Trichet’s harsh words on financial sector

ECB President has been giving many interviews lately. In the interviews he comes across as a king defending his fort.

In the latest interview with Le Monde he again defends Euro, ECB and criticises financial sector:

Is the euro in danger?

 The euro is a very credible currency which keeps its value. Since its introduction 11½ years ago, average annual inflation has been below but close to 2%, in line with our definition of price stability. The euro’s capacity to maintain its value is absolutely essential for the confidence of investors both inside and outside the euro area.

 So what is the problem?

The issue is that of financial stability within the euro area on account of bad fiscal policy in certain countries, in particular Greece. It is imperative that this be corrected.

The responsibilities of each of the countries concerned are the primary cause. But there is also a true collegial responsibility. Close multilateral surveillance, which is fundamental in the spirit and the letter of the Stability and Growth Pact, has been terribly neglected. This is not particularly surprising, given that in 2004 and 2005 the Pact was unfortunately subject to severe criticism, including from large countries such as Germany, France and Italy. They set a very bad example, both in terms of managing and being accountable for their own fiscal policy, and as members of the Eurogroup and thus essential figures in the surveillance of the fiscal situation in each country. All of Europe’s monetary team – including Christian Noyer and the Banque de France – joined the ECB in opposing these attempts to dismantle the Stability and Growth Pact. The dismantling of the letter of the Pact was prevented, but its application suffered enormously.

On financial sector:

What do you think of the European Commission’s proposals for each country to create an insurance fund specifically for banks to assist them in case of need?

We take a very cautious view on bank taxes. It seems to us that we must first draw the lessons from the financial crisis with regard to prudential regulations, in particular the Basel III rules. The question of a possible tax should come second. That said, I am deeply concerned by this gulf between the values of our democracies and those of the financial world, reflected particularly in the abnormal behaviours observed so often in recent years. This problem is faced by all of our democratic societies, and certainly on both sides of the Atlantic. The values of the financial world must change. In the prevailing ethos, they will no longer be tolerated as they are.

Phew..pretty strong words…..

Recently ECB officials are pointing to this interesting situation.

In a democracy, one cannot take decisions immediately without talking the public in confidence. If not the public, atleast the politicians need to be made aware of what is happening. All this takes time. But in the case of financial markets, they want a quick decision and mostly in their favour. Otherwise they take you for a ride. With globalisation of finance, one does not really care for all these delays. So what should democracies do in such a situation? Even if you have all kinds of resolution policies, it takes time to switch them on.  

Some like Rodrik are calling this the new trilemma. You cannot have these three together- economic globalization, political democracy, and the nation-state. You can at best have two of the three choices.

Don’t know where we are heading.

One Response to “Trichet’s harsh words on financial sector”

  1. Some Ideas To Get Your Ex Back « Get Ex Back Says:

    […] Trichet’s harsh words on financial sector « Mostly Economics […]

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