Trichet's Rebuke of French Government Widens Rift With Sarkozy

Trichet's Rebuke of French Government Widens Rift With Sarkozy

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By Sandrine Rastello and Gabi Thesing

July 19 (Bloomberg) -- Jean-Claude Trichet's rebuke of a French demand for a greater voice for governments in setting interest rates deepened a rift with President Nicolas Sarkozy.

``Such declarations are not acceptable,'' European Central Bank spokeswoman Regina Schueller said yesterday on behalf of Trichet. ``The president of the ECB repeats with gravity that any attempt'' to influence the ECB violates the European Union's founding treaty.

Sarkozy has complained that the Frankfurt-based central bank's eight interest-rate increases since late 2005 have driven the euro to a record, threatening European exports. While Sarkozy has retreated from a challenge to ECB independence, he said last week he and Trichet are not ``on the same wavelength.''

``For Trichet, more lobbying from the French government undermines the credibility of the ECB and that's what worries him, which is why he's hitting back,'' said Julian Callow, chief European economist at Barclays Capital in London. ``The battle will get more intense as the euro continues to rise.''

The euro rose 0.2 percent yesterday to $1.3810 at 6:11 p.m. in Paris, retreating from a record of $1.3833 set earlier. It's up almost 5 percent this year and 55 percent since the end of 2001.

Sarkozy has criticized the bank's exclusive focus on inflation, and Trichet has questioned Sarkozy's tax cuts that would violate a French pledge earlier this year to reduce the nation's budget deficit.

France the Laggard

French economic expansion is set to lag behind the euro region average for a second year in 2007 and the country's trade deficit reached a record in 2006 as Germany's exports rose 13.7 percent to their highest ever.

Trichet's response was provoked by French European Affairs Minister Jean-Pierre Jouyet, who was quoted by the International Herald Tribune yesterday as saying that politicians can influence the ECB's interest-rate decisions through more regular meetings with the bank's policy makers.

Trichet, a former governor of the Bank of France, told reporters last September that there were already ``a great number of occasions for meetings together'' with politicians, and that the EU treaty was clear in outlining how contact should occur.

Trichet routinely attends meetings of European finance ministers, invites their representative to attend meetings of the ECB Governing Council and gives testimony to the European parliament.

Raising Rates

The ECB has doubled the benchmark interest rate to 4 percent, from 2 percent in late 2005, to contain inflation as the economy of the 13 euro nations recorded its fastest pace of growth since 2000 last year. The U.S. Federal Reserve has maintained its 5.25 percent rate since June 2006.

France may be gaining some ground in its campaign to curb the euro's gains. A French government spokesman said yesterday that German Chancellor Angela Merkel is moving closer to France's position, and European Monetary Commissioner Joaquin Almunia said two days ago the euro's record-setting run risks slowing growth.

``Looking forward, we would like that exchange rates reflect the fundamentals,'' Almunia said in an interview in the Slovakian capital, Bratislava.

After meeting with Merkel in Toulouse, France, three days ago, Sarkozy called for an end to ``monetary dumping,'' saying other nations keep their currencies artificially weak to boost exports.

``For him, it's not about questioning the independence of the central bank but showing that monetary policy is a topic of debate and dialogue,'' government spokesman Laurent Wauquiez said, citing Sarkozy.

Untouchable Independence

A German government official, who declined to be identified, said yesterday Merkel told Sarkozy in Toulouse she'd reject any move to limit ECB independence or curb its monetary policy making. The U.S. current-account and budget deficits, not ECB interest- rate increases, are the main cause of the dollar's drop and must be addressed with fellow G-8 members, the official said.

Germany's history of hyperinflation after World War I makes its policy makers particularly apprehensive about rising prices. In France, by contrast, Sarkozy won election May 6 after a campaign featuring attacks against the ECB's focus on inflation instead of economic growth.

``Sarkozy feels confident because of the mandate he won in the election, but it will ultimately come down to whether he can persuade other European governments to join him, which at the moment looks unlikely,'' Barclays' Callow said.