Europe will recover and the dunce will be head boy

The ECB may yet have the last laugh. Green-span's a god and Duisenberg's a dunce. Strip away the verbiage, and this characterisation of the respective heads of the American and European central banks is commonly held out as an explanation of the euro's weakness.

While this may be unfair on Wim Duisenberg and his colleagues, it's become a self-fulfilling assessment. The more the euro falls, the more the ECB's credibility suffers and the more reasons the markets find to sell the euro. But fortunately for Mr Duisenberg, the assessment may ultimately prove to be self-correcting. The euro's slide is unleashing economic forces that will eventually put that fall into reverse.

It is easy to understand why Alan Greenspan gets a much better press. Under him, the US economy has enjoyed strong growth, without the inflationary excesses of the past. He has dealt adroitly with several financial market crises.

But for most Americans, Mr Greenspan is credited above all else with making them rich. His tenure has coincided with an unprecedented stock-market boom. Yet while he may be a great man, he is not a god. He's had the good fortune of being in the right place at the right time. He's been helped by the fact that the US public strongly supported the goals of low inflation and reducing government borrowing.

And, for the last five years or so, the US economy has benefited from a remarkable acceleration in technical progress. Its rapid prod- uc

tivity growth, rather than the Federal Reserve, has allowed the New Economy to grow rapidly without inflation. Mr Greenspan deserves credit mainly for not getting in the way by raising interest rates too aggressively.

It would be tough for any central banker to compete with Mr Greenspan's record. But this does not fully explain the criticism hurled at Mr Duisenberg. Part of his problem is that the ECB has been running policy for the eurozone for only a year and a half, and has to earn respect.

But it has to be said that there are many EMU-sceptics in the markets and media looking for the ECB to fail. It is criticised by some for being too secretive. Yet when it does make public comments, subtle differences are portrayed as major policy disputes. By contrast, the Fed is rarely criticised for the lively public debate among its governors. Aside from its track record, this partly reflects the perception that Mr Greenspan dominates the Fed.

Mr Duisenberg, sadly, does not carry such clout. The media, used to Mr Greenspan's delphic musings, have had a hard time with Mr Duisenberg's sometimes quirky sense of humour. He has developed an unfortunate reputation for being accident prone. Yet what has the ECB done wrong? It has not wavered from the strategy - low inflation - it inherited largely from Germany's renowned Bundesbank. It never saw its job as targeting the exchange rate.

On its own terms, the ECB has hardly done badly so far. Though inflation moved up to 2.1 per cent in March - up from 0.8 per cent last January - this is largely due to sharply higher oil prices, that have since fallen back. And it compares well with the US, where headline inflation has risen from 1.8 per cent to 3.7 per cent over the same time.

But, sadly for the ECB, it is being judged against the exchange rate. Yet, not only is not trying to control the rate, it doesn't believe it could. The underlying cause of the euro's weakness is that America's New Economy has put euroland in the shade, drawing in investment.

But it cannot be denied that the ECB's supposed credibility problem has had a tangible effect. In financial markets, perception is everything: a currency's value, like any financial asset, depends on investors' views of the future. So the fact that they think ECB policy is incoherent is bound to have depressed sentiment. As the euro's fall is seen as denting the ECB's credibility, a vicious circle has developed.

But the euro's decline won't continue forever. Indeed, it may ultimately become self-correcting. In the US, Mr Greenspan could become a victim of his own success. He somehow has to cool the super-hot US economy without triggering a dramatic crash. So far, his gradualist strategy of raising rates a quarter point at a time has singularly failed: growth has continued to accelerate. The markets remain hopeful he can engineer a "soft landing", but the risk of a crash, taking the dollar with it, is surely rising.

Meanwhile, back on the Old Continent, euroland's economy is gradually stirring, pumped up by the weak euro. Exports are now growing at 20 per cent plus a year.

Of course, time horizons in the financial markets these days are such that they tend to overlook the impact of exchange rate changes on trade flows that come through, not at "internet speed", but over months and years. But every day the euro falls, the bigger the stimulus to euroland's economy. At some point the markets will wake up to this, and the euro - and with it the ECB's reputation - could begin a revival as remarkable as its decline.

* Mark Cliffe is chief economist at ING Barings.

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