Richard C. Longworth
Both the euro and the European project have survived their financial crisis and are stronger and more resilient than ever, Jean-Claude Trichet, who led the European Central Bank (ECB) through the crisis, told The Chicago Council Wednesday evening.
“We had the sad privilege of being the epicenter of the crisis” after 2010, Trichet said. But predictions in the US and elsewhere that the euro and the drive toward European unity would collapse have proven false, he said.
None of the 15 countries in the Eurozone–the nations that use the euro as their common currency–left it, he said. Many investors thought Greece would leave: it didn’t. Others felt that stronger nations, especially Germany, would refuse to help weaker countries like Greece: they didn’t.
“If this currency is so bizarre, why the hell is it so preferred?” Trichet said. Right now, he added, the euro actually may be too strong against the dollar and other currencies.
“What’s happening in Europe is much more important than outside observers think,” Trichet said. He referred both to the resilience of the euro and to the European devotion to a deeper European Union, driven by the continent’s determination to bury its war-torn history in an economic and political union.
“I draw your attention to the resilience of the European endeavor,” he said. “What we are doing is very bold…But 15 years after [the euro was introduced], in the worst crisis since World War II, its governments and its central bank took bold decisions, and the euro remains credible as a currency. This tells a lot about the underlying resilience of this concept, of the attachment of Europeans to their endeavor.”
In fact, not only did the 15 euro nations stay in the Eurozone, but three others–Slovakia, Latvia, and Estonia–have since joined, he said.
“We were 15,” he said. “Now we’re 18.”
Trichet, who was president of the ECB from 2003 to 2011, spoke before 500 persons as part of the Council’s Global Economy Series.
The financial crisis that began in 2007 had three parts, he said. The first was the market turbulence, especially the American subprime mortgage market. The second began in 2008 with the collapse of Lehmann Brothers and convulsed private markets, mostly in the US– “a grave and immediate threat of the collapse of the financial system.” The third was more public than private and threatened mostly European treasuries and other public institutions.
The American part of the crisis stemmed from market instability and loose regulation. Trichet cited the work of the late Chicago-born economist, Hyman Minsky, who taught that markets, especially in banking, are inherently prone to both bubbles and credit squeezes, and require regulation. Less favorably, he criticized the broad but false belief in efficient markets as expounded by Eugene Fama, an economics Nobelist at the University of Chicago.
“The fact is that this [market efficiency] doesn’t work in all circumstances, as Mr. Fama himself has said,” Trichet said.
Europe became the “epicenter” of the crisis for several reasons, Trichet said. One was the earlier violation by the biggest nations–Germany and France–of the Stability and Growth Pact, set up in 1997 to protect the euro: with this pact in tatters, no discipline remained it was needed.
“This,” Trichet said, “is hard to forgive.”
Another was the absence of any governance of fiscal policies and trade balances of individual nations. A third was the lack of crisis management tools, “which we had to invent on the spot.”
Yet another was complacency, a feeling that the system wasn’t broken, so didn’t need fixing.
Several other reasons explain the euro’s survival and new strength, Trichet said.
One is the dramatic adjustment of weak countries, such as Greece, which have moved from current account deficits into surplus. Another is the institution of a compact governing fiscal policy and, equally important, a new stability and growth pact with teeth, including fines.
The old stability and growth pact also had teeth that never bit, but Trichet said the new system is tougher and, besides, “the memory of the past is there.”
The upshot, he said, has been “progress toward a de facto political union,” mostly because of progress toward common budgetary policies.
“We did a lot but a lot remains to be done,” especially in providing a democratic underpinning for these bureaucratic reforms, he said.
Trichet was asked about Capital in the 21st Century, the best-selling new book by the French economist Thomas Piketty, arguing capitalism leads inevitably to growing inequality in society.
Trichet, who also is French, said this inequality “is a very grave problem for the cohesion of our society,” because it undermines faith in democracy. France, he said, has always ranked égalité with liberté and fraternité, and “now I see this discussion starting in the United States quite strongly.”
Richard C. Longworth is a senior fellow at The Chicago Council on Global Affairs. Read more of his program summaries and recent publications or follow his blog.