EUROPEAN CENTRAL Bank (ECB) chief Jean-Claude Trichet faces questions today about the bank’s independence as its governing council holds its first rate-setting meeting since its decision last month to buy government bonds.
After the last meeting – in Lisbon on May 6th – Mr Trichet famously said the council did not even discuss the possibility of such an intervention.
The ECB went down that very road only four days later, as euro-zone finance ministers agreed with the European Commission and the International Monetary Fund (IMF) to establish a €750 billion rescue net for distressed single currency countries.
While Mr Trichet had come under huge pressure from French president Nicolas Sarkozy to buy up government paper, he has insisted there was no breach of the bank’s independence.
With the bank expected to hold its core interest rate at a historic low of 1 per cent today, markets will be watching the meeting to see whether the bank takes any further measures to add liquidity to the financial markets.
The decision to purchase government bonds was publicly opposed by Bundesbank chief Axel Weber – who is favourite to succeed Mr Trichet when he retires in 17 months – in what was a rare display of internal dissent.
Allies of Mr Trichet contend, however, that the measures were required to contain extraordinary pressure rippling out from the Greek crisis. “These are circumstances that cannot be captured in any normal framework.”
The move was the third in a series of big policy U-turns by the bank.
The ECB did not want the IMF involvement in the €110 billion Greek rescue but reluctantly agreed when German chancellor Angela Merkel insisted on the involvement of the Washington-based organisation.
The bank has also revised its collateral rules to offset the impact of the junk rating on Greek debt, a move that defied Mr Trichet’s own policy of not making special concessions for any single member of the single currency.
In a speech in Frankfurt yesterday, Mr Trichet said Europe must strengthen economic governance and press ahead with integration to emerge stronger from crisis.
“Some observers have said that the solution to our difficulties lies in more – not less – European integration and I agree with this view,” he said.
“Just as the idea of statehood is that citizens gain from acting collectively, the EU embodies the idea that nations also gain from acting collectively.
“This discussion is taking place, not because we have failed, but because we have been successful. Europe has succeeded in virtually everything it has sought to achieve.”
Bloomberg News – citing a quarterly poll of investors – said 73 per cent of participating subscribers believed Greek default was likely, implying serious doubt about efforts by Mr Trichet and the European authorities to contain the crisis. However the bank’s response to the crisis has won support in recent days from the IMF.
