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ECB ups the ante on “economic government” – Part 1

Finance Blogger: Anthony Harrington Anthony Harrington

Not surprisingly, given the turbulence in the markets over the last month, the European Central Bank (ECB) president Jean-Claude Trichet has been engaged in a fairly hefty speech making “offensive”, explaining the ECB’s view of how things stand and where they should be going.

How they stand, according to Trichet, is that the ECB remains focused on price stability above all things (that is its mandate, after all), and that prices remain stable with inflation under 2%. When the French newspaper, Le Monde, asked Trichet during the course of a lengthy interview, if the euro was in danger, his reply was, and I quote: “The euro is a very credible currency which keeps its value.”

This, despite the euro getting a right royal kicking in recent weeks, which saw it sinking to a four year low against the dollar. But Trichet was speaking of its “intrinsic” value, in euro land, i.e. it’s ability to resist inflation, not its exchange value, which certainly has not stayed constant (but then one wouldn’t expect it to.)

The problem, he told Le Monde, lay not with the euro, but with the fact that “close multilateral surveillance (of individual national fiscal policy), which is fundamental in the spirit and the letter of the Stability and Growth Pact, has been terribly neglected.” What is needed is a much tighter deployment of “collegiate responsibility”, where the euro states get tough on any member breaking ranks as far as fiscal discipline is concerned.

In fact he went far further than that in the Le Monde interview, calling, in as many words, for “the equivalent of fiscal union”:

“We have some very serious problems and we need to draw some serious lessons. The supervision of fiscal policies, of developments in competitiveness in the euro area economies and of structural reforms needs to be radically improved. We are a monetary union. We now need the equivalent of a fiscal union in terms of monitoring and supervising the implementation of policies on public finances.”

In this Trichet and the ECB are simply supporting the mainstream thrust of the conclusion reached by the European Finance Ministers in their meeting in May. The Finance Ministers were broadly in favour of submitting their national budgets to some kind of peer review before enacting them. In fact from his speech it seems clear that Trichet would like to see a formal economic union, but he knows that the chances of all the member states agreeing to give up national sovereignty to meld into a government of Europe are zero. Here’s his view of the next best thing:

“As a first attempt, we have to take the Treaties as the starting point, as they stand. However, if we fully exploit everything that the Treaties permit and greatly improve the “secondary legislation” from Brussels, I believe that we will be able to make the “quantum leap”, the radical improvement that I would like. Europe, as an historic construction, has often been able to make radical progress during times of difficulty and crisis. The Governing Council of the ECB is ready — within the scope of its responsibilities — to help Europe to make essential, new progress.”

What is this “new progress”? It is, of course, progress to fiscal union, the very thing that British euro sceptics, for example, fear most.

The Le Monde journalist then raises a very important question, namely whether it is OK for a non-democratically elected body such as the Commission, to grant itself a supra-national inspection right, namely the right to inspect and veto members’ budgets. Trichet’s answer is that this would only happen if the governments of the Eurogroup agreed to it, and they have perfect democratic creditials, so where is the problem?

There is, quite clearly, a mood abroad in Euroland to tighten up fiscal policy, but despite some good will at finance minister level, moving beyond individual pledges to some kind of formalised structure still looks difficult to achieve. Which leaves Euroland with the same contradiction as always, monetary union, but no fiscal union…

Further reading on sovereign debt and the ECB

Tags: European Central Bank , European Monetary Union , financial crisis , fiscal stimulus , regulation , sovereign debt
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