The current rise in the value of the euro is directly attributable to the crisis in the US stock market, itself a direct result of the frauds perpetrated by major corporations like Enron, Worldcom and Xerox. Despite attempts by the US government to restore confidence, mainly by strengthening the powers of the regulators, international investors have been piling into Europe, fearful that there may be more to come out of the American woodwork and far from sure that the moves announced by President Bush will put corporate America back on the straight and narrow.
But can there be any assurance that the European market is any safer? The grandiose follies of some of Europe’s megacorporations, such as Vivendi and France Telecom who have seen their values tumble because of extravagant spending sprees, ought to sound a note of warning: only this week Deutsche Telekom followed Vivendi in parting with its president because of his reckless over-expansion program.
However, it is Tuesday’s announcement that the governor of the Bank of France, Jean-Claude Trichet, must stand trial over a banking scandal that will set alarm bells ringing. This is the man who is in line to take over as head of the European Central Bank when its current president, Wim Duisenberg, retires, supposedly in July next year. He has come under suspicion because, as a French treasury official, he was directly involved in the 1980s with the then state-owned Credit Lyonnais bank whose reckless lending and consequent bad debts at the time forced a restructuring that cost the French tax payer some $30 billion. The worst of it, resonating so alarmingly with the unfolding US scandals, is that Credit Lyonnais bank tried to cook the books to hide the losses.
Even if Trichet is cleared of any involvement, there is no way that he could be now appointed as president of the ECB; indeed, his present position must be considered tenuous. After the scandals in the US and the disastrous effect they have had on the world economy —- far more devastating than Sept. 11 — the person who takes on the European post has to be seen as whiter than white. Trichet’s appointment would trigger a major crisis of confidence in Europe’s financial probity and consequently in the value of the euro. But there is a further aspect to the Trichet affair that even now threatens a body blow to investor confidence that transparency reigns in the economy of euroland. It has now emerged that French state prosecutors leaned heavily on the magistrate examining the Credit Lyonnais bank case to leave him alone. Moreover, government officials in Paris say that regardless of the circumstances, he remains the French choice to head the ECB. This sends a chill message to investors: it says that the environment of coverup and institutional deception that enabled fraudulent accounting to flourish on both sides of the Atlantic, be it in Credit Lyonnais bank or Enron, is still very much alive and kicking.
Just as investors in the US need to be reassured that new standards of business accounting and transparency are being set, so too in Europe. If they are provided with messages to the contrary — and the Trichet affair does precisely that — they are going to look elsewhere to put their money.
