Trichet Adopts a Measured Pace

Don’t pile up new decisions, but execute what has already been decided. That’s the basic approach of ECB President Trichet as expressed in Sunday’s interviews with Japanese newspapers. He thinks the policy-makers have done what it takes to restore global growth, but, he warns, it won’t happen until 2010.

Some commentators had complained that the ECB did not cut enough when it reduced interest rates by a quarter per cent early this month to 1.25, but Trichet is keen to keep his powder dry. He talks of a measured pace. Another quarter per cent is possible in May, together with other “non-conventional measures”.

So what measures are they? Money markets are apparently waiting with bated breath to see whether the European Central Bank resorts to buying up corporate debt and government bonds to release more liquidity on to European markets.

This process of so-called quantitative easing, already introduced by the Bank of England and the Fed, could have some sensitive political overtones for the ECB. Where should they target the action?  Do they buy up Portuguese, Irish, Greek and Spanish bonds to help the weakest national markets, or concentrate on the biggest economies such as Germany which act as drivers for the EU as a whole? Or maybe they can buy up bonds issued by the European institutions like the EIB.

These quandaries nicely illustrate the complexities of the eurozone, where measures necessary to support the general eurozone interest could benefit one member country more than others.

Trichet has argued that ECB action to boost liquidity has already had an impact, reducing euro interest rates below those of the dollar and relaxing constraints on borrowing. He is not in favour of more dramatic action.

It seems that we are now moving into a new phase of this crisis, where governments must struggle to fight the fires of recession, the social unrest and political turbulence which come with rising job losses and soaring budget deficits, but can really do little more than hold on while world trade picks up again (desperately important for Germany, for instance) and confidence returns.