Outlook: School of scandals qualifies Trichet for ECB presidency

Mansion House; WestLB/Saunders
Click to follow
The Independent Online

Jean-Claude Trichet's acquittal on charges of cooking the books at Credit Lyonnais is the best news for European economic policy making in a long time. The acquittal clears the way for M. Trichet's appointment as the next president of the European Central Bank.

As an independently minded reformer, widely respected in international circles, M. Trichet has long been seen as a more credible ECB president than the present incumbent, Wim Duisenberg. France's President, Jacques Chirac, fought tooth and nail to secure the job for the Bank of France governor when it was first up for grabs, but the German government was having none of it, and eventually the two were forced to settle on the compromise candidate of Mr Duisenberg, a Dutchman.

I suspect that the judgement of history will be kinder on Mr Duisenberg, or Dim Wim as he is sometimes labelled in international capital markets, than present day commentators. The euro has not so far proved an outstanding success, but nor has it been the complete disaster some anticipated.

Even so, there have been key policy errors, and a complacency of approach, verging on arrogance, which sometimes makes the ECB look as if it is entirely divorced from reality. The latest example of it is in the ECB's relaxed view of the appreciation of the euro, which it seems to regard more as a vindication of the single currency than an economic force in its own right, posing a serious threat to Europe's largest economy, Germany.

The US administration and its monetary authority, the Federal Reserve, are not so stupid. Publicly they still pay lip service to the strong dollar policy, but they do nothing to support it, knowing that America's best chance of growth for the next two years lies in a weak currency. Growth achieved through currency depreciation is growth stolen from someone else - in this case largely euro land.

The ECB's constitutional makeup dictates most of its misjudgements, which are more to do with institutional than personal failings, but Mr Duisenberg with his repeated gaffes and faintly eccentric sense of humour is their public face. M. Trichet will make a welcome change. Whether in practice he'll prove more focused on growth than his predecessor, given the difficulty of setting an interest rate for the eurozone as a whole, remains to be seen.

However, some of the hardwork has already been done for him with reform of the ECB's inflation target, making it more like the Bank of England's symmetrical target, while the obvious economic distress of large parts of the eurozone automatically allows the ECB more overtly to pursue a policy for growth. Yesterday's acquittal will be a relief not just to M. Trichet personally, but also to all those with the best interests of the euro project at heart, for he is easily the best qualified to see the single currency through to a maturer phase.

The inability of the French legal system to hold anyone of any significance accountable for the scandal of Credit Lyonnais, an affair which is now more than 10 years old, is another matter entirely, and if M. Trichet has learned anything from his ordeal, it will be the urgent need for reform across large parts of the euroland economy. The fact that prosecutors have taken so long to bring the case to court is not only a travesty of justice, but their failure adequately to get to the bottom of what happened reflects extraordinarily badly on the integrity of the French financial system.

The scandal centred on the fact that Credit Lyonnais, a state owned bank that had thrown caution to the winds by indulging in a lending binge of extraordinary proportions, had on at least three occasions cooked the books to cover up the true state of its finances and thereby preserve its international credit rating.

As a senior banking regulator at the time, M. Trichet approved the figures but contends he had no idea they were wrong when he did so. The suspicion remains that someone in the French government most certainly did know. Whatever the truth, the legal process has failed to uncover it. The universal view of the American press was that such a lamentable state of affairs could only really happen in France. Since then the US has had its own accounting scandals. The universal view of the French press has been that Enron, WorldCom and the rest could only have happened in America. What is certainly the case is that America has at least moved decisively and swiftly to deal with the miscreants and rebuild the system. It is part of the US's economic strength that it is able to do this.

As M. Trichet knows to his cost, Europe is still a long way from achieving a similar degree of transparency and accountability.

Mansion House

The Chancellor returned to one of his favourite themes in last night's Mansion House speech, which is not so much forget the euro - although Britain can safely do that for some considerable while after last week's the five tests - as let's make the euro more outward looking and global in its approach, and maybe then we can think about joining.

The Chancellor's agenda for European reform is worthy and right, but the problem he's got is that as long as Britain remains outside the euro its voice will count for very little. Even Luxembourg has more influence than us.

There is zero chance any time soon of meaningful reform of the Common Agricultural Policy, the big sticking point in further trade liberalisation, and the Chancellor is whistling in the wind by preaching the benefits of it.

WestLB/Saunders

Robin Saunders' reputation is in tatters even before the outcome is known of the investigation by German financial regulators into WestLB's London-based principal finance arm. The AWG saga, which ended yesterday without a bid being made for the owner of Anglian Water, has made sure of that.

To recap, WestLB, or rather Ms Saunders and her principal finance unit, were the original backers of Bream Investments, the specially constructed bid vehicle which fired its opening shot at AWG way back in January. As we now know, the bid was put together on a wing and a prayer. First, Ms Saunders did not have the support of the WestLB board. Second, the finance was never in place to proceed with an offer that could be recommended by the AWG board. Third, WestLB failed to work out what to do with its existing water company, Mid-Kent, which it knew it would have to get rid of in order to gain regulatory approval to buy AWG.

Plenty of excuses have been put forward by WestLB for why it withdrew earlier this month from the Bream consortium, making the collapse of the offer all but inevitable. But none of them wash. The whole affair has been a shambles, for which WestLB has much to answer for.

Ms Saunders came to the AWG deal with an air of invincibility, having just pulled off the financing of the new Wembley stadium. Apparently besotted by her apparent powers of alchemy, the WestLB board in Germany too were swept along by the hype. They are paying the price now. One of the principal finance unit's earlier deals, the refinancing of the television rentals chain Boxclever, has already cost WestLB £350m. Meanwhile, the investigation by the German banking regulator BaFin threatens to cause bigger ripples right up to the door of WestLB's chairman, Jürgen Sengura.

Until very recently, Mr Sengura hailed Ms Saunders' unit as one of the bank's most profitable operations. Then he suddenly put the business up for sale, which makes you wonder how real those profits were. Ms Saunders' botched attempt to put her toe into the UK water industry has forced AWG to spend £3m in advisers' fees defending itself. That's bad enough, but she promises to be a lot more costly for WestLB.

jeremy.warner@independent.co.uk

Comments