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Western EuropeAugust 3 2003

Trichet presidency good for markets

The arrival of Jean-Claude Trichet as president of the European Central Bank (ECB) in October should have a positive impact on financial markets. The euro/dollar relationship will be underpinned by the tacit understanding that ECB intervention will be more wisely undertaken, interest rate policy better explained, and Euribor, the euro interest rate curve, will price less uncertainty over ECB rate policy.
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Mr Trichet takes over from Wim Duisenberg, widely regarded by financial markets as one of the less competent central bankers of modern times. Mr Trichet, by contrast, is held as one of the most able of Europe’s financial market officialdom.

The gaffes that characterised Mr Duisenberg’s presidency will not be repeated under Mr Trichet. The ECB’s headline financial operations will prove to be more orderly – in particular, ECB intervention, when needed, will not give money away to FX dealers. One FX market joke in the late 1990s about Mr Duisenberg highlights the market view:

Question: How much intervention would it cost to stabilise euro/dollar at parity? [euro/dollar was trading at $0.86].Answer: About $20m.Question: Why so little?Answer: That’s the salary Alan Greenspan would ask to take on the job.

The potency of the joke was best illustrated in October 1999 when ill-advised remarks by Mr Duisenberg to a UK newspaper negated in less than an hour massive ECB intervention to prop up the euro. A sudden €5bn of intervention raised the euro three cents, and Mr Duisenberg’s words sent it back to original levels.

Other Duisenberg gaffes – such as saying one Tuesday that no ECB rate cuts were planned, before making a sudden 50bp drop the following Thursday – have meant that interest rate markets have been confused over ECB policy and have priced that into the curve accordingly.

These kinds of blunders would have been unthinkable with Mr Trichet, who for the last decade as head of the Banque de France has maintained a reputation for being both discreet and capital market savvy.

Mr Trichet belongs to France’s so-called énarque elite – arguably some of the most gifted bureaucrats in the world. Mr Trichet’s CV and experience highlights a training second to none. In the 1960s, he studied at France’s School of National Administration (ENA), the breeding ground for France’s top civil servants. In the early 1970s, Mr Trichet worked his way through administrative bureaucracy as a deputy inspector of finances – a title earned by only the top 10 ENA graduates each year. In 1975, he entered the French Treasury – part of the finance ministry and the traditional launch pad for many an énarque career.

His record in public service shows Mr Trichet to be a complete pragmatist. He is typically non-conflictual in his approach. His ability to chart a course through the highly hazardous waters of the French public administration over the last two decades – when bitter arch-rivals François Mitterrand and Jacques Chirac held the key positions of power – demonstrates this most clearly. It has become the stuff of near legend in Paris.

However, Mr Trichet is more than just an adept functionary. He is one of two people – the other is former German chancellor Helmut Kohl – considered responsible during 1995 for converting French president Jacques Chirac to the European cause and adherence to franc fort.

In the 1990s, Mr Trichet was always a strong adherent of pursuing the Maastricht process into the single currency to achieve France’s own long-term strategic objective. Paris has long wanted to harness German industrial power, eliminate growth and job-destructive currency parity changes (mostly due to dollar volatility) and boost the geo-strategic position of continental Europe – particularly in competition with the US and the rapidly growing Asian economies.

As ECB president, one can expect Mr Trichet to bring his economic pragmatism to full effect in the monetary discussion in the six-member board and the Council. Mr Trichet should be more of a counterweight to views that give higher priority in the strategy and stance to liquidity conditions. These are almost solely represented by economics board member Otmar Issing, supported by his economics staff, where virtually all key positions are held by German or Dutch nationals. In this respect, Mr Trichet is closer to ECB vice president Lucas Papademos in his economic approach and in his personality.

Working against him, however, will be Mr Trichet’s instinctive secrecy – as governor of the Banque de France he was prepared to talk to the press only on a non-attributable basis. ECB transparency over interest rates is likely to become clearer, but will continue to lag that of the US Fed or the Bank of England.

Allan Saunderson is chairman of Eurozone Advisors, a European economic research consultancy. For the last 15 years he has been analyst of the ECB and the Bundesbank that preceded it.

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