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    August 15, 2007

     The ECB shows its teeth

    The European Central Bank (ECB) chose last week to release a letter it sent to the Portuguese EU presidency objecting to an arcane change in the ECB's status smuggled into the draft EU reform treaty at the Berlin summit (FT story here). It doesn't want to be listed as one of the "EU institutions", as these will be required to cooperate towards a long list of common goals, no longer including market competition. What if anything this means is unclear, but it's plainly part of a French plot to subject the ECB to political meddling by EU finance ministers. The ECB said politely a month ago that it was against any such changes; now the gloves are off.

    The first ECB president, Wim Duisenberg, had an attractive frankness rather out of place in a central banker. Jean-Claude Trichet may have the same weakness for Mission Impossible blow-dry hairdos, but he's a cannier and smoother operator.

    The stars have been kind to Trichet. The major financial scare last week, in which the ECB decisively pumped €155bn into the markets, showcased the value of its autonomy and professionalism. As a bonus, the spread of the subprime panic to Europe was accelerated when the largest French bank, BNP Paribas, suddenly suspended quotations for three of its investment funds because it could no longer value some of the underlying assets. Who's responsible for prudential regulation of banks in Europe? Why, national governments, in this case that of France. So much for the superior wisdom of the Quai de Bercy.

    I have some theoretical sympathy with the French. The ECB inherited from the Bundesbank a remarkable degree of embedded democratic unaccountability, and it can define its statutory objective of price stability how it likes. (The Fed enjoys no such constitutional protection, but it has so far has been protected by the markets from the general Republican subversion of American government. The Bank of England's inflation target is set by the government, but operationally it's autonomous.)

    In practice, the case isn't even close. Sarko knows about as much about economic policy as George Bush, while Trichet is a lifetime professional. Sarko's Colbertian dirigisme is wrongheaded for France, and absurd for Europe - the statist French economic paradigm (which bears less and less relation to how the economy actually works) has minimal attraction for most of the other member states, and especially the free-marketeer new ones. The euro is among the rare genuine achievements of the European project; the ECB that runs it has a hard-won track record; and Trichet is as we have seen a bonny street fighter as well. I tip him to win this fight.

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