The former head of the European Central Bank (ECB), Jean-Claude Trichet, has blamed EU governments for what he called the “worst economic crisis since World War II” and said the eurozone is still at risk.
Trichet, who led the ECB between 2003 and 2011, spoke out on Tuesday (14 January) at a European Parliament hearing on the “troika” of international lenders which managed bailouts in Cyprus, Greece, Ireland and Portugal.
Echoing EU economics commissioner Olli Rehn’s remarks to MEPs ealier this week, Trichet underlined the “extraordinary” and unpredictable nature of the euro-crisis.
But the 71-year-old French banker said he had warned EU governments of growing economic divergences in the euro area as far back as 2005 and that he had criticised member states, notably France and Germany, for ignoring the deficit and debt rules which underpin the common currency.
They did not listen.
As a result, when the US mortgage bubble burst and when Lehman Brothers investment bank fell, the euro was exposed to the full consequences.
Trichet said the eurozone could not have avoided some kind of fallout, “but it could have avoided becoming the epicentre of the sovereign debt crisis.”
He rejected criticism by several MEPs that under his rule the ECB was too prudent and failed to calm markets the way his successor, Italy’s Mario Draghi, managed to do with the mere verbal promise that he will “do whatever it takes” to save the euro.
Trichet noted that the ECB intervened on bond markets and bought up Greek debt as early as May 2010, when he was still chief and when the first-ever EU bailout was still being drafted. It interevened again in 2011 to buy Italian and Spanish debt when investors started to bet against the larger euro-states.
He said that if the ECB had not bought Greek, Italian and Spanish debt on his watch, then Draghi’s verbal promise would have had less weight.
“If we wouldn’t have bought Spanish and Italian debt – a move which was highly criticised at the time – we would be in a totally different situation now,” he added.
Turning to Ireland, where the government first used taxpayers’ money to guarnatee all deposits in Irish banks and then had to seek a painful rescue package, Trichet said “nobody advised them to do so.”
But he noted that the Irish move was “justified” because all the big countries – France, Germany, the UK and the US – were at the same time securing their “systemic banks” to prevent a Lehman-type collapse.
“In Ireland this was dramatic because of the size of banks in relation to its economy. At the time you couldn’t afford to let big banks fail. Now we’re in a different situation, banks can be wound down,” Trichet said.
On Greece, Trichet tried to justify his clash with the International Monetary Fund (IMF).
Back in 2010, the IMF said Greece could never repay its debt and should write off some of its private and public liabilities. But the EU, under a deal by the French and German leaders, wanted the private sector to take the hit alone in what it called “private sector involvement [PSI],” putting Trichet in a tough spot.
Trichet said the IMF talks were “difficult,” but in the end the two sides agreed on the basis the Greek PSI would be a one-off.
One MEP asked him why he “denied reality” for more than a year, ignoring the IMF’s predictions on the unsustainability of Greek debt, in a situation which drove up the final cost of the Greek bailout and the PSI losses.
Trichet said he did it to buy time to fight the Franco-German idea of PSI as a model for all bailouts.
Despite his actions, PSI came back in a vengeance in Cyprus in 2013, when it was renamed a “bail-in,” and when it saw lenders snatch the savings of well-to-do private depositors on top of private bondholders.
But Trichet was already long gone from the ECB.