ECB Cites Independence after Merkel Slap

The European Central Bank defended its independence on Thursday (4 June) as doubts grow over how long current Eurogroup chairman Jean-Claude Juncker will remain in his post.

Speaking after a two-day meeting of the ECB's governing board, the bank's president, Jean-Claude Trichet, revealed he had held a telephone conversation with German Chancellor Angela Merkel on Wednesday as a result of criticisms she made earlier in the week of current central bank policies.

Mr Trichet said he defended the bank's "fierce independence" in the telephone call, saying current decisions were based on the "extraordinary" economic circumstances that have gripped the Eurozone since the start of the financial crisis.

The ECB president reminded the German chancellor that decisions were made without "bowing to pressure," but added that a clear exit strategy was also vitally important.

"What we do today should not hamper medium-term price stability which is in the interest of all our citizens," he said while refusing to be drawn on who had phoned whom.

In a prepared speech on Tuesday, Ms Merkel lashed out at the US Federal Reserve and the Bank of England, saying she viewed their policies with "great scepticism" and that they would ultimately lead to more economic turmoil.

"The European Central Bank has also bowed somewhat to international pressure with the purchase of covered bonds," she added, highlighting her concerns that the extra liquidity will lead to future inflation.

Mr Trichet confirmed on Thursday that the bank's purchases of covered bonds – the type of bonds used by banks in the funding of loans – of up to €60 billion will go ahead, starting in July of this year and likely to run until June of next year, with their distribution spread across the euro area.

The aim of the purchases is to provide further capital to European banks in a bid to kick-start normal credit flows. The issuance of covered bonds enables financial institutions such as banks to finance the mortgages and public sector loans they give out.

ECB board members decided to hold interest rates at their current historical low of one percent on Thursday, saying they were "appropriate" under the current circumstance but not necessarily at their lowest limit.

Mr Trichet said he expects positive growth to return to the Eurozone mid 2010.Juncker to end eurogroup chairmanship?

While the ECB was vigorously defending itself, fresh doubts emerged on Thursday over how long Eurogroup chief Jean-Claude Juncker – also the current prime minister and finance minister of Luxembourg – will remain in the post.

Luxembourg holds parliamentary and European elections on Sunday, with Mr Juncker indicating he will stay on as prime minister but give up his position of finance minister if his CSV party wins another term.

Precedent would suggest that Mr Juncker would then resign his Eurogroup chairmanship – the post is traditionally held by a finance minister – although he has been unclear on this subject.

"This does not necessarily imply that I will leave the presidency of the Eurogroup. It could be but it is not compulsory," he told Reuters on Thursday.

As head of the Eurogroup since 2005, Mr Juncker has chaired monthly meetings of euro area finance ministers with some success, his term being extended last September until 2010.

However, criticism this year from Germany and France over Luxembourg's banking secrecy rules has somewhat soured Mr Juncker's relationship with the two euro area heavyweights.

Speculating on the Luxembourg premier's next move, Daniel Gros, director the Centre for European Policy Studies, a Brussels-based think-tank, told EUobserver he felt Mr Juncker would most likely hold the post for the remainder of this year.

"Maybe he will stay on for a little bit and then towards the end of the year when we have the Irish referendum cleared, a new commission and a permanent president for the European Council ... At that point it may be the time to look at his position," said Mr Gros.

He added that under normal circumstances, the work of the Eurogroup did not require the seniority of a prime minister.

Before falling out with Berlin and Paris, Mr Juncker had been mooted as a possible candidate to take up the new position of a permanent president of the European Council, a post that would be created if the Lisbon Treaty were to be ratified.

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