Trichet suggests finance ministry for euro zone

AACHEN, Germany Thu Jun 2, 2011 10:17am EDT

Jean-Claude Trichet, president of the European Central Bank, listens to a question following his speech at the Stanford Institute for Economic Policy Research at Stanford University in Palo Alto, California March 12, 2010. REUTERS/Robert Galbraith

Jean-Claude Trichet, president of the European Central Bank, listens to a question following his speech at the Stanford Institute for Economic Policy Research at Stanford University in Palo Alto, California March 12, 2010.

Credit: Reuters/Robert Galbraith

AACHEN, Germany (Reuters) - The 17-nation euro zone should consider establishing a central finance ministry as it tightens coordination of national economic policies to fight crises, the head of the bloc's central bank said on Thursday.

Jean-Claude Trichet, who was accepting the Charlemagne Prize, awarded for contributions to European unity, said the ministry might be created after a long process of transferring oversight of national policy to the zone's central authorities.

"In this Union of tomorrow, or of the day after tomorrow, would it be too bold, in the economic field, with a single market and a single central bank, to envisage a ministry of finance of the Union?" he said in a speech.

Trichet acknowledged a central ministry would need dramatic political changes in the European Union, including a revision of its underlying treaty. There is little appetite for such changes at present in the EU, where solidarity has been strained by demands for richer states to bail out those hit by debt crises.

But the speech by Trichet, whose eight-year term as ECB president will end in October, underlined frustration among EU policymakers over the difficulty of handling those crises without being able to impose solutions on indebted governments.

Since last year the EU and the ECB have put together international bailouts worth hundreds of billions of euros for Greece, Ireland and Portugal, but their success remains uncertain as the three governments struggle to muster the political will to implement spending cuts and economic reforms.

Trichet, who ran the ECB for much of the first decade of its existence, was speaking in the German city of Aachen, where Charlemagne, who unified much of Europe during the Middle Ages, lived and was buried.

In a speech in Singapore on Thursday, Chancellor Angela Merkel of Germany, which has had to stump up much of the money for bailouts in the euro zone, reiterated German demands for closer coordination of European economic policies.

"We want to further deepen the coordination of the key areas of economic policies," she said.

STAGES

Trichet said international bailouts of countries in exchange for their pledges to reform their finances -- the model which has been followed for Greece, Ireland and Portugal -- were reasonable as an initial response to debt crises.

"But if a country is still not delivering, I think all would agree that the second stage has to be different," he said, suggesting that euro zone authorities be given "a much deeper and authoritative say in the formation of the country's economic policies if these go harmfully astray."

The EU already appears to be following this strategy in the case of Greece, where talks are underway on a new bailout deal that could involve external supervision of the Greek privatization program.

"It would be not only possible, but in some cases compulsory, in the second stage for the European authorities -- namely the Council on the basis of a proposal by the Commission, in liaison with the ECB -- to take themselves decisions applicable in the economy concerned," Trichet said.

He suggested European authorities could have the right to veto some national economic policy decisions, such as major items of government spending and policies essential for a country's economic competitiveness.

The central finance ministry would be created only later -- "not necessarily a ministry of finance that administers a large federal budget. But a ministry of finance that would exert direct responsibilities in at least three domains."

The ministry would monitor both the fiscal policies and competitiveness policies of member states; handle issues related to Europe's financial sector; and represent Europe in international financial institutions, Trichet said.

(Reporting by Sakari Suoninen; writing by Andrew Torchia; editing by Patrick Graham)