A former Federal Reserve economist who made a name for himself telling his superiors they were wrong is now taking on European Central Bank President Jean-Claude Trichet.
Athanasios Orphanides, the governor of Cyprus’s central bank, was the first ECB official to argue in favor of zero interest rates, challenging Trichet’s position that cutting them so low would have “drawbacks” and should be avoided. Now, investors and economists are betting Orphanides, 46, is winning the argument as the euro region suffers its worst recession since World War II.
The ECB “can’t stand on the sidelines and use some weird voodoo economics,” said Erik Nielsen, chief European economist at Goldman Sachs Group Inc. in London. “Over time, the power of the right argument tends to win out over the wrong.”
At least seven members of the ECB’s 22-member Governing Council have lined up behind Trichet as they struggle to agree on new tools that would be needed with zero rates. Still, some have started to warm to the idea of deploying all the ECB’s rate ammunition and turning to unconventional methods, suggesting Orphanides may be securing support.
Bond markets expect Orphanides to prevail: Yields on two-year German bunds have fallen to their lowest level since at least 1990. All 55 economists surveyed by Bloomberg News predict the ECB will cut its main rate by a half-point to a record level of 1.5 percent on March 5.
Of course, the fact that Ben and I shared a very congenial cup of coffee last month in my favourite bar in Barcelona is entirely coincidental to all of this :).