Eurozone to lose ‘de facto president’ when Trichet goes

WHEN Jean-Claude Trichet retires on October 31, the euro area may lose more than just a European Central Bank president.

Mr 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 Mr Trichet, the central bank showed itself more willing and able to act than the bloc’s 17 finance ministers and government leaders.

“Mr 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 eurozone bond markets, Mr Trichet has taken the ECB further into uncharted territory to protect the currency.

In his latest attempt to stop the debt crisis from spreading, he 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 €800 billion.

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.

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 their debt.

A lack of political cohesion in Europe has forced Mr Trichet to take the lead role in tackling a crisis that began with Greece’s fiscal meltdown more than 18 months ago.

As heads of state disagreed, they increasingly turned to Mr Trichet for guidance, and to win time.

While leaders have agreed to allow the European Financial Stability Facility 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. Mr Sarkozy and Ms Merkel want this done by October.

“Mr Trichet has found himself between a rock and a hard place,” said Julian Callow, of Barclays Capital in London.

“By nature conservative yet pragmatic, he’s often had to step up because he saw the politicians were not capable of acting.”