Interview with an ECB president

Media playback is unsupported on your device
Media captionOutgoing president of the European Central Bank, Jean-Claude Trichet, says the euro is a "credible" currency

There are not many who have played a more central role in the financial dramas in Europe over the past few years than Jean-Claude Trichet - criticised by some for doing too little to support the European single currency, by others for doing too much.

You'll be interested to hear that Mr Trichet thinks he has got it just right.

In an extended interview, timed to coincide with his last day in office, the man who has led the European Central Bank for the past eight years told me the institution had done its job well - both before and during the recent turmoil. After all, inflation had been stable, and so had the value of the currency.

I asked him whether he regretted saying the euro had been "an anchor of stability during the financial crisis"' in December 2008. Not at all, he said. "It still is."

You might think that sounds a little odd. But if you measure the stability of the euro by, er, the stability of the nominal exchange rate, then he's right. It's certainly been more stable than the value of the pound, which fell by more than 25% between 2007 and 2008.

True, most people would say it takes a bit more than that to be an "anchor of stability" for the global financial system: fewer IMF bailouts, for a start. But this was not the first, or the last, time in my 30 minutes with Mr Trichet when I found him defining the ECB's role much more narrowly than many outside critics would.

He said it had not been a mistake to start the single currency, without fiscal union or any common treasury, though that is something he has said it will need at some point in the future. And he flatly rejected the notion that the ECB had contributed to the build-up of massive private imbalances within the euro area (all that lending by German banks to Greece, Spain and the rest) by treating all government debt as equally good collateral for ECB liquidity.

Media playback is unsupported on your device
Media captionTrichet: Absolutely normal for the European rescue fund to try to find more money

Economists such as Simon Johnson have said this played a major role in the narrowing of spreads between, say, German and Greek borrowing rates in the first decade of the euro.

In May 2008, looking back on the first decade of the single currency, Mr Trichet himself said: "From the very beginning, the successful launch of the euro and the strong credibility of the newly created monetary authority led to a convergence of market interest rates at all maturities around the lowest interest rates prevailing prior to the euro."

However, in our interview, Mr Trichet gave the criticism short shrift, and categorically denied that he had ever pointed to the narrowing of interest rate differentials as a sign of the euro's success. If there had been mistakes, he seemed to suggest, they were the mistakes of governments and investors, not the ECB. It was their "benign neglect" that caused all the trouble.

So much for the past. What about the future? Mr Trichet said the deal struck at last week's summit of eurozone heads was a step in the right direction, but (yes) more work was needed, and the reduction in the debt owed by the Greek government must be a one-off event.

He also said that financial markets had been "hectic and erratic" in their judgements of individual economies, and the eurozone economies were much stronger - in the language of economics, their "fundamentals" were much better - than the crisis headlines might suggest.

For me, that was when it got interesting, because his critics say it is precisely when markets are at their most "hectic" - i.e. irrational - that central banks need to step in, to bring investors to their senses and put a floor under the prices. In this case, the ECB might put a floor under the price of borrowing for the Italian, and maybe even the French, governments, by saying it would stand behind them no matter what.

There are very few governments in the world who would not find themselves unable to repay their debt, given a sufficiently high interest rate, for a sufficiently long period of time. But once again, Mr Trichet did not think the "erratic" nature of markets had broader implications for the ECB - at least when it comes to governments. It was only politicians who could end the crisis, by convincing investors that Europe's public finances were under control.

He has a point. Many would say a central bank cannot be a true "lender of last resort" in a currency union that does not share a common treasury, or at least it cannot play that role without seriously overstepping its mandate - and raising big questions about the democratic legitimacy of what it is doing.

But I was less convinced by Mr Trichet's insistence, throughout the interview, that the eurozone crisis was not so very different from the financial tensions that all countries have had to go through in the past few years.

The crisis, he said, "held an x ray" to every advanced economy, revealing their hidden flaws; in the case of the eurozone, those flaws had simply centred around governments, and the economic governance of the euro system.

Watching this long drawn-out crisis, which has had so many crunch points and so much fallout for other countries, many would surely disagree with Mr Trichet's notion - that the eurozone was a basically strong economy, with a few local difficulties to sort out.

It is true that the big imbalances are between different parts of the eurozone - not between the eurozone and the rest of the world. That is in contrast with the US, with its large current account deficit and its borrowing from China. But the eurozone's strengths do not count for much, if it cannot resolve its internal imbalances without wreaking mayhem in global markets.

Outsiders, watching the interview, might also quibble with Mr Trichet's claim, that it was "entirely normal" for 17 of the richest countries in the world to be scrabbling around for ways to turn 440bn euros into one trillion euros - which do not actually involve spending any money.

Then again, who knows what might seem normal if you've just spent the past eight years at the helm of the ECB.