ECB chief pushes for European finance ministry

As the euro zone grapples with a worsening crisis in Greece, European Central Bank chief Jean-Claude Trichet is proposing a universal finance ministry for the region, with the power to veto budget measures that threaten to put member nations into dire fiscal straits.

With European policy makers scrambling to put together a second bailout package for Greece in an effort to stop its slide toward default, the ECB president clearly hopes policy makers are as fed up as he is with the series of Band-Aid solutions for the debt crisis.

Mr. Trichet, who is departing his bank post in October, has been warning for months that the euro zone cannot get out of the current mess without some form of "budget federalism." But he is now ratcheting up the pressure as his term winds down, calling on the region's policy makers to set up a central finance ministry with considerably wider powers than they are likely to grant.

The proposal, outlined in a speech Thursday in Germany, is not brand new, since one of the biggest concerns about the euro zone from the beginning was the lack of a co-ordinating body to oversee the various governments' fiscal policies. Instead, the Maastricht Treaty of 1992 that established the euro, a document Mr. Trichet played a big part in producing, merely set guidelines for member nations' deficits and debt, which have been largely ignored.

The main message Mr. Trichet wants to convey is that euro zone governments can't get out of the current predicament or back to normal conditions by "just tinkering at the edges," said Nicolas Véron, a senior fellow at Bruegel, a think tank based in Brussels. "They have to introduce a much more centralized decision-making authority and not just some rules that members can decide to skip when it suits them, as they have in the past."

Mr. Trichet is also eager to ensure that his successors won't find themselves in the position he was put in a year ago, when the ECB committed to buying massive amounts of debt from troubled euro zone countries, shrinking the distance between monetary policy and elected officials. This occurred shortly after Mr. Trichet appeared to dismiss the idea of turning the central bank into an emergency lender.

"Would it be too bold, in the economic field, with a single market, a single currency and a single central bank, to envisage a ministry of finance of the union?" the retiring central banker asked in his speech, adding that the European Union should be able to overrule individual countries' fiscal policies that veer "harmfully astray" - a policy change that would require changes to EU treaties. Mr. Trichet's speech coincided with his being honoured with the Charlemagne Prize, handed out by the German city of Aachen for services to European unity.

There was guarded optimism going into Friday that a new austerity package planned by Greece will help it secure a tranche of rescue funds from the EU, the ECB and the International Monetary Fund, without which a default seems inevitable. Greece signed on to a €110-billion ($155-billion) bailout in May, 2010. On top of working to secure the latest portion of those funds, Athens is seeking a second deal to tide it over through 2013, to the tune of another €65-billion.

The euro gained more than 1 per cent Thursday as German Chancellor Angela Merkel indicated she remains committed to the euro, and as investors also started to lose faith in Washington's ability to solve America's debt problems.

In the longer run, Mr. Trichet's challenge to policy makers may be the only way to keep the euro zone intact in its current form, as richer countries such as Germany and France (and their citizens) have long chafed at having to underwrite their poorer cousins' profligacy.

His proposal is similar to one floated by French President Nicolas Sarkozy at the height of the global financial crisis in October, 2008, who called for an "economic government" of the euro zone.

Mr. Trichet's idea "strikes at the very heart of the problem with Europe, which is that the euro is a political project that has no political oversight," said Marko Papic, a senior analyst with Stratfor, a global intelligence firm in Austin, Tex. Mr. Trichet "has more liberty to suggest something like this because he is effectively looking forward to retirement. Nonetheless, it certainly is cogent."

However, while analysts praised the proposal as a sound, even essential, idea, they questioned whether it is at all realistic.

The problem, Mr. Papic said, "is that taxation is the ultimate expression of sovereignty. So we are not talking here about agricultural rules or regulation of genetically modified organisms. This strikes at the very core of modern nation-state sovereignty. There is a reason there is no political oversight of the euro zone."

Even on less politically explosive issues, it's all but impossible to persuade governments to give up even an inch of policy turf. Finance ministers and central bankers from the Group of 20 major industrial and developing economies took 18 months just to agree on a series of guidelines they will eventually use to measure whether the world economy is drifting off track. And there has barely been a mention about how those guidelines would be enforced.

"As times got better, some of the commitments that were made to push things up to supranational organizations sort of wavered as everyone got a little bit further away from the direct crisis,'' said Mark Chandler, chief of Canada fixed-income and currency strategy at RBC Dominion Securities in Toronto. "Even on areas where it should be relatively easy - agreeing on capital standards for banks ... you're still subject to different interpretations by different national bodies.''

Carl Weinberg of High Frequency Economics in Valhalla, N.Y., called Mr. Trichet's proposal "an idea whose time has come." But it is still far from fruition, and policy makers need to focus on the more urgent task of preventing one or more sovereign defaults that could devastate the continent's banks, including the ECB itself, he added.

"Right now, [a Greek default]is the base case," Mr. Weinberg said. "Something has to happen to avert that base case. It's not like if people do the following five things wrong, the plane's going to crash. This plane is headed to the ground, and someone has to do something to prevent it from hitting."

With files from Bloomberg, Reuters