“It is still a global crisis; it is not over and the epicenter is still in Europe”

In an interview last month with EL PAÍS at the Bank of France in Paris, ex-European Central Bank (ECB) President Jean-Claude Trichet, discussed, among other things, the events surrounding a telephone conversation he had with former Socialist Prime Minister José Luis Rodríguez Zapatero in August 2011, when it seemed Spain might be the next euro-zone candidate for a bailout.

Zapatero revealed in a recently published book that Trichet warned him about the seriousness of the situation facing Spain and that there was a subsequent "epistolary" agreement that the Spanish leader would address the ECB's concerns in exchange for the supervisor buying Spanish debt to prevent a financial collapse.

Question. Let me begin with your presidency years. You led the ECB in dire times: the central bank avoided a sort of breakup with the purchase of bonds, but at the same time you approved rate hikes in 2008 and 2011, just before recessions. Was that the political price you paid to endorse non-standard measures?

Answer. The ECB had to mobilize itself four times in very difficult circumstances. It was the first central bank that decided unconventional measures. Secondly, the ECB was decisive in preventing the unfolding of a speculative crisis starting with Greece, Ireland and Portugal. Thirdly, in August 2011, with Spain and Italy in extraordinary difficult financial situations, the ECB had a decisive role in encouraging countries to adjust, and decided to intervene on the secondary market. Finally, in mid-2012, there was the OMT [Outright Monetary Transactions] program, with appropriate conditionality applied. I think the ECB has constantly lived up to its responsibilities. Delivering on our primary mandate of price stability, we made swift and bold unconventional decisions.

Spain took, with total independence, the decisions it thought best"

Q. And now? [Current ECB president Mario] Draghi's activism is still very significant, but at the same time inflation is very low and we have dangerous financial fragmentation. Why is the ECB not engaging in quantitative easing like other central banks?

A. In our case, 80 percent of the financing of the [European] economy is carried out by banks. That is the reason why the main concept for us is to supply liquidity to banks on an unlimited basis. In my understanding, this insurance policy given to commercial banks so that they have all the liquidity desired is our own European way of engaging in a very active "enhanced credit support," which is the equivalent of the credit easing or "quantitative easing" on the other side of the Atlantic.

Q. So are you saying the ECB cannot do anything else?

A. The ECB itself says that it is exploring a number of possible new avenues. It is a multi-dimensional issue involving government policies, improved euro-area economic and fiscal governance and the banking union project.

Q. There has been a wave of criticism from the southern euro-zone members. Zapatero said recently that the US, the UK and Japan are in a better state thanks to their central banks.

A. There has been criticism from both sides: some talk about a lack of activism, while others were very openly critical of what they called an excess of activism.

Spain has problems to be corrected, as in all countries, including mine"

Q. Have you read Jose Luis Rodríguez Zapatero's recent book?

A. Not yet. But I will read it very carefully, as I read The Alchemists by Neil Irvin.

Q. There is a big controversy in Spain about the letter you sent Zapatero. He has published it in his book now. Do you regret that letter in this light?

A. These messages [...] were sent to the prime ministers of Spain and Italy at the moment when the two countries were losing the confidence of European and global investors and savers, with a dramatic financial situation, at a time when the ECB considered intervening in the market provided the countries could demonstrate their capacity to redress the situation to investors and savers. We believed it was our duty to make the governments aware of our analysis as to why credibility had been lost. Given the responsible attitude of the prime minister, we demonstrated that we trusted Spain.

Q. So was it a sort of quid pro quo?

A. There was no negotiation. Exercising full independence, we explained what we understood to be the best ways to regain lost credibility. The government took, with total independence, the decisions it thought were best. And the ECB after a very thorough examination decided to intervene.

Some talk about a lack of activism, others an excess of activism"

Q. Zapatero has titled his book The Dilemma. Did you have a dilemma with the letter?

A. We did not give orders. We did not negotiate. We informed the government of Spain what we were observing, as we had in 2003 and 2004 when the Stability and Growth Pact was under attack, and again in 2005 when it was clear that several countries, including Spain, were losing competitiveness. For me there was no dilemma: we had to inform governments and European institutions of the dangers that were looming.

Q. And the results?

A. Spain embarked on a direction that could allow it to regain credibility and competitiveness [...] despite many difficulties.

Q. Do you have the same opinion with Berlusconi?

A. I am not handing out good and bad marks.

Q. After the letter, Zapatero and later Rajoy approved reforms of the banking system, the labor market and pensions. But the results have been very poor: 26 percent unemployment and declining credit. Can Spain be considered a success story?

A. Spain had large external current account deficits that needed to be financed by the rest of the world. The problem arises when the rest of the world says: "We do not want to finance the deficit of that country anymore." As long as the rest of the world does not want to continue indefinitely financing, a country has no choice other than to adjust; which is what Spain has done in my eyes.

Q. Has the fiscal adjustment imposed on the south been overdone?

A. The bulk of the effort had to be made by the countries with the biggest imbalances. At the same time, there are countries with healthy situations and current account surpluses that have some room for maneuver; not only Germany. The normal functioning of market economies should drive these countries to augment domestic demand and foster growth. In a way it is what we are observing now, although still too timidly.

Q. What do you expect for Spain?

A. I would say that structural reforms are never enough, but in the case of Spain it is impressive to see all the work that has been done by successive governments. I am particularly impressed by the present level of cost competitiveness, which is fostering exports. Still, Spain has problems that have to be corrected, as in all countries, including mine.

Q. The new mantra is: "The worst is over"

A. It is still a global crisis: it is not over. And the epicenter of this crisis is still in Europe. But Europe has demonstrated, unexpectedly in the eyes of many, a remarkable level of resilience.

Q. How do you explain this resilience?

A. The necessary adjustments took place, and Spain is a case in point. Economic, fiscal and financial governance of the euro area has improved. All the countries, when asked implicitly or explicitly whether they would like to stay in the euro area or leave, or to help others to stay, responded positively, including Greece and Germany. The Central Bank did what it had to do.