts in official EU reassurances. Responsibility for bailing out Dexia is now a quarrel between France and Belgium, which itself is raising questions about the possibility of needing a national bailout.

The intention now attributed to EU officials is to “recapitalize banks and [enable them to] get rid of toxic assets they may have.” Such recapitalization would mean that these banks would issue new shares of their stock – a process that could result in their being partly nationalized if the only investors willing to buy the new (diluted, but healthy) shares turn out to be their own governments.

German Chancellor Angela Merkel said this week that she favored “co-ordinated recapitalization of European banks if that was deemed necessary.” She will meet Friday with other key international players to discuss this option.

The question of whether the ECB should take the lead on buying bonds from debt stricken countries or whether this matter should be resolved by democratically elected leaders remains hotly contested. The ECB’s tools enable it to take action quickly, but there are political reasons to member states’ elected leaders confront the problem themselves.

European Affairs