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New European Central Bank President Determined to Keep Inflation Under Control - 2003-10-31


A new president takes over Saturday at the European Central Bank. He will face major challenges, as several of the 12 nations that use Europe's single currency struggle with their public finances.

In 1998, the 12 euro-zone countries ceded sovereignty over monetary policy to the Frankfurt-based European Central Bank, or ECB, and gave it the mandate to support the euro's stability and fight inflation.

During his five and a half years at the bank's helm, outgoing President Wim Duisenberg has been firm in resisting calls by business leaders and politicians for sharp cuts in interest rates to spur growth in the euro-zone's flagging economy. He acknowledges that such cuts help create jobs, but he has always argued that they can also fuel inflation. And inflation for the euro-zone's 300 million people has averaged only two percent on Mr. Duisenberg's watch.

The new bank president, Frenchman Jean-Claude Trichet, is not expected to change that policy.

Financial analysts, like Joanne Collins of Daiwa Securities in London, say Mr. Trichet is well-qualified to be Europe's top central banker.

"He has a very good reputation, a long history of experience at the highest levels of the French bureaucracy," said Ms. Collins. "He's been secretary of the treasury. He's been governor of the Bank of France. He's also been involved in the ECB from the onset, and, of course, also part of the team that oversaw the launch of the euro."

Mr. Trichet has admitted that he is obsessed with the euro's stability and wants to uphold his predecessor's legacy of a credible currency. In his previous job as governor of the Bank of France, he fought hard to strengthen the now defunct French franc by pushing up interest rates, despite fierce opposition from politicians.

Now, like Mr. Duisenberg before him, he will have to put pressure on the governments of France and Germany to trim budget deficits that have broken the limits the European Union has imposed to support the euro, not an easy task at a time when those governments are insisting on measures to spur economic growth.

And Mr. Trichet will also have to find a way to deal with the euro's strength against the dollar, which is undermining the competitiveness of euro-zone exports. If the euro continues to rise - or the dollar falls as a result of U.S. budget deficits - the still fragile prospects of an economic recovery in the euro-zone would be stymied.

One area in which financial analysts give Mr. Trichet the edge over Mr. Duisenberg is his ability to articulate policy and communicate with both policy-makers and the public. Philip Shaw, of the London firm Investec, says Mr. Trichet is smooth and polished, whereas Mr. Duisenberg was blunt and often provocative.

"First, communications is an obvious priority," he said. "Wim Duisenberg has improved his style a bit, but he was still very prone to making some rather embarrassing gaffes. I think Trichet, with his experience, will probably reduce the number of blunders that the ECB makes in that respect."

Mr. Duisenberg, too, has a high opinion of his successor. Asked what advice he would pass on to Mr. Trichet, the white-haired Dutchman said simply, he doesn't need any.

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