Trichet: A Fresh Start for Europe?
Banque de France Governor Jean-Claude Trichet will have his work cut out for him when he takes over from Wim Duisenberg as president of the European Central Bank in November. Duisenberg, with his rigid policy on interest rates, became something of a punching bag for the ECB's critics. Many are hoping Trichet will give the the bank a fresh start. With more than 300 million people -- and a $7.7 trillion euro zone economy -- affected by his monetary policies, Trichet's first goal should be to get Europe moving. Sluggish growth in France, Germany, and Italy is pulling down the whole Continent. That means persuading hawkish fellow members of the ECB's governing council to cut rates from their current 2% level. With inflation trending down, there is clearly still room for monetary stimulus.
Trichet should also push his ECB colleagues to raise their mandated ceiling on inflation from 2% to 2.5% or even 3% for short periods, especially when food and energy prices spike up. This would allow the bank to keep rates lower for longer and to shoot for a medium-term inflation target. Trichet also needs to use his central bank pulpit to goad reluctant European leaders into sweeping out arcane work rules and retirement formulas that stifle growth and investment. It's ironic that France, his home country, imposes some of the most rigid rules, such as the 35-hour workweek, despite Trichet's internal criticism.
The inside of the ECB also needs work. Although only five years old, it operates like an old men's club, where consensus matters more than good policy. Trichet needs to have a voice over the all-powerful staff, which now writes policy. He also needs to accept that full disclosure of the bank's votes and a public discussion of its policy debates is the only way to build Europewide support. The Federal Reserve, the Bank of England, and the Bundesbank have all learned that sharing their decision-making with the public is the best way to safeguard their independence.
Under the cautious Duisenberg, the fledgling ECB sought to establish its credibility while it rolled out Europe's new currency, the euro. Now, however, it faces a much bigger challenge. Starting next year, as many as 10 new countries will be joining the European Union. Many of them, such as Poland, have dynamic growth potential. Trichet needs to show that the ECB can be flexible enough to accommodate their interests while getting growth out of Western Europe. And he'll have to justify his management to the largest collection of nations ever put in one monetary area.
Under the bank's charter, the president is technically a co-equal with his 17 other colleagues. But knowledge and force of personality matter greatly. Trichet will arrive in November with a reputation for sharp political instincts and a polished diplomatic demeanor. Many European economists, politicians, and business folk hope he will put these skills to good use on behalf of a more dynamic and prosperous Europe.