Ireland not euro zone's weakest link, says Trichet
“IRELAND IS certainly not the weakest link of the euro area,” the president of the European Central Bank (ECB) said yesterday.
Speaking at the European-American Press Club in Paris, Jean-Claude Trichet said: “There is no weak link. The euro area is a very intertwined, single-market economy with a single currency. Speaking of any particular country in the euro area as a weak link is an error of judgment.”
The German finance minister, Peer Steinbrück, suggested on Monday that members of the euro zone might have to bail out countries facing payment difficulties, though this was not foreseen in euro-zone regulations.
Mr Trichet seemed to discount the possibility. “I consider that it is extremely important that each government is fully responsible for its own policies, and for its own fiscal policies particularly,” he said.
“The first responsibility lies with the various governments concerned. It seems to me implicit in what minister Steinbrück said. I have no other comment.”
The European Commission on Wednesday initiated disciplinary procedures against Ireland, France, Greece, Latvia, Malta and Spain for running excessive public deficits. Mr Trichet did not mention any of the six by name but said that “the fact the commission has initiated excessive deficit procedures is a good thing”.
“The commission had to do it,” he added. “Confidence today depends on correctly calibrating decisions, and on the ability of leaders to demonstrate that . . . things will return to normal. We must never lose sight of the medium and long term.”
The ECB president chose his words carefully, speaking of “tension” rather than “crisis”, and “turbulence” instead of “recession”.
Asked how long the crisis was likely to last, he said: “Since the start of the turbulence, I’ve been asked many times: ‘Is the worst over? Is the worst ahead of us?’”
He said he always replies: “We are experiencing a market correction of first magnitude. It is an ongoing process, largely an uncertain process. We are in uncharted waters.”
Mr Trichet called the crisis “the first full-scale, very, very difficult test of the globalised economy we built progressively, almost biologically, by spontaneous evolution, under the pressure of globalisation, extraordinary technological innovations and the unification of the world after the collapse of the Iron Curtain.”
Historic, economic, technological and scientific factors “contributed to profoundly change the structure of the world economy. He advised against looking for scapegoats, because the responsibility was diffuse and widespread.
“All must change. We must consider that the entire system has shown itself to be too fragile, not resilient enough. We must patiently build a world market system, with no quick fixes. Of course it will be a market, the only system that creates wealth, but with what is needed to resist crashes and fluctuations.”
The “primary objective” of the ECB was maintaining price stability, which Mr Trichet defined as price increases of below, but close to, 2 per cent. Since the euro was created, inflation in the euro zone has averaged 2.2 per cent.
The ECB is responsible for steering short-term interest rates, but since last September, when money markets virtually ceased to function, it has prevented a liquidity crisis by providing unlimited refinancing to the banks of the euro zone, Mr Trichet said.
The ECB has temporarily extended the list of assets eligible for use as collateral. Through an agreement with the US Federal Reserve, it is providing unlimited access to dollars. Because of these steps, “the Eurosystem’s balance sheet rose by around €600 billion since June 2007”, Mr Trichet noted.
ECB measures were able to overcome the liquidity shortage in the interbank market. “However, they cannot eliminate the increased concerns regarding credit risk,” he said. “In this regard, the conditions in the money market have not yet normalised and remain strongly affected by an elevated degree of risk aversion.”
Prior to the crisis, repeated warnings by central bankers were not heeded, Mr Trichet said. Now there is “an emerging consensus” that central bankers, who “have no short- or medium-term vested interests”, should be given more responsibility for economic policy-making.
“I have indicated publicly that we are available, if Europe thinks we can be useful. Article 105.6 of the Maastricht Treaty foresees the possibility of giving more responsibility to the European Central Bank.”
Mr Trichet referred repeatedly to the necessity of restoring confidence in economic and financial systems. It was “an abrupt loss of confidence striking simultaneously the financial system as well as the real economy, the industrialised countries as well as the emerging economies”, that precipitated the crisis last September.
“Confidence is the condition for returning to a normal situation. We are doing everything in our power to strengthen it,” he said.