Debt crisis defines Trichet's tenure at ECB

Outgoing European Central Bank President Jean-Claude Trichet
Image caption Mr Trichet resisted calls for the ECB to lend money to the eurozone bailout fund

For the first half of Jean Claude Trichet's eight years in charge of the European Central Bank (ECB), everything seemed to be going reasonably well.

The eurozone economy grew at a respectable rate, inflation was moderate and the financial system was stable. Life at the ECB was just how another central banker said it should be - boring (Mervyn King of the Bank of England, if you want to know). What more could Mr Trichet have been expected to deliver?

To state the obvious, the good times didn't last. That period of calm was uneven. Some economies were growing robustly, notably the Republic of Ireland and Spain. Others, such as Italy and Portugal, were much weaker.

Today that is a familiar looking group of countries - all four have joined Greece on the eurozone's sick list.

Inevitably, it is the debt crisis that gives rise to the most pointed criticism of Mr Trichet. Strikingly, some say he didn't do enough, others that he did too much.

'Credit boom'

But first, did the ECB under his leadership do enough to prevent the crisis happening?

Daniel Gros of the Centre for European Policy Studies in Brussels says the ECB allowed the money supply to expand faster than their target, which led to a credit boom.

"They should have known that when you have a credit boom, you sooner or later have a bust, and they did not anticipate that," he says.

When the crisis came, the ECB did respond. It provided extra loans to the banks, and it has intervened in the market for government debt, buying the bonds of countries in difficulty.

But Mr Trichet has opposed the idea of countries having their debts reduced.

He also resisted proposals, favoured by the French President Nicholas Sarkozy, for the ECB to lend money to the European Financial Stability Facility, the eurozone's bailout agency, to boost its capacity to help governments in financial difficulty.

Mr Gros says Mr Trichet was very flexible in the early stages, but he failed to recognise the depths of the crisis. He says the key is providing enough liquidity - loans - for banks and governments, and on that he says, "the ECB has failed".

Raising rates

Gabriel Stein of Lombard Street Research also has a mixed assessment of Mr Trichet.

Until the Greek crisis, "[the ECB] had a difficult hand dealt to them and they played it quite well", he says. But thereafter, he argues, the ECB under Mr Trichet continued to focus too much on inflation, rather than financial stability.

Image caption Mr Draghi, the incoming ECB head, is seen by some as more pragmatic than Mr Trichet

The interest rate rise in July 2008 was a mistake, he says, and even worse was the resistance to doing anything to help Greece.

Paul Krugman, the Nobel Prize winner, writing in the New York Times, criticised the ECB for "trying to head off inflation risks that only exist in its imagination".

But there are critics on the other side, especially in Germany. Two senior German central bankers have stepped down amid reports that they were unhappy with the ECB's policy of buying government bonds. The policy has helped keep interest rates on, for example, Spanish and Italian government borrowing under control.

Those bonds are bought with newly created money, which could create an inflation risk - though the ECB insists that is not a problem.

It can also been seen as rescuing governments that have failed to manage their finances properly, a so-called moral hazard problem that encourages future profligacy.

The German President Christian Wulff has even questioned the legality of the bond buying programme. And Sigmar Gabriel, the leader of the main German opposition party, the Social Democrats, has accused Mr Trichet's policy of turning the ECB into a bad bank by buying these problem assets.

That criticism, when put to him by a journalist, led to the rare spectacle of Mr Trichet losing his cool. The ECB's record on inflation was, he said emphatically, "impeccable, impeccable".

His successor is Mario Draghi, who leaves the post of Governor of the Bank of Italy. Mr Gros thinks he is more pragmatic than Mr Trichet; less averse to unorthodox central bank action. Mr Gros also thinks the ECB is the key to fixing the eurozone crisis.

Mr Draghi won't make ECB policy on his own - he has to take the 23-member governing council with him. But he might be about to try to pull the bank in a new direction that would affect how the crisis unfolds.

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