Mannheim Economic and Monetary Talks: Former ECB President Jean-Claude Trichet Calls for Increased Integration of Fiscal Policy Within Europe

Had the European Central Bank (ECB) not made exceptional interventions in order to prevent collapse, the financial crisis in 2007 may have pushed Europe to the brink of ruin. This is the view held by Dr. h.c. mult. Jean-Claude Trichet, who himself witnessed the crisis from very close quarters at that time. According to the former President of the ECB and current Chairman of the Board of Brussels-based think tank Bruegel, the severest financial crisis since the end of the Second World War is yet to be overcome. Speaking at the Mannheim Economic and Monetary Talks at the Centre for European Economic Research (ZEW) on December 8, 2015, Trichet drew conclusions and explained what can be learned from the crisis.

Europe relies more than ever before on binding fiscal structures, implemented on a supranational level. Trichet believes that the crisis has made at least one thing clear. Namely that, "we need joint governance." This was also the key conclusion in his lecture "Economic, Financial and Budgetary Governance of the Euro Area – Lessons from the Crisis and Future Development" held at ZEW. "Budgetary and financial governance are absolutely essential," explained Trichet with regard to the sovereign debt crisis which began in 2007 and still continues today. "The financial crisis continues to cast its shadow," emphasised the French financial expert. This is mostly due to the fact that in 2007, as is still the case today, the EU lacked greater fiscal integration.

"The ECB has fulfilled its mandate"

During the "general financial turbulence in the markets from August 2007 until August 2008," the ECB was the first credit institute to intervene by implementing exceptional measures. "We made 95 billion euros available to ensure the liquidity of banks," recapitulated Trichet. The ECB bore responsibility in 2007, Trichet said, and bears responsibility today in view of threatening national bankruptcy in Greece and unconventional methods of quantitative easing. "The primary mandate of the ECB, which has been entrusted to it by the European democracies, and which we have fulfilled, is guaranteeing price stability, even where the crisis makes this difficult," explained Trichet.

The insolvency of the US investment bank Lehman Brothers in September 2008 posed an "immediate threat to the financial system." The crisis had a domino effect; within a few hours the consequences extended from the US to Japan and Great Britain, according to the former ECB President. Trichet compared this with the conditions shortly before the global economic crisis in 1929: "The Lehman bankruptcy could easily have led to a collapse with all imaginable consequences." Trichet identified six reasons for the shift of the epicentre of the financial crisis from the United States to the eurozone.

"We failed to respect the Stability and Growth Pact"

Reason number one: According to the former President of the ECB, "we have failed to respect the Stability and Growth Pact." Even if Europe has more or less complied with the literal points agreed upon, the overarching aim of the Pact has not been fulfilled. "Greece, Portugal and Ireland, for example, implemented overly lax fiscal policies," emphasized Trichet. Reason number two is the insufficient monitoring of macroeconomic indicators such as unit labour costs in individual countries. The nominal pay and salary levels in the public sector increased by around 117 per cent in Greece and around 110 per cent in Ireland between the beginning of 1999 and the end of 2009. This compares to average rises of around 36 per cent throughout the EU, and 20 per cent in Germany. "The differences are all too obvious," said Trichet, and added that in view of the competitiveness of individual states, "no real corrections were carried out."

Trichet provided further reasons for the shift; namely the lack of a banking union and an emergency crisis programme, the fragmented domestic market, and Europe's failure to implement structural reforms. Above all, the creation of a European banking union, a process which is currently under way, is "a huge step for us, which will prevent absolute correlation between the credit standing of a country and its banks, thereby supporting the creation of a domestic market for financial services." In addition, Trichet underlined that further development of the Stability and Growth Pact, the European fiscal compact, the reorganisation of the "European semester for the coordination of economic policy", as well as the Macroeconomic Imbalance Procedure (MIP) play a hugely significant role. "The eurozone has not collapsed, even if that is what many external observers predicted," said Trichet in regard to these measures. "We have survived, made progress and learned something from the crisis."

That said, it would be a mistake to think we can sit back and relax, stressed Trichet. In the short term it is vital that the European banking union is fully implemented. This is particularly the case in view of the single resolution mechanism designed to determine the orderly liquidation of non-viable banks, which should come into power from January 2016, Trichet explained. In the long term, policy-makers must prevent the eurozone from becoming a permanent transfer system. Moreover, Trichet recommended that the position of a joint Finance Minister for the eurozone be created and that greater competence in the decision process be attributed to the European Parliament. This would not only increase the credibility of the EU as a whole, but would also enhance the value of democratic legitimation. "It cannot always be the European Commission and the Council of the European Union who make the decisions," concluded Trichet, "in my opinion, there is no better institution than the European Parliament."

The Mannheim Economic and Monetary Talks take place on a regular basis with the support of the Bankenvereinigung (Bank Association) Rhein-Neckar-Mannheim.