Oct. 20 (Bloomberg) -- France has never made a secret of its belief that it is entitled to install a Frenchman at the helm of the European Central Bank. Now it will have its way: European Union leaders voted unanimously last Thursday to confirm Bank of France President Jean-Claude Trichet as the second president of the ECB.

Trichet will take over from retiring ECB president Wim Duisenberg on Nov. 1.

The ECB under Duisenberg was remarkably conscious of preserving its independence on questions concerning monetary policy.

Yet the succession history is another story. The circumstances surrounding the installation of Trichet raise higher-level concerns about the bank's having become a political trophy that will be passed from one large European country to the next in succession.

The French were so insistent on Trichet's getting the job they managed to persuade Duisenberg to agree to early retirement. He is stepping down after serving only 5 1/2 years of his 8-year term.

What a nice guy, this Wim Duisenberg. Not only did he agree to bow out but also to be flexible on the date of his departure. Originally this was supposed to have been in July.

Credit Lyonnais

Then Trichet's legal problems intensified as a result of the bogus-accounting scandal at Credit Lyonnais SA, arising from practices in 1992 and 1993, when the bank was state-owned and he was head of the French Treasury.

Duisenberg agreed to stay on while Trichet fought in court. In effect, he was keeping the seat warm for Trichet.

A French court acquitted Trichet in June, clearing his way to the ECB throne.

In truth, everyone seems to like Trichet for professional reasons. He will probably make a perfectly competent head of the ECB.

What will make his new job difficult is the way he came to office. The position ought to go to the best central banker in the European Union. And while that might well be Trichet, he faces having to prove he didn't get his post simply because he is French or because French President Jacques Chirac placed him in the job.

`Stability Pact'

Chirac has been openly frustrated with the European Union's stance on budget deficits and taxes, and with the ECB for now lowering interest rates in the current growth slowdown.

One of Trichet's challenges will be to maintain the central bank's support for the EU budget accord, known as the ``stability pact.'' The EU seeks to limit the fiscal deficits of member nations to no more than 3 percent of gross domestic product. France is notoriously in violation of the accord, as is Germany.

Asked earlier this month about this issue, Trichet diplomatically responded: ``The ECB's position, as stated by (ECB President) Wim Duisenberg, is to say that we attach importance to the stability pact and its terms being respected.''

Not exactly a ringing endorsement of the budget pact, one would have to say. Worse yet, Trichet stated during his hearing at the EU parliament's monetary committee that the role of the ECB was to fight inflation, not to punish France and Germany for their deficits.

Monetary Policy

Sounds like a waffle, but maybe Trichet can get away with being coy on budget deficits. He can't escape responsibility for monetary policy.

Duisenberg was recently asked if he had any advice for Trichet on monetary policy. His answer: ``That he would be transparent, attentive and prudent, and that he follow our monetary policy strategy.''

The last part of the statement is the key, because follow ``our'' strategy means keep the ECB on its strict monetarist path.

Unlike the Federal Reserve and the Bank of Japan, the ECB pursues a single prime objective of keeping stability in domestic prices. The ECB wants to see consumer price inflation not exceed 2 percent per year. That is the goal, period. What is not included in the agenda is using monetary policy to promote growth and job creation.

Growth Test

What plagued Duisenberg was that euro zone growth was slowing at a time (from mid-2000 to present) when inflation was technically above the ECB's 2 percent target.

Though the ECB eventually did lower its short-term interest rates, critics charged that what was done was too little and too late from a growth perspective.

This will test Trichet's mettle even more than the issue of budget deficits.

Let's see what he does when the pressure starts for him to support lowering interest rates at once. Growth in the euro zone is negligible.

Even if he stands his ground now, he will be tested again when, and if, the member countries' economies begin to pick up.

Look for the politicians to demand that Trichet delay raising interest rates for as long as possible, even if inflation exceeds the 2 percent target.

If he can deal with that situation, then maybe he is the man to run the ECB.

Last Updated: October 20, 2003 08:33 EDT