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27 July 2011

Jean-Claude Trichet: The euro is not in question - it is solid, strong and credible


During an interview with “Le Point”, Trichet said that the ECB is not imposing “austerity” on Greece. He stressed that Greece itself is correcting its years of mismanagement. Sound governance is the only way to achieve growth and job creation based on a new-found competitiveness.

Q: The 17 euro area countries have bought Greece some time, but that’s no guarantee that the country is going to accept the austerity measures being imposed on it.

A: We are not imposing “austerity” on Greece. Greece itself is correcting its years of mismanagement. Throughout the years in the run-up to the crisis, Greece continued to spend more than was coming in. Sound governance is the only way to once again achieve growth and job creation based on a new-found competitiveness.

Q: Do you think that Greece’s membership of the euro area is partly to blame for its downfall? Despite the level of inflation in the country, Greece has been able to borrow at very low rates, thanks to the ECB. This gave rise to a credit bubble.

A: No, I don’t think so, because the euro area has only been in existence for just under 13 years, and prior to that, other countries, everywhere in the world, had experienced similar problems to those that Greece is experiencing today. Moreover, we are seeing today, unfortunately, that the issue of poor fiscal discipline is arising more often in developed countries, whereas before it was only an issue in developing countries – in Asia, Latin America or the Near East. Greece is a symbolic example of this turnaround.

Q: And what is the reason for this turnaround?

A: The fact is that the monitoring of economic and fiscal policies in the euro area was not as good as it should have been. The ECB and the Banque de France – Christian Noyer and myself – have always said with regard to Europe that the Stability and Growth Pact was not an artificial creation conveying an ultra-orthodox view of the economy coming from across the Rhine. It was a fiscal framework that was absolutely necessary for a monetary union that had neither a federal government nor a federal budget. On behalf of the Governing Council, I publicly denounced the liberties that in 2004–05 Germany, France and other major countries wanted to take - and indeed took - in the form of a Stability and Growth Pact that was weakened both in letter and in spirit. We have constantly called for closer monitoring, not only of fiscal policies, but also of indicators of competitiveness and internal imbalances.

Q: Over the last few weeks, you have fought against the idea of asking the private sector (banks, insurance companies, funds, etc) to incur losses to help Greece. It would seem that the Heads of State did not listen to you?

A: Once again, we have always said publicly that it is not the Central Bank that takes the decisions, but the governments themselves. With regard to private sector involvement and Greece, we have had three very clear messages. First, we said that any participation had to be voluntary. As far as this is concerned, our advice has been followed. Second, we said that it was necessary to avoid a “credit event”, and at the moment, it looks as though we have done so. Lastly, our third message was that a “selective default” should be avoided. However, in the event of such a default, governments would have to recapitalise the banks and provide credit enhancement for the collateral accepted by the ECB for its refinancing operations. We secured this guarantee which was essential to protecting the integrity of the ECB in the event of a “selective default”. It was essential for the ECB, and all the Eurosystem central banks, in order to maintain stability and confidence in Europe. The protection of the integrity of the central bank is non-negotiable.

Q: Following the summit in Brussels, the European Financial Stability Facility (EFSF) is to provide cheaper loans to programme countries and will also be able to purchase bonds and recapitalise struggling banks. With this, are we not getting sucked into in a costly and vicious circle?

A: We have advised governments to incorporate more leeway and flexibility into the EFSF – taking into account that we are experiencing exceptional circumstances since the onset of the worst crisis since the Second World War. A more versatile and flexible EFSF will be a more efficient tool for helping to ensure the financial stability of the euro area as a whole.

Q: With regard to private sector involvement, the Heads of State have affirmed that these solutions would only be applied to Greece. Why the special treatment?

A: The creditworthiness of a country is absolutely essential. Whether you are a household, a company or a country, you will be granted loans on good terms if the lender is confident that he will be paid back. That’s why confidence is so important. The Heads of State or Government wanted to remove all ambiguity, and in their own words they said: “All other euro countries solemnly reaffirm their inflexible determination to honour fully their own individual sovereign signature. The euro area Heads of State or Government fully support this determination, as the credibility of all their sovereign signatures is a decisive element for ensuring financial stability in the euro area as a whole”. I could not have put it better myself.

Q: Did you look into the possibility of Greece leaving the euro?

A: Not for a minute did anyone consider that option.

Q: But what do you have to say to the many people who don’t believe that Greece will pull through unless its debt is drastically reduced?

A: The problem that Greece has is that it needs to return to a path of sound governance as quickly as possible, i.e. it needs to restore its budget to health, implement a rigorous privatisation programme and carry out essential structural reforms. The proposals from the private sector and the decisions of the European governments, i.e. lowering interest rates and extending the duration of the loans, will ease Greece’s debt service burden considerably. Furthermore, the outstanding debt will decrease through bond swaps and debt buybacks. But what is important is that Greece carries out the adjustment itself, helped by this very important decrease of the yearly service of the debt.

Full interview



© ECB - European Central Bank


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