Duisenberg in firing line as flak flies over euro's new low

ECB chief breached a golden rule of central banking
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The Independent Online

The Euro slumped to new record lows last night as the embattled European Central Bank president, Wim Duisenberg, prepared to face his critics at today's meeting of the bank's governing council.

The Euro slumped to new record lows last night as the embattled European Central Bank president, Wim Duisenberg, prepared to face his critics at today's meeting of the bank's governing council.

The European single currency dived 2.5 per cent to $0.8328 in the latest fallout from comments, made by Mr Duisenberg in a newspaper interview on Monday, which sent the euro into a new downward spiral.The euro is more than a cent below $0.8440, the level at which central banks intervened in the market to prop up the ailing currency.

For the Dutch-born central banker the stakes have never been higher than at today's gathering at the Bank of France headquarters, in Paris. The ECB expects a big media turnout to grill the man christened by one French newspaper this week as "Wim Duisenberg, Eurogaffeur", and referred to by his harshest critics as "dim Wim".

Mr Duisenberg's tenure as Europe's top banker has coincided with a dramatic slump in the value of the fledgling currency which first crashed below parity with the dollar, then under 90 cents and now under 84 cents.

But this week's developments have brought the euro crisis onto a more personal plane. The slump of confidence has spread to Europe's political elite, eating away even at those who have pledged support. As one official at the European Commission put it yesterday: "We may have said publicly that we have full confidence in Duisenberg, but the truth is we don't". In the newspaper interview, the ECB president was asked if intervention would make sense in the event of a sharp change in currencies caused by a Middle East war. "I wouldn't think so," he replied.

The ECB argues the comments were about a hypothetical situation: a full-scale regional conflagration. Yet Mr Duisenberg breached a golden rule of central banking - never discuss your intervention strategy - and, as the euro dropped again, the flak began to fly.

On Tuesday in Luxembourg, Italy's employment minister, Cesare Salvi, attacked the comments has "superficial". The ECB had to deny that its president was resigning (a rumour tracked down to an online financial gossip service). France's finance minister, Laurent Fabius was asked three times to endorse the president of the ECB but declined to comment.

Such a dire predicament is the more surprising because Mr Duisenberg's error was self-inflicted. Not only could he have avoided the question, he passed up the opportunity to retract his explosive words.

The timing could barely be worse, following last month's coordinated intervention with the US Federal Reserve and the Bank of Japan. The latest episode has wiped out gains made then and weakened the case for further international support. According to Chris Huhne, a Liberal Democrat MEP and member of the European Parliament's economic and monetary affairs committee, it is "deeply damaging to Mr Duisenberg's credibility and to US confidence in European policy-making".

The crisis also trains an unflattering spotlight on Mr Duisenberg's ability to speak to the markets in a language they can interpret. As an academic, a former finance minister in the Netherlands and a former governor of the Dutch Central Bank, he appears to have the perfect curriculum vitae. Yet the guilder is more a satellite of the German mark than a global currency, and Mr Duisenberg has yet to establish the credibility of a central banker of the calibre of Alan Greenspan.

One official in Brussels argues: "He has allowed himself to say things that have been read in an unfortunate way; the main skill of a central banker is to ... control the message".

Pietra Köhler, of Dresdner Bank in Frankfurt, believes Mr Duisenberg's concentration on price stability in the eurozone has been sound, "but ... this time [the ECB's communication policy] was tactically wrong".

The reaction of the politicians must be of equal concern in the Euro Tower headquarters of the ECB in Frankfurt, illustrating - as is does - a widening gulf at the heart of euro policy-making. Mr Duisenberg got his job with German support, being seen as a banker removed from political interference. The ECB president has striven hard to keep himself above the fray and protect the independence of his institution but has, in the process, lost his political touch.

Slow to talk up the currency, Mr Duisenberg was behind the curve of anxiety that gripped EU finance ministers this year as they pressed for intervention. When they met for an informal meeting in September in Versailles, amid another run on the euro, the Mr Duisenberg was absent, provoking a public rebuke from Belgium's finance minister.

The dominant figures at the Bundesbank may have made their names by stressing their independence but the euro is a political as much as an economic creation. An ECB president needs to pull off the trick of preserving independence while keeping a constructive dialogue with politicians. Its plunging fortunes have hit consumer confidence and played a big part in the Danish referendum rejection of the euro which, in turn, hit the value of the single currency.

Will he survive? Under a "gentlemen's agreement", Mr Duisenberg is expected to step down in 2002 to make way for Jean-Claude Trichet, the governor of the Bank of France who - ironically - hosts today's meeting in Paris. The Frenchman, however, has his own difficulties, being under judicial investigation over the Credit Lyonnais bank which lost around $18bn before undergoing a bail-out. That makes an early hand-over to Mr Trichet unlikely and the search for another successor politically and logistically difficult.

Were he to lose the confidence of the ECB's governing council, Mr Duisenberg would find himself in an impossible position, but the chances are that he will stay in post, a weakened figurehead of a sickly currency.

As one EU official put it yesterday: "The question is: if not Duisenberg, who else?"