Meet Europe's Next Central Bank Chief


By David Fairlamb Wim Duisenberg doesn't retire as head of the European Central Bank until July of next year. But the European Union leaders who gathered in Seville on June 21 have already designated his successor. In a series of private meetings in the southern Spanish city, Germany, France, and Italy unofficially agreed that the ECB's next president will be Jean-Claude Trichet, now governor of the Bank of France.

The EU's 12 other member states will almost certainly ratify the decision without discussion later this year.

A 59-year-old economist who has headed France's central bank since 1994, Trichet was a front-runner to get the top job in European monetary policymaking back in 1998, when the ECB was set up. But heads of government eventually backed Duisenberg, an anti-inflation hawk from the Netherlands who was supported by Germany. During the haggling accompanying the appointment, it was agreed that Duisenberg, now 66, would step down before his eight-year term expired and that he would be succeeded by a French nominee -- almost certainly Trichet.

L'AFFAIR LYONNAIS. The succession hasn't been without a few bumps. Trichet's chances hung in the balance two years ago, when prosecutors in Paris said they were investigating his role in the near-collapse of then-state-owned Credit Lyonnais, which cost the French government billions of dollars in the late 1980s and early 1990s. As head of the French Treasury at the time the Lyonnais scandal broke, he was responsible for signing off on Lyonnais' annual report. So long as the investigation continued, Trichet had little hope of succeeding Duisenberg.

All changed on June 2, when French judges recommended no action be taken against Trichet. Newly reelected French President Jacques Chirac was quick to seize the moment. He reminded his senior European partners of the Frenchman's claim to taking over from Duisenberg.

Germany has been privately attacking France in recent weeks for not being in a position to balance its budget by 2004, as Chirac had publicly pledged to do. Nonetheless, it quickly backed Trichet. "We are annoyed by the French government's failure to live up to its budgetary commitments," says a German financial official. "But we think that Trichet is the best-qualified person to take over from Duisenberg, so we have no trouble endorsing him."

BALANCING ACT. Trichet has made it plain he wants France to pull out all the stops to balance its budget and support the spirit of the Stability & Growth Pact, which calls on the 12 EU countries that use the euro to balance their budgets over the medium term. "The Stability & Growth Pact is a crucial part of economic and monetary union in Europe," he said on June 17. If governments do not adhere to its strictures, he warned, the markets could react negatively, possibly pushing down the value of the euro and driving up the interest rates the euro-zone governments must pay to borrow money.

Trichet will take over as ECB president at a crucial time. The EU is preparing to expand to the east and south by taking in up to a dozen new countries, the most important being Poland, Hungary, and the Czech Republic. The countries will all eventually introduce the euro and become members of the ECB.

At present, monetary policy in the euro zone is set by the ECB's 18-member governing council, made up of the central bank governors from the 12 nations that use the euro and the 6 members of the ECB's executive committee. The ECB's governing council is already too big to operate effectively, critics says. And things can get only worse when a dozen more central bankers get seats at the table.

DEFINING STABILITY. So, the council will need to be streamlined, possibly by abolishing the automatic right of all euro-zone central banks to be represented and by finding a new way to choose its members. Trichet could play a central role in rewriting the rules, and, given the national sensitivities involved, it's bound to be a controversial process.

Then, the next president will need to review the factors the ECB takes into account when setting monetary policy and to revise its definition of what constitutes price stability, say influential pundits such as Jürgen von Hagen, head of the Center for European Integration studies.

At present, the ECB is mandated by the Treaty of Maastricht to ensure that prices remain stable. What's stable? The bank defines it as being when the inflation rate is 2% or less. Many economists say the definition is too strict, and that it forces the ECB to keep interest rates higher than the economy needs.

A higher ceiling of 2.5% or 3% would give the central bank more room to maneuver, and the economy more room to breathe, they say. One reason the U.S. economy has outperformed Europe's in recent years is that the U.S. Federal Reserve Board has been more relaxed than the ECB when it comes to inflation, say reform advocates.

A COMMUNICATOR. Trichet is credited with successfully managing France's entry into monetary union by squeezing inflation in the second half of the 1990s and by keeping the franc strong against the German mark. Despite his prowess at fighting inflation, however, he's generally considered to be less of a hawk than Duisenberg. He could well be willing to accept a slightly higher inflation rate in a bid to foster faster economic growth, some reformers hope.

Don't expect far-reaching change, though. At the end of the day, Trichet is almost as committed to monetary probity as Duisenberg is. The best way to bolster the European economy while keeping inflation low, he says, is for governments to liberalize their sclerotic labor markets and push through other such structural reforms. That will give business room to grow without pushing up prices, he argues.

One area where Trichet does differ from Duisenberg is in the ability to communicate clearly and effectively with the markets. Duisenberg's stint at the ECB has been marred by a series of embarrassing communications gaffes, mainly involving off-the-cuff comments being misinterpreted by currency traders and monetary economists.

Trichet measures his words more carefully and is less inclined to speak extemporaneously. Even if the ECB's policies don't change greatly, its relationship with the markets will probably improve significantly under its next head. Fairlamb covers the ECB from BusinessWeek's Frankfurt bureau


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