Credibility crisis?

Credibility is sacred to powerful monetary watchdogs like the US Federal Reserve, the European Central Bank (ECB) and Germany's Bundesbank. It's something precious, central bankers are quick to admit, that is hard to earn but easy to lose.

Perhaps no one knows that better than Jean-Claude Trichet, an architect of the euro who oversaw the French central bank's deliverance from political control in the 1990s. The ECB president is waging the battle of his career to preserve the reputation of the bank, which he and his predecessor, former Dutch central banker and European Monetary Institute president Wim Duisenberg, helped build. The outcome is all but clear.

An unprecedented move to rescue the euro

Trichet has been under fire ever since eurozone finance ministers agreed over the weekend to launch an unprecedented aid package worth 750 billion euros ($1 trillion). The scheme is designed to rescue the euro as the effects of the Greek fiscal crisis spill over into other indebted nations in the eurozone. In a nutshell, it allows the ECB to buy government bonds issued by eurozone nations in financial trouble.

Analysts argue the move has comprised the central bank's independence; the bank would effectively be buying government debt, giving governments a freer hand in raising money when it should actually be policing their efforts to do so.

Trichet has vigorously defended the move. At a press conference in Basel, he said the central bank's monetary policy was "hampered" and that a number of markets were "dysfunctional." And with an eye to critics, he said that the central bank has always been and will always be "fiercely and totally independent."

Critics, indeed, are in no short supply. Numerous monetary experts accuse the ECB's 22-member council of bowing to political pressure from the European Union and the 16 eurozone nations.

"Significant stability risks"

Among the more outspoken and high-profile critics is Bundesbank president Alex Weber, who is a leading candidate to succeed Trichet next year. In an interview with Germany's Boersen Zeitung, Weber said that the purchase of government bonds "poses significant stability risks." He criticized the ECB council's decision "even in this extraordinary situation."

In a message to investors, David Zervos, managing director of Jefferies & Co investment bank in New York, said that for all the attempts by the ECB to remain independent, it was unable "to push back on the EU power base in a crisis period." Zervos warned that this development could make the eurozone "far less stable in any crisis times than a traditional national union."

Trichet realizes that ECB's credibility is tightly linked to the bank's independence and that any u-turns could soften the euro. He knows all too well that if there's anything Europeans don't want - especially many Germans who still mourn the loss of their beloved deutschmark - it is a weak, suffering currency.

Citizens of euro nations have every reason to be concerned: Tuesday saw the euro retreat against the dollar as euphoria over the massive eurozone bailout announced on Monday gave way to continuing doubts over the ability of euro nations to reduce their deficits.

Author: John Blau
Editor: Sam Edmonds