A central banker can never really doze in the sun. But in the usually sleepy month of August, Jean-Claude Trichet, European Central Bank president, might have expected to relax longer in Saint-Malo, the rocky seaport on France’s Brittany coast, where he skippers motor and sailing boats.
Instead, the former French bureaucrat was, metaphorically, at the bow when the waves of this year’s global credit squeeze came crashing down on the world’s economies.
It was the first financial market crisis fought by BlackBerry from the beach. In possession of such a device but not yet using it, Mr Trichet’s response by fixed and mobile phone and old-fashioned fax was nevertheless swift and bold. As the ripple effects of the collapsing US subprime mortgage market caused global finance to seize up, the ECB announced it would unilaterally pump in unlimited overnight liquidity: in the end it added almost €95bn ($136bn, £69bn).
Europe had been hit too early in the morning to allow proper consultations with Washington. “That tsunami that came across the Atlantic had a dimension, when it came to our borders, which was not the dimension it had at the beginning,” explains Mr Trichet.
Initial shock at the unexpectedly radical intervention gave way to admiration of its steady hand. As the drama unfolded, the ECB appeared to be setting the pace among central banks. In the ultimate compliment, the venerable US Federal Reserve and Bank of England copied the tactics of an institution not yet 10 years old. Mr Trichet is one of the few to emerge from the turmoil with his reputation enhanced, leading the Financial Times to name him today as Person of the Year.
It is true the crisis is not over. The eurozone may yet face a jolt as big as the public UK bail-out of Northern Rock or the US housing slump. The ECB’s initial actions have proved no panacea: financial markets remain on edge as the year ends. Last week the ECB pumped a record €348.6bn into the two-week money markets.
But this year has seen the ECB smashing myths about its supposed clumsiness and has secured Mr Trichet’s position as senior prefect among the world’s central bankers. “Especially with Alan Greenspan [the former US Fed chairman] no longer around – Trichet is the most experienced central bank policymaker in existence, by some distance,” says Jim O’Neill, head of global economic research at Goldman Sachs. “The speed at which the ECB responded and its steady tone . . . have been quite impressive.”
“Fancy that at the time we had the reputation of being incapable of taking a rapid decision,” jokes Mr Trichet. It takes just 45 minutes to call a teleconference of its governing council. “The usual criticism,” says Andrew Balls, global strategist at Pimco, the asset manager, “is that the ECB did the right things but six months late. On this occasion they were the first to move.”
August 9 was a day for which the silver-haired Mr Trichet, who turned 65 last week, had spent a career preparing. In his first four years at the ECB, his biggest decision was probably to test a still-shaky eurozone economy by raising eurozone interest rates in December 2005, after a pause of more than two years. But he learnt the ropes of global financial crisis management more than 20 years ago when he chaired the Paris Club meetings of international creditors. At the French Treasury he witnessed the 1987 Louvre Accord on shoring up the dollar – and had been at the helm during Europe’s early 1990s exchange rate crises.
Mr Trichet was born in Lyons. His father and grandfather were both professors of Greek and Latin. His wife Aline, whose family is of Ukrainian origin, was the head of translation services at the French foreign ministry.
Mr Trichet initially trained at university as a mining engineer and briefly worked underground in a coalmine in north-eastern France, later recalling his experience as interesting but tough. He can compare notes with Hans Tietmeyer, the former Bundesbank president, who did holiday work in mines. His experience led him to dally in leftwing politics; he joined the militant PSU political party, earning the nickname Justix after Asterix, the cartoon character, from friends for his defence of workers’ rights. But he quickly rejected his youthful flirtations.
His path to the French elite started when he switched to economics and later moved to France’s Ecole nationale d’administration, graduating in 1971, fifth in his class. He then entered the ministry of finance and rose to become director of the Treasury in 1987.
“One of his strengths is his ability to manage a crisis – he enjoys that,” says Olivier Garnier, an adviser to Mr Trichet at the Treasury in the early 1990s, now a senior manager at Société Générale Asset Management. Mr Trichet was always even-tempered but forceful in action: “His rules were: act fast, don’t work alone but build your contacts and use your international network of relationships.”
Treasury colleagues recall him quoting Napoleon’s dictum “Un bon croquis vaut mieux qu’un long discours”, or “a good sketch is better than a long speech”, capturing the sense that it is better to act quickly. “He is interested in big ideas, strategy and negotiations. He is more a master strategist than a pure central banker sticking to the textbook,” says Mr Garnier.
In 1993 Mr Trichet became governor of the Banque de France where he served for 10 years, forging close relations with Germany’s ultra-conservative Bundesbank. He faced criticism from French politicians, notably Jacques Chirac, then French president, for his defence of currency stability and the franc fort (strong franc) and for his veiled attacks on French budget deficits. Even so his credentials in asserting central bank independence made him a plausible candidate for Mr Chirac to nominate as head of the ECB. His progress was interrupted by a long public trial over the collapse of Crédit Lyonnais, the state-owned bank, and his role as Treasury head. His exoneration cleared the way for him to succeed Wim Duisenberg, the ECB’s first president, in November 2003.
He arrived with a reputation as someone with diplomatic skills, adept at communicating to financial markets and with little air of French superiority. Mr Trichet has a passion for science, art and poetry – his “secret garden”, says Mr Garnier. The economics editor of L’Express, the French news magazine, once called him “the most cultivated civil servant in France”. He enthusiastically discusses Shakespeare’s sonnets, the works of Léopold Sédar Senghor (the late Senegalese president was a family friend) or François-René Châteaubriand, a pioneer of French romanticism. He regularly reads the Scientific American magazine.
These cultural influences were given voice in a speech in the Netherlands in 2004 that was remarkable for a central banker, packed with cultural references and no economics. European integration was built on its diversity – and was richer as a result, he argued: “European-ness means being unable fully to understand my own country’s literature and poetry – Montaigne, Châteaubriand, Baudelaire and Mallarmé – without understanding Dante and Boccaccio, Cervantes and St John of the Cross, Shakespeare and Sterne, Goethe and Heine.”
Underlying that speech was Mr Trichet’s fervent belief in European integration. The 1990s exchange rate crises strengthened his support for monetary union and he helped negotiate the 1992 Maastricht treaty, preparing for the euro’s launch seven years later. On a recent trip to Malta, he impressed officials with his enthusiasm for its 16th-century St John’s cathedral, with its individual chapels for each of the langues, or sections, of the knights of Malta. Mr Trichet saw the baroque building as a metaphor for Europe.
The euro has this year built its international profile; the dollar’s fall has made it an increasingly plausible alternative reserve currency. Mr Trichet is proud of its success, insisting that he – not any politician – should be seen as “Mr Euro”. (“There is my signature on the notes,” he tells them.)
Although at world gatherings the eurozone is still represented by a bus-load of politicians and its fiscal policy is decided in 13 capitals, Mr Trichet’s strength has been to give the ECB a powerful, unified voice. Using political skills honed in Paris, Mr Trichet has imposed discipline over ECB communication, a task not simplified by interacting in 21 languages. Governing council members have learnt not to stray far from the line he sets at his monthly press conferences, which remain an exception among central bankers.
In French, Mr Trichet can be eloquent, gently ironic and humorous. Speaking English – the working language of the ECB – he is as animated if not as elegant. Still, ECB watchers observe a pleasing lyricism: he “ships” rather than sends messages to financial markets and does not “think about” or “reflect on” issues but “meditates”.
Mr Trichet has not been afraid of controversy, calling for bold structural reforms to boost European growth. He “is a beacon of reform”, says Edmund Phelps, the Columbia university professor who won last year’s Nobel prize in economics. “He is right to stress the need for reform…It looks like it is going to be needed more than one might have thought.”
Most resistance is encountered in Paris, where Mr Trichet is seen as being under the spell of the Bundesbank. Indeed Nicolas Sarkozy, France’s new president, has accused the ECB of being obsessed with fighting inflation at the expense of jobs and growth and of letting the euro soar to record levels.
In response, Mr Trichet – as during his time in Paris – has stood firm, stressing the inviolability of central bank independence while shunning undignified slanging matches. “Trichet seems to have handled Sarkozy with the appropriate amount of disdain,” says Adam Posen, deputy director of the Peterson Institute for International Economics in Washington. “It is evidence that the ECB has come of age; it is not inherently on the defensive.”
His record in crisis management laid the foundation for the ECB’s response to the credit squeeze. Mr Trichet argues that the ECB’s effectiveness was the result of its “lucid” analysis: it correctly read the situation. Although some in financial markets argue that the scale of its initial action on August 9 simply exacerbated the crisis, creating an air of panic, in retrospect the scale of the banks’ difficulties has become clearer. The unlimited amount of liquidity available “was a positive sign of the ECB at least knowing where the problem lay”, says Marco Annunziata, chief economist at Unicredit.
Mr Posen argues that the ECB has been “cleaner and more consistent” than the Fed in distinguishing between actions aimed at easing financial market tensions and its interest-rate strategy, aimed at combating inflation. Meanwhile, the Fed and the Bank of England have moved towards the ECB’s system of auctioning funds without applying a penalty rate to a broad range of banks and against a wider range of collateral.
Mr Trichet makes much of the fact that he foresaw a market correction; he warned at January’s Davos world economic summit that investors should prepare for a “re-pricing” of assets. Even so, in its “war-gaming” exercises to prepare for financial crises the ECB never imagined a sequence of events spreading across so many markets.
The ECB president has played events to the bank’s long-term advantage. In the US, Mr Greenspan won his place in the history books for his forecasting skills and understanding of the forces shaping American capitalism. The eurozone’s less dynamic economies require arguably less economic expertise. But Mr Trichet has as intimate an understanding of the cultural and political forces shaping Europe. His actions in 2007 – the year of the euro’s rise – have left the ECB with credibility and helmsmanship skills that will long outlast the current financial storms.
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