The chief of the European Central Bank (ECB), Jean-Claude Trichet, is a very disciplined and wise man. It is clear that the Economic and Monetary Union (EMU) of the European Union (EU) is not seeing Greece quite the same way as the rest of the world is in deliberating the Greek crisis.
The EMU’s perspective seems to be cold and unsentimental toward a member country that had veered from fiscal discipline and its commitment to the economic cohesiveness of the euro area. To the EMU, Greece does not represent Europe. If the euro is to be saved, Greece must be abandoned. And this could mean Greece being evicted from the euro zone until it gets its act together for a possible re-entry in the future, while relying in the interim on the International Monetary Fund (IMF) for rehabilitation.
The possible ostracism of Greece would be the lesson that Brussels and Frankfurt would be teaching to the rest of the EU and the EMU: behave if you want in, or else go because economic discipline is needed as much for entry as it is for continuance in the brotherhood, lest the shadow of Greek troubles metastasize to dismantle the euro. It appears that the EU wants to keep the euro area but temporarily without Greece rather than fall prey to the geopolitical dismantling of the area into the Mediterranean, Northern and Central.
The signal to the financial markets from the most credible man in European economics is clear: do not write-off the euro because Greece is in trouble. The important countries are the anchors: Germany and France. Trichet, being guided by the economic discipline imposed by Maastricht Treaty, as is well known, is a stickler to his inflation target. He will not abandon that discipline as he prepares to leave the ECB. So, he is not concerned about the ECB’s interest rate policy as long as the ECB is comfortable with the euro area’s inflation outlook. This, however, is not the case with the Fed.
The central bank of the United States has a fuzzy and implicit target for inflation. The markets know it if the Fed knows what it is as it balances inflation with unemployment and weakly influencing long term interest rates. The Fed’s claim to central bank independence is more about obfuscation than clarity, trading off economic discipline for politics. Had the Fed been disciplined, the current crisis would have been considerably mitigated because even though the Fed was not wrong on interest rate policy in the ‘90s, the Clinton Treasury would have been forced to take any explicit commitment by the Fed to an inflation target seriously in the context of financial innovation and economic globalization fueled by U.S debt-laden consumption at the expense of domestic savings.
Trichet rejecting Greece is an example of what Alan Greenspan ought to have done with the Rubin-Summers Treasury agenda of unbridled economic liberalization through Wall Street to ensure that globalization did not lead to global imbalances in capital and trade flows, because inflation saved in the short run through a rapid increase of cheap imports can mean inflation later, if not the greater threat of geopolitical tensions between incompatible political economies such as the United States and China. Values, translated into policy consistently, matter without which moral hazard is bound to be introduced.