Thirty-five floors above Frankfurt’s financial district, European Central Bank (ECB) president Jean-Claude Trichet has transformed his office into a crisis command center.  Sitting at his L-shaped wooden desk, Trichet can punch a button on a white telephone to contact any of the 20 other men and one woman who help him set monetary policy for nations ranging from Germany to Malta.

Nearby is a row of six handsets for ECB Executive Board members to use at the first sign of financial trouble. Inside a pocket of Trichet’s charcoal-gray double-breasted suit rests a mobile phone programmed with a speed dial for US Federal Reserve chairman Ben S. Bernanke. On the other side of the room, below an antique map of Europe, stands a satellite phone he’ll use if everything else fails.

“We utilize all possible and appropriate means of communication,” Trichet, 66, says on a wet June Monday after chairing a board meeting of the bank he has led since 2003. “We have to remain alert permanently; we are in uncharted waters.”

The task of navigating the 16-nation euro region out of recession may require Trichet to abandon his consensus-building ways as he tries to persuade European banks to lend again. His ability to control the fate of what is effectively the world’s second-largest economy is limited compared with the powers held by Bernanke or Alan Greenspan, Bernanke’s predecessor at the Fed.

As far back as 2005, the Frenchman was warning of a looming financial disaster triggered by credit deals that few people understood. His concerns were dismissed by bankers convinced that the mania for cheap cash carried little risk.

When the crisis erupted in 2007, Trichet won praise from economists and academics for averting a greater meltdown by issuing emergency loans to banks. The acclaim turned to impatience as Trichet refused to immediately follow other central bankers in cutting interest rates and rolling out asset-purchase programs—a reluctance that triggered a public debate among those on the ECB’s Governing Council.

If Trichet pushes for more debt purchases and keeps doling out cash to Europe’s lenders, the bank risks stoking inflation. Yet a continued preoccupation with consumer prices could stop a recovery in its tracks as France and Germany show early signs of a return to growth. The ECB conciliator’s ability to juggle those competing goals may determine the timing and, ultimately, the strength of Europe’s emergence from recession.

“Trichet is a very good manager of personalities, and his greatest strength has been to hammer out a unified policy response in what has undoubtedly been very tense times,” says James Nixon, a former ECB forecaster who’s now chief European economist at Société Générale SA in London. “Going forward, the big risk is that if he remains too focused on inflation and is not proactive enough, it could create a recipe for a very long and protracted downturn and a very weak recovery.”

As one of France’s top economic officials, Trichet helped bring the euro into being by negotiating the treaty that led to its creation and defusing currency crises that could have derailed the project. The euro traded only electronically in the three years after its introduction on January 1, 1999, and slumped against the dollar during its first two years of existence. Now, in its second decade, the euro is the world’s second most-traded currency, defying the prediction of the late Nobel Prize-winning economist Milton Friedman that it would splinter once the “global economy hits a real bump.”

Trichet, who can serve only a single eight-year term, has until October 2011 to restore harmony on the ECB’s Governing Council over its debate on stimulus measures, steer the euro-zone economy back to growth and prove that the 11-year-old institution has the power to head off the next crisis. On July 8, the International Monetary Fund said every major economy would return to growth next year except the euro region, which it forecast would shrink 4.8 percent this year and 0.3 percent in 2010.

The ECB president is getting a chance to outline his recovery plan and catch up with his colleagues at the recent gathering of central bankers from around the world in Jackson Hole, Wyoming. Speaking at the conference, Trichet said it’s premature to declare that signs of an economic recovery can be sustained. He urged policy makers to maintain efforts to restore confidence and find ways to improve bank regulation.

“We know that we have an enormous amount of work to do and we should be as active as possible,” he said.

At home, Trichet faces a debate about whether the ECB should have greater powers. European Union leaders have agreed to create a new agency to act as a financial watchdog for banks, insurers, investment firms and credit-rating companies. The regulatory system that the ECB is currently dependent on, which is spread among the 27 member states, failed to head off the last crisis.

In June, at a meeting in Brussels, EU leaders also committed to a new economic-risk board that could be led by the ECB. UK Prime Minister Gordon Brown, whose country doesn’t use the single currency, won agreement that any recommendations made by EU agencies could be overruled by local regulators. The British also object to EU proposals to tighten risk rules for hedge funds and private equity firms.

“My sense is the ECB is on a land grab for regulatory power and they’re pushing hard, but whether the ECB is going to be listened to is questionable,” says Bob Penn, a regulation lawyer at law firm Allen & Overy LLP in London.

As the subprime crisis gathered momentum beginning in the summer of 2007, the ECB kept its benchmark rate at 4 percent for the 13 months through June 2008 and even raised it 0.25 of a percentage point the following month. This year, the ECB played catch-up, cutting its interest rate to a record-low 1 percent in May and introducing a €60-billion ($85 billion) asset-purchase plan that totals just 0.6 percent of the euro-zone economy. In contrast, the Fed has spent 12.3 percent of gross domestic product buying government and corporate bonds, with the Bank of England pledging to buy assets amounting to 12.1 percent of GDP to revive growth.

The rift on the ECB has dented Trichet’s reputation as a consummate communicator who views his job as an opportunity to educate. In March, he took time away from crisis management to talk in Frankfurt about European cultural identity. The 5,512-word speech, delivered in English, offered a tour d’horizon of the connection between literature and money, citing James Joyce, Marcel Proust and Franz Kafka along the way.

“Poems, like gold coins, are meant to last,” he said. “They are both aspiring to inalterability, whilst they are destined to circulate from hand to hand and from mind to mind.”

In the address, Trichet name-checked five French poets along with five other literary giants, including William Shakespeare and Johann Wolfgang von Goethe, in a single sentence.

“He’s an eager beaver; he obviously sleeps, but I don’t think that much,” says Klaus Liebscher, a former governor of Austria’s central bank who was one of Trichet’s ECB colleagues.

In his Frankfurt office, stacked with books such as The Lords of Finance, money manager Liaquat Ahamed’s best-selling history of the role central bankers played in the Great Depression, Trichet defends the ECB against critics who say it has been too slow to act.

“What is very important for a central bank is not to succumb to fashion,” Trichet says as he leans forward in his black leather chair to emphasize the point. “What we try to do is to take decisions—including, when needed, bold decisions—that are designed both to cope with the exceptional short-term circumstances of the present time and to preserve totally medium and long-term monetary stability. We think we have reasonably struck the balance between those two considerations.”

The approach of trying to revive bank lending makes sense, Trichet says, because banks account for about 70 percent of company financing in the euro region compared with about 20 percent in the US, where lenders issue commercial paper and corporate bonds to finance the majority of investments, according to the ECB. Recent economic surveys may prove Trichet right. The European Union’s statistics office said this month that the euro-region economy contracted just 0.1 percent in the second quarter, beating a forecast of a 0.5-percent shrinkage. The better-than-expected figure suggests that the ECB’s policies and stimulus packages in Germany and France, the two largest economies in the single currency, are helping lift the region out of recession.

In the press conferences that he always conducts in English, Trichet uses verbal clues to signal the bank’s future course. Investors know that when he pledges “vigilance” over inflation, a rate hike is possible. When he amends that to “strong vigilance,” the benchmark is all but guaranteed to rise.

Yet Trichet knows from experience that words alone aren’t always enough. In 2005, his then-central bank colleague Greenspan was publicly praising the emergence of a significant subprime mortgage market.

“Lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers,” the former Fed chairman said in a speech in Washington on April 8, 2005.

By the end of that year, Trichet was sounding a warning on cheap credit, couched in the diplomatic language of a central banker.

“Perhaps there is an underestimation of risks by financial markets at the present juncture,” he told reporters at a meeting of financial officials in November 2005 in Basel, Switzerland.

“Trichet is definitely somebody who conducted monetary policy with more caution than Alan Greenspan,” says Juergen von Hagen, an economics professor at the University of Bonn.

As financiers and business executives gathered for the World Economic Forum in Davos, Switzerland, at the height of the credit boom in January 2007, Trichet was insisting that investors were underestimating risk.

“We are currently seeing elements in global financial markets which are not necessarily stable,” Trichet told a panel in Davos. “There is now such creativity of new and very sophisticated financial instruments that we don’t know fully where the risks are located. We are trying to understand what is going on, but it is a big, big challenge.”

The bankers and investors at the ski resort dismissed those concerns.

“The business community, the financial markets, the world economies are all actually in quite good shape,” John Thain, then-chief executive officer of NYSE Group Inc., said in Davos. Within two years, Thain would become CEO of Merrill Lynch & Co. and then lose his job after the brokerage was bought by Bank of America Corp.

“Even if the CEOs were thinking there was a general underassessment and underpricing of risks, they didn’t necessarily have all the lucidity or wisdom to go against a very powerful market trend,” Trichet says now.

Trichet and Yaga Venugopal Reddy, governor of the Reserve Bank of India from 2003 to 2008, were the only major officials who saw the coming financial crisis, Morgan Stanley Asia Ltd. chairman Stephen Roach says.

“Of all the central bankers I have encountered in recent years, Trichet of the ECB and Reddy of the RBI stand out for their perceptive warnings about the mounting perils in unbalanced asset markets and the real economy,” Roach says. “Unfortunately, Trichet was fixated on inflation targeting and unwilling to act in order to stave off the very dangers he correctly anticipated. Reddy, on the other hand, was both pre-emptive and flexible in executing India’s monetary policy. The lesson: Dogmatic inflation targeting doesn’t cut it in an increasingly asset-dependent world, and central bankers can no longer afford to ignore financial stability in interpreting their policy mandates.”

The ECB itself couldn’t slow down the market due to a consensus-driven way of doing business that Trichet himself helped shape. As an aide in the French Treasury and head of the Bank of France in the late 1990s, he was part of the brain trust that made the dream of a single European currency a reality—a role he seems to have trained for all his life.

Born in Lyon, France, in December 1942, Jean-Claude Anne Marie Louis Trichet learned how to juggle the romance of poetry and the cold facts of mathematics from his father, Jean, a professor of Greek and Latin literature.

Trichet père was a published poet whose work seemed to presage the studious image of Trichet fils. The elder Trichet’s book, L’autre versant (The Other Side), published in 1964, includes the poem “A Droll Biography:” “A life lived on the dotted line/Moralists will think him fine/For his life’s strict unity/And laudable economy.”

Persuaded by his father to focus his education on mathematics, Trichet studied mining engineering and worked in a coal mine during a school break, at a time when he was involved in Socialist Party politics. At 22, he married Aline Rybalka, a diplomat and translator whose parents came from Ukraine, with whom he has two sons, Pierre-Alexis, 37, a marketing strategy director at telecommunications company Orange SA, and Jean-Nicolas, 35, a musician and producer.

Trichet attended the Ecole Nationale d’Administration, a breeding ground for French government officials. While at school, his friends gave each other nicknames inspired by the popular Asterix comic-book series—and Trichet was dubbed “Justix” for his skills as a conciliator.

Trichet’s placement in 1971 as fifth-best student in his class of about 100 students qualified him for a job as an inspector in the Treasury, the first step on a classic path for French civil servants. He served as energy adviser to President Valery Giscard d’Estaing at a time of rising oil prices. As the French Treasury’s international affairs chief in 1985, he chaired the Paris Club, the group of sovereign creditors that rescheduled debt for governments from Russia to Latin America.

In 1986, Finance Minister Edouard Balladur appointed Trichet chief of staff and a year later made him head of the Treasury. Trichet introduced a more collegial style to the Treasury, opening his office to aides of all ranks and welcoming their challenges to his views, says Olivier Garnier, a former adviser.

“Trichet loves to talk with the opponents of policy,” says Garnier, now deputy general manager of Société Générale’s asset management division in Paris. “If you disagree with him, he will try to convince you.”

At the Treasury, Trichet helped develop the “franc fort” policy, which played a role in driving down inflation to 0.7 percent in 1998 from 5.8 percent in 1985. The strategy was intended to prepare France for membership in the single currency, says Hans Tietmeyer, who worked with Trichet on policy as a German finance official and later ran the Bundesbank from 1993 to 1999.

“He’s definitely a supporter of price stability, and today he fully supports an independent central bank, but that’s against the French tradition,” Tietmeyer, 78, says. A blue-and-orange painting of Paris’s Notre Dame Cathedral by Tietmeyer’s wife, Maria-Therese, hangs in Trichet’s office.

Trichet has a passion for explaining policy, says Xavier Musca, now President Nicolas Sarkozy’s chief economic adviser and one of Trichet’s successors as Treasury head. At the end of 1996, Musca, then a finance ministry official, bumped into Trichet on a train ride from Paris to the northern French port of St. Malo after talks with German officials. A fellow passenger overheard Trichet discussing monetary policy and correctly identified him as the governor of the Bank of France. For the rest of the journey, Trichet conducted a snap tutorial for the carriage’s passengers, bantering with strangers in defense of his controversial franc policy.

“He’s got that seductive side,” Musca says. “He’s going to employ charm to convince other people. He’s the salesman of economic ideas.”

As the ECB took shape in the late 1990s, the question of who would run it became a point of contention. Jacques Chirac, then France’s president, promoted Trichet’s candidacy at a May 1998 EU summit in Brussels. Other leaders voted for Dutchman Wim Duisenberg, backing a candidate from outside the Franco-German group that was behind the single currency. At the summit, Chirac won a pledge that Duisenberg would step down before the end of a full term and give way to Trichet.

Now that he was all but guaranteed the top job at the ECB, Trichet took France’s seat on the Governing Council as the euro began to trade in January 1999. Today, the council consists of the central bank governors representing the 16 nations using the euro and six other board members appointed by EU governments, one of whom is Trichet. The group meets twice a month.

When ECB policy makers debated how to meet their inflation goal of just under 2 percent, they chose to do so by building a consensus in private rather than setting policy in publicly disclosed majority votes. Responsibility for regulation and all fiscal policy decisions remained in Europe’s capitals.

In 2002, Trichet’s path to the top job in Frankfurt was threatened by potential scandal. Trichet was ordered by Philippe Courroye, a French investigating judge, to stand trial on charges that as a Treasury official he helped Credit Lyonnais SA, then controlled by the government, falsify its accounts in 1992 and the first half of 1993 to conceal a weakened financial state. Trichet was acquitted of all charges in June 2003.

Four months later, Duisenberg exited the ECB to make way for the Frenchman, who moved into the inner circle of economic policy makers. At the Jackson Hole retreat, Trichet is part of a select group of monetary figures who dine at the nearby home of former World Bank president James Wolfensohn for closely held discussions on global financial issues.

“I have the highest regard for him as a central banker, and he’s been doing an extraordinary job in these times,” says Greenspan, 83, Fed chairman from 1987 to 2006, who forged a friendship with Trichet at such private conferences.

Trichet has struck up a similar relationship with Bernanke, whom he describes in public as “my friend Ben.” At conferences across the globe, the two men make time for conversations that take place away from the gaze of reporters. Bernanke’s official diary, for example, shows that he met Trichet privately for an hour in the presidential suite of Frankfurt’s InterContinental hotel at an ECB conference on November 14, 2008.

As a committed advocate of European institutions, Trichet has worked hard to learn how to speak German by listening to a course on his iPod. He was proficient enough by February to deliver an economic speech in Osnabrueck, Germany, in the language. Former Austrian central banker Liebscher says Trichet is capable of abandoning his professorial public persona at social occasions. At a 2006 concert in Frankfurt, the ECB president enthusiastically joined the crowd in the traditional clapping in time to Johann Strauss Sr.’s “Radetzky March.”

“He was beaming and leaned over again and again, saying, ‘This is fantastic, this is fantastic,’” Liebscher says. “He’s got a sense of humor—but probably not too many occasions to show it.”

By 2005, as Trichet began expressing concerns about risk, the ECB was privately planning ways to head off a financial crisis. The bank’s analysts held several war games, first in the ECB’s Eurotower headquarters in Frankfurt and later throughout the whole region, which centered on a hypothetical liquidity problem at a single European bank.

Such exercises were of little practical value in the summer of 2007. Instead of a localized problem, Trichet and his central bank colleagues confronted an unprecedented global meltdown. On July 17, 2007, investors in two Bear Stearns Cos. hedge funds that had snapped up collateralized-debt obligations were informed they had lost their collective $1.6-billion stake.

Two days later, Bernanke testified before the US Senate Committee on Banking, Housing and Urban Affairs that lenders might have suffered as much as $100 billion in losses associated with subprime mortgage products. Trichet didn’t heed those signs of trouble on several occasions that month. He said inflation concerns meant that the ECB was in a position of “strong vigilance,” his usual signal for a rate rise.

In early August, Trichet was in St. Malo for a sailing holiday. As dawn broke on August 9, European markets plunged as BNP Paribas SA, France’s biggest bank, halted withdrawals from three investment funds, saying a lack of liquidity meant it couldn’t fairly value their holdings.

The disclosure sent other banks scurrying for money, pushing the overnight rate they charged each other to lend in dollars to 5.86 percent from 5.35 percent, the highest level in six years. Stranded nearly 1,000 kilometers from his office, Trichet deployed faxes and telephone calls to coordinate the ECB’s response.

At 12:32 p.m. Frankfurt time on that Thursday in August, the ECB announced an unprecedented move designed to satisfy market demand: Banks could borrow whatever they needed overnight from the ECB at the benchmark rate of 4 percent. With the cash spigot open, European banks snapped up €94.8 billion, one-third more than what they sought a day after the September 11, 2001, terrorist attacks.

As markets opened in New York, Bernanke’s Fed also introduced temporary loans, capping available funds at $24 billion. The Bank of England joined the emergency auctions six weeks later, on September 19.

“From the very beginning of the crisis, we were the first to intervene in a nonconventional way,” Trichet says. “We made a correct diagnosis of what was happening on the market. If I may say, with the benefit of hindsight, unfortunately we were right.”

While central banks from London to Washington began cutting interest rates by the end of 2007, the ECB held firm as record oil and food prices sent consumer prices spiraling.

Throughout the spring of 2008, the ECB held rates steady even after the US cut its benchmark to 2 percent in April from 4.25 percent the previous December. In July, the ECB raised its benchmark a quarter point to 4.25 percent, becoming the only Group of Seven central bank to tighten monetary policy that year.

“The ECB was wrong to raise policy rates in July 2008, when the economy was entering a recession environment,” says Jacques Cailloux, chief euro region economist at Edinburgh-based Royal Bank of Scotland Group Plc. “This had an impact on the ECB’s ability to react quickly when the situation turned nasty.”

By September 2008, Trichet was still arguing that Europe would return to growth the following year, projecting expansion of about 1.2 percent. That optimism was undermined by the disaster unfolding across the Atlantic with the collapse of Lehman Brothers Holdings Inc. On September 14, Trichet worked into the night receiving updates as the then fourth-largest US investment bank plunged into bankruptcy.

Trichet now says his US colleagues underestimated the immediate impact of Lehman’s demise, which froze credit markets.

“The sentiment all over the world was that such a dramatic bankruptcy of a signature institution was impossible,” he says.

The aftershocks triggered the greatest policy reversal of Trichet’s tenure: the first rate cut he had overseen in five years as ECB president.

He had already tipped his hand by saying on October 2 the bank was mulling a rate reduction. Two days later, Bernanke called him to begin formulating the broadest coordinated rate cut in history, according to officials with knowledge of the communications between the two men.

After talking to his ECB colleagues by telephone, on October 8, 2008, Trichet cut the euro region’s main rate a half a percentage point and told banks they could access unlimited funds on a weekly basis, an offer later expanded to longer maturities. Central banks in the US, the UK, Canada, Switzerland and Sweden also reduced rates. Trichet declined to comment on the details of his talks with overseas colleagues that day.

Those actions weren’t enough to protect the euro region from being infected. By the time the ECB’s council met in Brussels in December, inflation was slowing to below target for the first time in 16 months, raising the risk of price deflation. The bank axed its benchmark by an unprecedented 75 basis points to 2.5 percent. (A basis point is 0.01 percentage point.)

As the ECB cut interest rates in January, March and April this year, the master of coordinated communication was faced with a split in the ECB that was increasingly becoming public.

In one camp sat Axel Weber, president of the Bundesbank, who argued that cutting interest rates too low removed any incentive for banks to lend to each other and posed the threat of greater inflation and asset bubbles. More aggressive action, such as buying corporate or government debt, would expose the ECB to political meddling if the purchases turned sour, he said.

In an April 15 speech in Hamburg, Weber publicly voiced his concerns. “Direct interventions, such as the purchase of corporate debt, shouldn’t take priority,” he said.

The ECB’s activist faction was represented by Athanasios Orphanides, governor of the Central Bank of Cyprus and formerly a Fed economist for 17 years. Orphanides, 47, argued that the threat of a contraction in consumer prices meant that the bank should consider making deeper rate cuts and buying assets, according to people briefed at the time.

On May 7, Trichet joined ECB policy makers in the main conference room on the Eurotower’s 36th floor. They sat around a wooden table in order of their surnames, from board member Lorenzo Bini Smaghi of Italy to council member Nout Wellink of the Netherlands. Seated in front of a curtained window and flanked by ECB Vice President Lucas Papademos, Trichet called the meeting to order by ringing a golden hand bell.

On that occasion, Weber, 52, held firm to his aversion to buying assets of any type, say people familiar with how the meeting unfolded. Central bankers from the smaller countries pushed for a plan to purchase €125 billion of debt to stimulate the euro-region economy. “People may have diverging views, but you know you have to take a decision,” says Finnish central banker Erkki Liikanen, 58, who attended the meeting. “The president knew he wanted to get it done.”

The solution was a compromise. The ECB decided to buy €60 billion of covered bonds. Those debt securities are backed by the cash flows of mortgages or reserves from public sector loans taken by local governments. Investors get a narrower spread than one offered by corporate bonds because the debt is covered by a pool of assets large enough to virtually guarantee payment even if the issuer goes bust. The ECB also lengthened to one year its unlimited-fund loan offer to banks. While the central bank’s benchmark was cut to 1 percent, Trichet declined to call it a floor, as Weber had publicly proposed.

Trichet says the ECB’s strategy of limited purchases of assets and unlimited cash for banks is working. The rate that euro region banks charge to lend to each other for 12 months has been lower than in the US and the UK for most of this year.

Meanwhile, economists surveyed by the ECB forecast in July that euro-region inflation would be 1.6 percent by mid-2011 and 2 percent by 2014, indicating that the bank will meet its primary task of controlling prices.

The question remains whether Europe’s banks return to normal lending levels this year. The ECB estimated in June that banks may need to write off another $283 billion of bad loans by the end of next year, on top of $365 billion in losses already reported. Loans to households and companies grew at a record-low 1.5 percent in June from a year earlier, according to the ECB.

If the euro region’s economic recovery lags behind that of its peers, Trichet may have to resort to more aggressive measures. That would once again put pressure on his consensus- driven approach, Tietmeyer says.

“He’s holding on to consensus decisions; I don’t think this is a good idea for eternity,” Tietmeyer says of Trichet. “The statutes don’t call for consensus decisions. If you wait until consensus has been reached, you’re lagging others.”

If Trichet passes on that challenge, he may find himself raising an alarm about the next crisis, only to be ignored again by his audience. He will have forged a reputation as a prescient prophet without adequate power to fully shape events.