European Bank President Urges Budget Cuts

In the words of Jean-Claude Trichet, “monetary policy responsibility cannot substitute for government irresponsibility.” Europe has to cut spending.

European Central Bank president Jean-Claude Trichet urged governments to “turn the page” and start making serious budget cuts in 2011. “Monetary policy responsibility cannot substitute for government irresponsibility,” he told a conference of conservative lawmakers from Bavaria in southern Germany yesterday.

The ECB has been a proponent of austerity throughout the euro crisis. Trichet has repeatedly called for tougher budget rules in order to avoid a repetition of the meltdown that occurred in Greece last year. In a speech before the European Parliament in June, Trichet warned that “sanctions need to be applied earlier and must be broader in scope” lest European publics lost confidence in their institutions.

The European Commission has proposed to punish budget rule breakers but in a compromise, France and Germany, the eurozone’s two largest economies, agreed that sanctions would not be automatic. That’s not enough as far as Trichet is concerned. “We should be inflexible in applying sanctions if rules are breached,” he professed. Penalties should include “fines, reduced access to EU funds and other pecuniary consequences.”

While the central banker is trying to convince embattled countries on the fringes of Europe to make cutbacks, he has to cope with a German public that is increasingly skeptical of having to come to the monetary union’s rescue time and again.

Chancellor Angela Merkel’s ruling coalition lost its majority in the upper house of parliament last May in the wake of the Greek bailout effort and German voters long for the days of the Deutsche Mark. The head of the Bundesbank, Axel Weber, who is likely to replace Trichet as president of the ECB, publicly criticized his decision to buy some €74 billion ($95 billion) worth of Greek, Irish and Portuguese government bonds over the past year in an attempt to fend off investors’ worries. Trichet is still defending the move eight months later, saying Friday that buying bonds doesn’t interfere with the bank’s mandate. “The reason for the [bond buying] decision was certainly not to finance debt laden member states, but to address some severe malfunctioning of markets,” he claimed.

Observers expect that the ECB will again need to buy large amounts of bonds in the weeks ahead as concerns persist that Portugal will be forced to accept a rescue package from the European Union and the International Monetary Fund soon. Greece and Ireland had to accept bailouts last year.