Jean-Claude Trichet stood on a stage at Washington’s Willard Hotel, leafed through his prepared speech, and cast it aside.
The reason for the European Central Bank president’s Sept. 23 ad-libbing: a desire to rebut what he called the “particularly gloomy” economic outlook of the previous panel featuring former U.S. Treasury Secretary Lawrence Summers and Pacific Investment Management Co. chief executive officer Mohamed El-Erian.
“The overall picture when you look at the euro area as a whole is very, very different from the perception,” Trichet said in his Washington speech to a conference organized by the Bretton Woods Committee.
Taking on American economists and investors has become a regular feature of Trichet’s final days atop the ECB. Since mid- June he has delivered three speeches in the U.S. defending his 17-nation economy against critics who say it’s riddled with fault-lines threatening the single currency he helped build in three decades of policy making. His tenure ends Oct. 31.
Trichet says that the euro-area’s strengths are too often “overlooked,” as are its similarities with the U.S., and he suggests the region’s monetary and fiscal policies are misunderstood. His argument resonates because naysayers were taking potshots at the euro even before it began trading in 1999.
U.S. Skepticism
“There is widespread skepticism toward the euro in the U.S.,” said Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington. “As far back as the 1990s there was talk the euro wouldn’t happen and wouldn’t work, but it did.”
Among those skeptics was Harvard University Professor Martin Feldstein, who wrote in a 1998 paper that monetary union would prove an “economic liability” because divergent economies couldn’t fit under one monetary roof. Milton Friedman, the Nobel laureate who died in 2006, said “it’s highly unlikely that it’s going to be a great success,” and would splinter as soon as the “global economy hits a real bump.”
Former Federal Reserve Chairman Alan Greenspan disclosed in the German version of his 2007 memoir that he had doubted the euro would happen. Nobel laureate Paul Krugman warned its economy may be dogged by deflation.
Figuring It Out
U.S. Treasury Secretary Timothy F. Geithner is also pressuring Europe, saying Oct. 6 its crisis poses a “significant risk to global recovery.” He and Trichet will this week attend a Group of 20 finance chiefs meeting in Paris.
Even as the debt crisis roils markets and threatens to tip the world back into recession, the euro is stronger than the average value during its lifetime, evidence that investors agree with Trichet about its survival. Six of the euro’s 17 members still have AAA ratings at Standard & Poor’s, which the U.S. lost on Aug 5.
“The Europeans will figure it out,” Citigroup Chief Executive Officer Vikram Pandit told Bloomberg Television on Sept. 29. “They’ll get through the debt crisis and get to the other side being fully committed to the euro and the euro zone.”
Nevertheless, the 19-month debt turmoil is hardening the opinions of doubters. Feldstein told Bloomberg Television on Sept. 2 that the euro has proved a “failure” and Greece should take a “holiday” from it. Krugman wrote in his Sept. 12 New York Times column that the euro could collapse in “a matter of days.”
Likely to Shrink
Pimco’s El-Erian said at the September Willard Hotel event that the rot has reached Europe’s “core,” at least one euro member will restructure its debts, and that politicians needed to choose between a fiscal union or smaller euro zone. Summers, who in 1997 said there are “serious economic challenges that will have to be overcome” if the euro is to succeed, complained of “grudging, incrementalist” policy decisions in Europe and urged leaders to fix the continent rather than focus on Greece.
“In a three to five year horizon I would expect there is a good probability the euro zone is going to be smaller than the current size of it,” Nouriel Roubini, chairman of Roubini Global Economics LLC, said in an Oct. 3 interview.
This is the chorus that Trichet is seeking to silence, even as he acknowledges some European governments behaved “improperly” by disregarding fiscal discipline and says leaders must accelerate efforts to beat the crisis and take steps to avoid a repeat. He also wants banks to reinforce their balance sheets.
Growth Argument
ECB officials “are not blind and we are not hiding,” Trichet said Sept. 23.
One of his arguments is that critics miss the euro zone’s strengths. In an Aug. 27 speech to fellow central bankers in Jackson Hole, Wyoming he estimated that the region has logged per-capita growth of around 1 percent a year since 1999, just below the U.S.’s 1.1 percent, and that the figures match once adjusted for population growth. During that time, the euro-area has created 14 million jobs, six million more than the America, he said.
Four weeks later in Washington, he noted the euro-area will run a budget deficit of about 4.5 percent of gross domestic product this year and its current account is broadly in balance, better than “other advanced economies.” The International Monetary Fund predicts a U.S. budget shortfall of about 10 percent this year and a current account deficit of 3 percent.
Parallel Lines
To refute the charge that the economy he oversees is too diverse to corral, Trichet tasked his economists with drawing parallels and differences between the 17 euro nations and 14 U.S. metropolitan areas. The study found that prior to the financial crisis which began in 2007, regional growth rates for both areas differed by about 2 percent, while inflation diverged by 1 percent.
The economists found similarities in pockets of boom and bust, as well as territories facing long-term structural challenges. Spain and Ireland are mirrored by Nevada and Florida as locales where house prices outpaced the averages of neighbors. Onetime manufacturing U.S. powerhouses Michigan and Ohio have suffered below-average growth like Portugal.
It is “often assumed that the U.S. economy would be significantly more homogenous than the economy of the euro area,” Trichet said in Jackson Hole. “Looking more closely at the regional dispersion across U.S. regions and euro area economies does not confirm this.”
European Unification
Honors may be even, said Allen Sinai, president of New York-based Decision Economics Inc., who attended recent speeches by Trichet. He says the Frenchman is right to defending the central bank’s work, yet wrong to argue the euro area cannot fracture.
“Jean-Claude Trichet has been a man on a mission dedicated to the political unification of Europe, but Europe is on the wrong track,” said Sinai. “As a central banker, he is a hero.”
Countering criticism from Roubini and Krugman that the ECB is too focused on inflation and was wrong to raise its benchmark interest rate twice this year, Trichet says delivering price stability is the best thing the ECB can do for its economy. To ease the financial system, the ECB was the first central bank to respond to the credit crisis in 2007 and has kept pumping banks with liquidity since then, he said in Washington.
The ECB left its key interest rate at 1.5 percent on Oct. 6, yet Trichet announced it will offer one-year loans to banks and resume purchases of covered bonds from next month.
Democratic Imperative
While acknowledging the economic policy errors of European governments, Trichet also defends their need to observe democracy by taking time to win parliamentary approval for the crisis-fighting measures they agreed July 21, adding that sovereigns outside his continent also over-spent. It took two votes of Congress to pass the Troubled Asset Relief Program in 2008, while the U.S.-led push to “spend, spend, spend” during the recession was not the best advice for all, he says.
Americans cite Europe’s lack of labor mobility and cross- border fiscal transfers as undermining its claims to construct an optimal currency zone, according to a January 2010 paper co- written by Lars Jonung, a professor at Sweden’s Lund University, when he was a European Commission adviser. The lack of a Federal Reserve-like unemployment goal also prompts criticism.
Now while he says he is “less optimistic” about the future of the euro than he was when he wrote the paper, Jonung says neither Trichet nor his opponents are right.
“U.S. economist were critical of the euro, but nobody mentioned Greece was cheating and under-reporting deficits,” he said. “Trichet of course has to defend the project, but he has to be optimistic.”
To contact the reporter on this story: Simon Kennedy in London at skennedy4@bloomberg.net
To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net
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