Bundesbank 'nuclear blast' sets back single currency

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A huge public row broke out yesterday between the Bundesbank and the German government when the central bank rejected the government's plans to revalue its gold reserves and take some of the profit.

In his determination to see the single currency launched, Chancellor Helmut Kohl is now in a head-to-head confrontation with one of Germany's most trusted institutions. "What we are seeing is a showdown between the Bundesbank and the government," Armin Kayser, of Swiss Bank Corp in Frankfurt, said yesterday.

The revaluation plans were devised as a means of allowing Germany to meet the criteria for economic and monetary union, but the bank's action threatens to throw the Emu project into disarray. Already this week President Jacques Chirac, Mr Kohl's main partner in the drive for monetary union, has been forced to sacrifice his Prime Minister, Alain Juppe, half-way through the French elections, in effect, to keep the project on the rails.

The Bundesbank criticised the German government's plan in extraordinarily forthright language, saying it threatened its cherished independence. "This sounds like a nuclear explosion in Bundesbank terms," said another banker.

The Bundesbank's refusal to sanction the idea of revaluing its gold, which was born of the government's desperation to ensure it cuts its borrowing enough to qualify for the single currency, puts a question mark over how the country will meet the requirements on time. Without Germany in the first wave, the entire European Monetary Union project would crumble. The European Commission last night refused to comment on the developments in Germany.

Across the Continent, voters blame the rush to qualify for the single currency for high levels of unemployment. With unemployment in Germany at record levels, the public is likely to place more trust in the Bundesbank, the incredibly successful guardian of the Deutschmark, than in the politicians.

Otto Issing, the Bundesbank's chief economist, yesterday weighed in to Mr Kohl's government for turning to creative accounting in order to be sure of qualifying for the single currency. "This is even more creative than steps taken in other countries," he said.

The Bundesbank statement said the plan could be seen as an infringement of its independence and, if it went ahead, could undermine public confidence in the stability of the future European currency. The plan went against German tradition as well as the intentions of the Maastricht Treaty governing central bank independence. If the plan was "prescribed by law", that would constitute an interference in the Bundesbank's monetary policy.

Mr Kohl responded immediately, saying the plan to revalue the gold would go ahead despite the central bank's objections. The final decision will rest with parliament.

A statement issued by Mr Kohl and his Finance Minister, Theo Waigel, insisted that the plan to increase the gold reserves' book value "in no way infringes on the successful stability policy of the Bundesbank, its independence and its sole responsibility for monetary policy".

It is Germany's large public debt and new holes in the government's budget that have raised doubts about whether it will meet single-currency ceilings on debt and deficits. The country's gold reserves have a book value of 17bn German marks (pounds 6bn) but a market value of DM57bn. Mr Waigel wants to increase the book value and transfer the profit to government coffers.

The Bundesbank was forced to deny rumours that its president, Hans Tietmeyer, had resigned in protest. The row, which emerged only after the financial markets closed yesterday, will send the German currency and bonds plunging when they re-open.

The limit on borrowing for countries to qualify to join the single currency is 3 per cent of GDP, and the limit on debt is 60 per cent of GDP. The only economic forecasts that show Germany making it have been those issued by the European Commission, dismissed as politically motivated by most economists. Thomas Mayer, of the investment bank Goldman Sachs in Frankfurt, said the government "will have a tough time to proceed with this plan".