Trichet Is Put to French Test

ECB Chief Aims to Gird Autonomy
As Sarkozy Seeks More Sway

By JOELLEN PERRY
July 25, 2007

FRANKFURT — France’s bid for influence over decisions of the European Central Bank has put bank President Jean-Claude Trichet in the hot seat as rarely before. Economists and central bankers say he is well-equipped to defend the bank’s independence.

Nearly halfway through his eight-year tenure running monetary policy for the $11.6 trillion euro zone, the 64-year-old Mr. Trichet has already proved he has the political skills needed to battle Nicolas Sarkozy, France’s barn-storming new president. He has also shown he is willing to tough out top-level criticism of the inflation-focused monetary policy for the ECB.

A mining engineer and economist by training, Mr. Trichet has squelched public revelations of dissent on policy from within the ECB’s governing board since he took over as president in 2003. The board includes national central-bank chiefs from the 13 countries that share the euro, from slow-growing Italy to booming Ireland.

Since Mr. Sarkozy’s election in May, he has badgered the ECB over the euro’s strength and insisted euro-zone governments should have more sway over the bloc’s exchange-rate policy. Other French officials have called for a say in setting interest rates for the zone. Mr. Sarkozy — the leader of the euro zone’s second-biggest economy, and riding the wave of an electoral mandate — has found little backing elsewhere in Europe, but his demands were well heard.

Mr. Trichet holds a lot of cards in his defense of the ECB’s independence. His tight focus on inflation is supported by most euro-zone countries, including the bloc’s biggest economy, Germany. And he is backed by hard-to-change treaties that give the ECB more political independence than the Federal Reserve.

Mr. Trichet is also riding high on the back of the euro zone’s economic recovery. Growth in gross domestic product this year is on track to rival 2006’s 2.7%, a six-year high. Inflation has been in the ECB’s preferred range of just less than 2% for 10 months.

As governor of the French central bank in the 1990s, Mr. Trichet faced down attacks by political leaders — including former President Jacques Chirac — on his anti-inflation policies. He even commissioned opinion polls to show he had public support. When the ECB raised interest rates in December 2005 from 2%, euro-zone politicians and international institutions including the International Monetary Fund howled that the bank risked squelching the bloc’s nascent recovery. “We have been fully vindicated,” Mr. Trichet said last month.

“I think he’s been very successful,” says Princeton University economics professor Alan Blinder, a former vice chairman of the Federal Reserve’s Board of Governors. Mr. Blinder noted the ECB’s achievements have come despite surging oil prices, a U.S. slowdown and a German tax increase, all of which were expected to throw off the euro-zone recovery.

Neither a larger-than-life presence like former Fed Chairman Alan Greenspan nor a professorial economist who leads the technical debate like Ben Bernanke, Mr. Trichet has a reputation for guiding decisions through diplomacy. He seeks out consensus and has kept a firm grip on the ECB’s governing board.

Still, Mr. Trichet faces a formidable opponent and some genuine concerns. Mr. Sarkozy has shown he is determined to make his mark in Europe. After seeing his call for greater government influence on the ECB rebuffed by Mr. Trichet and Germany — Mr. Trichet called France’s demands “unacceptable” — Mr. Sarkozy may now try a different approach, pushing for Europe’s governments and the ECB to take a tougher line on China’s undervalued currency. He said last week he would like to discuss the currency with Chinese authorities, and his aides have signaled he will ask other euro-zone officials to join the push.

Many economists expect the euro, which yesterday hit record highs above $1.38, to continue rising as the ECB increases interest rates and euro-zone economic growth outpaces that of the U.S.

Mr. Trichet signaled in June the ECB is likely to lift its key lending rate a further quarter-point to 4.25% in September. Currencies tend to become more attractive to investors when interest rates rise.

Mr. Sarkozy has complained the euro’s current strength hurts French exports. And while many economists say France’s troubles have more to do with foot-dragging on structural changes such as labor-market overhaul, some believe the new French president has a point.

A strengthening currency already works to brake growth and squelch inflation, so the ECB should leave rates where they are, argues Jürgen Michels, senior European economist at Citigroup in London. He worries the ECB’s eight interest-rate increases since December 2005 may not have fully worked their way through the economy.

Others say the ECB should be more transparent. The Federal Reserve is accountable to Congress, while the Bank of England has its inflation target set by the British government. Both publish minutes of their meetings and the breakdown of votes on each interest-rate decision, helping markets understand the central bankers’ thinking. The ECB’s mandate, by contrast, specifies that it should avoid all political influence, while its rate-setting decisions are taken by consensus and no minutes are published. The outside world has little insight into differing analyses within the board.

Mr. Trichet also often uses code words such as “strong vigilance,” which lets markets know a rate rise is coming in a month. As a result, the market tends to watch only Mr. Trichet’s language, rather than focusing on the bank’s economic analysis.

Mr. Trichet says the bank’s postdecision news conferences make it transparent. Defenders also say the lack of minutes and vote tallies protects national central-bank governors from political pressure at home.

While Mr. Sarkozy is unlikely to dent the ECB’s independence, some observers say he does, in fact, have a shot at giving politicians more say in euro-zone exchange-rate policy because of the wording of the treaty that established the ECB’s independence. “The treaty is ambiguous about who determines the exchange rate,” says Jacques Cailloux, euro-zone economist with the Royal Bank of Scotland in London.

Using this loophole, Mr. Sarkozy is expected to try to get euro-zone politicians unified around a common currency policy, and at a Group of Eight meeting of finance ministers in October he could aim for a statement calling on China to let its currency appreciate. That is unlikely to sit well with Mr. Trichet, who has called himself “Mr. Euro.”

Write to Joellen Perry at joellen.perry@wsj.com

TRICHET IN WSJ

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