A symbolic win for Germany: Choice of Frankfurt will reassure voters on monetary union
Against tough opposition from Britain in particular, which feared London would lose influence, Germany insisted, at the special European summit in Brussels on Friday, that its strong record on monetary policy made it the natural choice.
The European Monetary Institute, due to begin operating next January, will work to reinforce co-operation between member states in the running of their monetary policies. It will also help to prepare the way for the final stage of monetary union, when the fully-fledged European central bank takes over.
The importance of the future central bank for Germany is to a large extent political and symbolic. But there is little doubt that its siting in Frankfurt will augment the Bundesbank's considerable weight in the talks about Europe's future monetary policy. It may also, in the longer term, bolster the city's status as an international financial centre.
Chancellor Helmut Kohl, who faces a general election next year, was under intense pressure to bring home the prize. Since shortly before the signing of the Maastricht treaty on economic and monetary union in 1991, public opinion has swung from enthusiasm for full union to deep anxiety about giving up the mark.
'For Germans the mark is not a means of payment; it is the very symbol of post-war achievement,' said Thomas Mayer, senior economist with Goldman Sachs in Frankfurt. 'The government realised that to sell monetary union to the people, it had to provide the reassurance of having the future European central bank in Germany, in the shadow of the Bundesbank.' Many observers agreed that the symbolic significance far outweighed any practical implications.
Norbert Walter, Deutsche Bank's chief economist, described the EMI as a 'research institute on European monetary policy, with no impact on the open market dominance of London'. Under the presidency of Alexandre Lamfalussy, general director of the Bank for International Settlements in Basle, the EMI will be a largely powerless transitional body.
The EMI is not a central bank. The Bundesbank was absolutely adamant on this point. While the French, in the early stages of the Maastricht negotiations, argued for a more influential EMI, the Bundesbank said that until full union, national central banks or governments would be responsible for monetary policy - and that the Bundesbank intended to remain in charge of Germany's policy.
The advent of the EMI will not alter the financial establishment's caution about becoming a truly open, international trading centre to challenge London. 'We shall never be adventurers in finance, and want to avoid modernisation for the sake of it,' said Rolf Breuer, board member of Deutsche Bank and head of the German stock exchange.
The Bundesbank is strongly opposed to financial deregulation, seeing it as a threat to the culture of long- term saving. Caution about liberalisation will remain, and, as Mr Breuer conceded, trying to compete with London on daily operations would be a 'very ambitious goal'. But some observers believe Frankfurt could, in the longer term, become a more serious rival to London.
Of more immediate concern to the Bundesbank is its desire to set the monetary policy agenda for the EMI debate in the next few years. 'Putting the EMI in Frankfurt will tend to weight it in favour of Bundesbank thinking,' said Richard Reid, chief economist with UBS in Frankfurt. The Bundesbank wants a future policy to be steered by a money supply target, and to introduce minimum reserves for commercial banks.
'Ultimately the decisions taken will depend less on the EMI than on national governments and central banks,' said Kermit Schoenholtz, chief economist with Salomon in London.
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