Trichet and the Finance Ministers ... Questions of Governance and Independence

Issues between central banks who conduct monetary policy and policy makers responsible for fiscal policy are nothing new but in the context of the Eurozone it is even more interesting to watch since after monetary policy is controlled from Frankurt. Consequently, the air between the governor of the ECB Trichet and the Eurozone finance ministers has been rather cold lately as many finance ministers have been critizised the ECB of the chosen path of monetary policy, but Trichet won't have any of it ...

(From the FT - linked above)

'Jean-Claude Trichet, European Central Bank president, on Friday delivered a stiff warning to eurozone finance ministers to back off in an escalating dispute over the bank’s independence.

Mr Trichet pointed out that it was his signature on euro banknotes and that it was unlawful under the EU treaty for finance ministers to give instructions or try to influence the bank.'

Also Eurozone Watch reports on the relationship between Frankfurt and finance ministers and Daniela's accout is an interesting read since it outlines a situation where the criticism goes two ways (i.e. Trichet has criticised member states for being too slow on making much needed political reforms). So what is the solution here. Well according to Eurozone watch dialougue is the way forward and on that note Daniela's post also comes with a policy suggestion involving Jean-Claude Juncker the finance/prime minister of Luxembourg and head of Eurogroup.

(quote - Daniela)

'Jean-Claude Juncker should use his unique position as Finance and Prime Minister of Luxembourg, as the President of the Eurogroup and as the most experienced politician in Eurozone matters, to involve his fellow Heads of State and Government in a dialogue on the Eurozone. They should meet at a Eurozone summit twice every year, and more often in times of internal or external crises. Germany, which holds the EU Presidency in the first half of 2007 and is the largest EMU member country, is predestined to host the first Eurozone summit. Jean-Claude Juncker should use his newly and unanimously confirmed legitimacy as the political “Mr. Euro” to table this idea in Berlin.'

So what is Juncker doing here? Well, by all means let us take a look shall we ...

(From the FT)

'Jean-Claude Juncker, the political head of Europe's single currency, has called for an end to the public spat between finance ministers and the European Central Bank, and vowed to uphold the bank's independence.

After months of tension between Mr Juncker and Jean-Claude Trichet, ECB president, the Luxembourg prime minister used an interview with the Financial Times to say the sniping must stop.

“This Trichet-Juncker thing must be brought to an end,” the Luxembourg prime minister said in an interview marking his election to a second term as head of the 12-member eurogroup.'

 

(...)

 

“I have asked ministers not to be too outspoken on monetary policy,” he said after a meeting of finance ministers in Helsinki. “I am a great defender of the independence of the central bank.” (...)'His comments come at the end of a protracted public row between Mr Juncker and Mr Trichet – dubbed the “two Jean-Claudes” – over the extent to which the ECB should listen to the views of eurozone finance ministers in setting monetary policy.

 
It culminated on Friday with Mr Trichet and Mr Juncker debating publicly who deserved the title “Mr Euro” and with the ECB president pointing out that he was the one who signed single-currency banknotes. The debate has split the eurozone. Mr Juncker, supported by France and the European parliament, believes the ECB should be more open to political dialogue in setting rates, while the Netherlands is among the most strongly opposed. Germany, traditionally a staunch defender of the bank's independence, is today said by EU officials to be taking a more equivocal stance.
Mr Juncker said he would continue to press for regular informal talks with Mr Trichet to strengthen co-operation between the euro's political and monetary arms, but suggested he wanted to take the heat out of the debate.

“Both of us have said there is an excellent relationship and that co-operation will be intensified,” he said. “The idea the eurogroup has diabolic intentions to harm the independence of the ECB is totally wrong.”'

So what is the bottomline here? The first immediate question here is whether a little conversation would hurt Trichet and the ECB's independence. I would answer a careful no here; first of all I think that it is important to end the public dispute  between fiscal and monetary policy makers because that deserves no end in itself. This again brings us back to the question ... what about some dialougue here then? Conversation never killed anyone but I think we need to be careful here ... the last thing the Eurozone needs is another bureaucratic forum which mingles together fiscal and monetary policy makers. This is also why I believe Trichet is right to be rather harsh when finance ministers openly critisize his interest rate policy. This is pure and simply not their place and as such Trichet has to stand his ground here. In the end, a central bank's independence from policy makers is its biggest virtue and also the virtue on which it, as an institution, builds up that so very important credibility with markets.