Bloomberg News

Trichet Calls for Euro Finance Ministry as Crisis Deepens

June 02, 2011

(Updates with comment from economist in ninth paragraph.)

June 2 (Bloomberg) -- European Central Bank President Jean- Claude Trichet said governments should consider setting up a finance ministry for the 17-nation euro region as the bloc struggles to contain a region-wide sovereign debt crisis.

“Would it be too bold, in the economic field, with a single market, a single currency and a single central bank, to envisage a ministry of finance of the union?” Trichet said in a speech today in Aachen, Germany. He also favors giving the European Union powers to veto the budget measures of countries that go “harmfully astray,” though that would require a change to EU Treaties.

Trichet, one of the architects of the Maastricht Treaty that founded the euro, is setting out his vision for how the currency can be better managed just months before he retires and as European officials rush to put together a second bailout plan for Greece. Last year’s 110 billion-euro ($159 billion) rescue failed to prevent an investor exodus from Greece, which has been saddled with Europe’s highest debt load amid a three-year economic slump.

Ireland and Portugal also had to ask for European aid as borrowing costs soared on concern the countries wouldn’t be able to tame their budget deficits.

Ministry Functions

German government bonds fell after the remarks before regaining ground. The 10-year yield was little changed at 2.99 percent as of 12:44 p.m. in London. Greek two-year notes erased a decline to leave the yield little changed at 24.54 percent. The euro rose more than a quarter cent to as high as $1.4486.

Trichet, who has no formal power over government decision making, hasn’t said what he plans to do when he leaves the ECB at the end of October. He said today that while any single finance ministry would “not necessarily” administer “a large federal budget,” it would “exert direct responsibilities in at least three domains.”

These would include “first, the surveillance of both fiscal policies and competitiveness policies” and “direct responsibilities” for countries in fiscal distress, he said.

It would also carry out “all the typical responsibilities of the executive branches as regards the union’s integrated financial sector, so as to accompany the full integration of financial services, and third, the representation of the union confederation in international financial institutions.”

Europe’s Paymasters

“Germany and France as the paymasters of Europe are unlikely to go with this proposal,” said Tobias Blattner, a former ECB economist who now works with Daiwa Capital Markets Europe in London. “While the ECB has been pushing for closer fiscal integration throughout the crisis, Trichet’s proposals stop short of making this a proper treasury as he’s not mentioning enabling this institution to issue common bonds and it won’t have a budget.”

Trichet said that any new form of fiscal governance would need to be “decided by the people of Europe” and that the EU president, the European Commission and the German finance ministry are sure to have their own views. Calls to the German finance ministry for comments on Trichet’s proposals were not immediately returned. Officials at the French finance ministry declined to comment.

The absence of a European Treasury has drawn criticism in the past, including from billionaire investor George Soros who said as far back as 2009, before the sovereign-debt crisis erupted, that the lack of a common European fiscal authority is among the “issues that need to be confronted.”

Ad Hoc Plans

Dealing with the crisis on an “ad hoc basis looks pretty much played out now,” Niall Ferguson, a history professor at Harvard University, said in an interview with Deirdre Bolton and Erik Schatzker on Bloomberg Television’s “Inside Track.” “People’s minds are turning to the idea of some kind of permanent fiscal control. Nobody should pretend otherwise.”

Trichet has on many occasions voiced his frustrations at Europe’s finance ministers’ handling of the crisis, which effectively left the ECB to shoulder the main burden by buying distressed government bonds in the secondary market and support Europe’s economy by slashing interest rates to a record low.

The ECB is now one of the main holders of Greek government debt and, along with European lawmakers, may ask investors to reinvest in new debt when existing bonds mature, said two officials familiar with the situation.

Trichet signaled the current situation is not ideal. While financial aid is “justified” for any troubled country “in the context of a strong” adjustment program, “if a country is still not delivering, I think all would agree that the second stage has to be different,” he said.

In this second stage, European authorities could take decisions “applicable in the economy concerned,” he said, adding that this could include the “right to veto some national economic policy decisions.”

--Editors: Fergal O’Brien, Andrew Atkinson

To contact the reporters on this story: Christian Vits in Frankfurt at cvits@bloomberg.net; Gabi Thesing in London at gthesing@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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