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France Shows Its Colors in Trichet ECB Candidacy: David DeRosa
David DeRosa , president of DeRosa Research & Trading, is an adjunct finance professor at the Yale School of Management and the author of "In Defense of Free Capital Markets." The opinions expressed are his own.
June 20 (Bloomberg) -- Why are the euro-zone countries putting up with such an affront to common sense?
That's the question to be asked now that it appears France will get what it wants: a Frenchman running the European Central Bank.
Bank of France Governor Jean-Claude Trichet was acquitted in a French court Wednesday of charges that he was part of a conspiracy to conceal accounting problems at one of the country's largest banks, Credit Lyonnais SA.
The ruling makes Trichet, 60, the odds-on favorite to be the next president of the ECB.
At least that's what the French government seems to think. France is of the opinion that it has what has been termed a gentlemen's agreement with the 11 other euro-zone nations that a Frenchman will get the ECB job when the current president, Wim Duisenberg, retires this summer.
French President Jacques Chirac nominated Trichet for the ECB's top post in 1998 after persuading the European Union to cut short Duisenberg's eight-year term as the bank's first president and replace him with a Frenchman.
Best Frenchman Wins?
Why doesn't the job go to the best candidate in the euro zone regardless of nationality?
And as for the so-called gentlemen's agreement, you can be sure that if all 15 EU leaders and then the European Parliament make this happen, the parties will act like anything but gentlemen.
This appointment should be about good government, not entitlement. It suggests that the large countries like France and Germany regard the European Monetary Union, much less the rest of the European Union, as their private estate.
Trichet isn't without some experience and skills. As Bank of France governor, he has served on the ECB's rate-setting committee since the euro's birth.
So this arrangement is an affront to him because he is reduced to being the token French candidate rather than being elected on his ability.
Proof of that became apparent when his legal problems seemed to worsen. The French government began looking for another qualified Frenchman to take his place. It also pressed Duisenberg to delay his retirement so Trichet would have more time to clear his name.
Exchange Rate Mechanism
The case against Trichet centered on 1992 and 1993 when he was the head of the French Treasury, a post that made him responsible for overseeing the government's holdings. It also included being the government's representative on the board of Credit Lyonnais, then state-owned.
The bank almost collapsed due to an estimated 15 billion euros ($18 billion) in losses caused by bad real estate loans and some questionable ventures in entertainment finance. In the end, the government felt obliged to pony up a 31-billion euro rescue package to save the bank from insolvency.
Trichet was blamed for helping cover up the losses. His defense was that the bank's management took him in.
In 1993 Trichet changed government jobs, from running the French Treasury to governor of the Bank of France. Then the French franc participated in the EMU's infamous Exchange Rate Mechanism, a program that was designed to keep the participating exchange rates inside of target zones with respect to other European currencies.
French Franc Saga
This program was deemed necessary to achieve a state of convergence in exchange rates required to allow the introduction of the new common currency, the euro.
In fact the ERM was a disaster. In 1992 there was a tremendous crisis that saw the British pound and other currencies ejected from the system.
A second crisis erupted in August 1993 with the epicenter being the French franc. The solution then was to broaden the ERM bands so wide (plus and minus 15 percent) as to make the system impotent.
Yet the Bank of France spent what probably amounted to billions of francs in the defense of the ERM before conceding defeat. Funny enough, the ECB went on to introduce the euro without the narrow-banded ERM that was once thought to be necessary. In other words, the architects of the ERM spawned two major currency crises for nothing.
His problems with Credit Lyonnais may suggest Trichet doesn't know his banking. The saga of the French franc in 1993 may question his understanding of the foreign exchange market. That said, what is more objectionable is that he comes to the ECB post mainly because he happens to be French.
Last Updated: June 20, 2003 00:09 EDT |
