ECB asserts its independence

News Analysis: European bankers resisted politicians' pressure yesterday. Will they continue to do so?

EIGHT WEEKS before it is due to take control of much of the Continent's monetary policy, the European Central Bank sought to assert its independence from politicians yesterday.

With calls for lower interest rates ringing in their ears, members of the ECB's governing council met in Frankfurt to finalise preparations for the launch of the euro on 1 January.

What had been pencilled in as a routine meeting to rubber-stamp the minutiae of the transition, has gained added importance in recent days by the new German government's efforts to influence interest rate policy. The 17 central bankers on the ECB's governing council thus found themselves on a political fault line, challenged in their role as custodians of Europe's new currency by governments of the left.

Chief villain, from Frankfurt's point of view, is Oskar Lafontaine, the new German finance minister who is pushing interventionism beyond Frankfurt's endurance. Even before his appointment, Mr Lafontaine had been dispensing advice to the Bundesbank to cut interest rates in Germany to boost the economy and the jobs market. With unemployment just under 10 per cent, Mr Lafontaine's government of Social Democrats and Greens has made job creation its top priority.

Amid signs that the German economy is slowing, from 3 per cent growth projected this year to about 2.3 per cent in 1999, the government has been arguing for added stimulus. That, however, is not the German way. The Bundesbank's independence in fixing interest rates is guaranteed by the constitution, and politicians not respecting that tend to find themselves in the dog-house.

This fate has already befallen Mr Lafontaine, but he seems unperturbed. Despite assurances from Chancellor Gerhard Schroder that the central bank will not be dictated to, Mr Lafontaine is raising the stakes. Aware that the Bundesbank's role will be supplanted at the end of the year, the finance minister has started directing his demands towards the ECB.

Yesterday, as the ECB's governing council prepared to meet, Mr Lafontaine fired another missive at Frankfurt. "I don't want to put anyone in the ECB under pressure," he said with thinly disguised menace. "The only people under pressure are those without a job."

Mr Lafontaine is convinced that a cut in interest rates will bring the desired results. His Social Democrat party had promised to stimulate the economy by easing taxes on business and encouraging flexibility. But the tax reforms unveiled after the elections disappointed industry. Mr Lafontaine is now locked into a power struggle between the left he leads, and the modernising wing represented by allies of Chancellor Schroder, such as the chancellery minister, Bodo Hombach, who would like to see more tax cuts.

To Frankfurt's horror, the banking community has been caught in the middle, and is resenting it. Until recently, the Bundesbank might have been tempted to revise its interest rates, following the trend set by the Fed. At 3.3 per cent, the interest rate in Germany and France is low, but bankers were sympathetic to arguments for another reduction in response to the global downturn.

Now, with Mr Lafontaine due to attend the Bundesbank Council meeting on Thursday, the central bankers are eager to prove they cannot be pushed around. Mr Lafontaine will leave Thursday's meeting empty-handed, economists predicted. The question is whether the ECB is prepared in the long run to treat the politicians with the same kind of contempt. The euro's stability depends on this.

But interest rates in Germany are the least of the ECB's problem. As monetary union approaches, the representatives of the 11 central banks of the participating countries and the six members of the executive board are striving for a painless convergence. This means reducing minimum lending rates across "euro-land" to the benchmark German rate, without inflating the economies of southern Europe and Ireland. Yesterday's quarter per cent cut in Spain's repo rate to 3.5 per cent showed that convergence was no longer a distant dream. To stay on track, though, the last thing the ECB needs is a further lowering of the German benchmark, as Mr Lafontaine is demanding.

Aside from this consideration, the ECB had personal motives to resist Mr Lafontaine's bullying. The institution is modelled on the Bundesbank, is steeped in the ethos of its German forerunner, and two of the 17 people gathered yesterday in its boardroom had cause to be insulted by Mr Lafontaine's tactics.

Hans Tietmeyer, the Bundesbank president at the brunt of Mr Lafontaine's urgings, was unlikely to have put in a good word on behalf of interest rate cuts. And Otmar Issing, a member of the ECB's Executive Board, was until recently on the Bundesbank Council.

Wim Duisenberg, the Dutchman picked by the Bundesbank to head the ECB, is also a member of the anti-Lafontaine resistance movement, as is Jean- Claude Trichet, governor of the French central bank. Both men have protested against interference, as has the European Commission.

Round one, then, to the ECB, but Mr Lafontaine is an obstinate man, who has a habit of bouncing back from defeats. However, the mettle of the central bankers on the governing council, used to taking orders from their governments, has yet to be tested.

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
Attenborough with the primates
tvWhy BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
News
people
News
Campbell: ‘Sometimes you have to be economical with the truth’
newsFormer spin doctor says MPs should study tactics of leading sports figures like José Mourinho
News
news
ebooks
ebooksA special investigation by Andy McSmith
Voices
Lance Corporal Joshua Leakey VC
voicesBeware of imitations, but the words of the soldier awarded the Victoria Cross were the real thing, says DJ Taylor
Life and Style
Alexander McQueen's AW 2009/10 collection during Paris Fashion Week
fashionMeet the collaborators who helped create the late designer’s notorious spectacles
Sport
football
News
i100
News
Perry says: 'Psychiatrists give help because they need help. You would not be working in mental health if you didn't have a curiosity about how the mind works.'
people
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: HR Benefits Manager

£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

Recruitment Genius: Office Manager / Financial Services

£30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...

Jemma Gent: Year End Accountant

£250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...

Jemma Gent: Management Accountant

£230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...

Day In a Page

War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn
Yvette Cooper: We can't lose the election. There's too much on the line

Yvette Cooper: We can't lose the election. There's too much on the line

The shadow Home Secretary on fighting radical Islam, protecting children, and why anyone in Labour who's thinking beyond May must 'sort themselves out'
A bad week for the Greens: Leader Natalie Bennett's 'car crash' radio interview is followed by Brighton council's failure to set a budget due to infighting

It's not easy being Green

After a bad week in which its leader had a public meltdown and its only city council couldn't agree on a budget vote, what next for the alternative party? It's over to Caroline Lucas to find out
Gorillas nearly missed: BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter

Gorillas nearly missed

BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
Downton Abbey effect sees impoverished Italian nobles inspired to open their doors to paying guests for up to €650 a night

The Downton Abbey effect

Impoverished Italian nobles are opening their doors to paying guests, inspired by the TV drama
China's wild panda numbers have increased by 17% since 2003, new census reveals

China's wild panda numbers on the up

New census reveals 17% since 2003
Barbara Woodward: Britain's first female ambassador to China intends to forge strong links with the growing economic superpower

Our woman in Beijing builds a new relationship

Britain's first female ambassador to China intends to forge strong links with growing economic power
Courage is rare. True humility is even rarer. But the only British soldier to be awarded the Victoria Cross in Afghanistan has both

Courage is rare. True humility is even rarer

Beware of imitations, but the words of the soldier awarded the Victoria Cross were the real thing, says DJ Taylor
Alexander McQueen: The catwalk was a stage for the designer's astonishing and troubling vision

Alexander McQueen's astonishing vision

Ahead of a major retrospective, Alexander Fury talks to the collaborators who helped create the late designer's notorious spectacle
New BBC series savours half a century of food in Britain, from Vesta curries to nouvelle cuisine

Dinner through the decades

A new BBC series challenged Brandon Robshaw and his family to eat their way from the 1950s to the 1990s
Philippa Perry interview: The psychotherapist on McDonald's, fancy specs and meeting Grayson Perry on an evening course

Philippa Perry interview

The psychotherapist on McDonald's, fancy specs and meeting Grayson Perry on an evening course
Bill Granger recipes: Our chef recreates the exoticism of the Indonesian stir-fry

Bill Granger's Indonesian stir-fry recipes

Our chef was inspired by the south-east Asian cuisine he encountered as a teenager
Chelsea vs Tottenham: Harry Kane was at Wembley to see Spurs beat the Blues and win the Capital One Cup - now he's their great hope

Harry Kane interview

The striker was at Wembley to see Spurs beat the Blues and win the Capital One Cup - now he's their great hope
The Last Word: For the good of the game: why on earth don’t we leave Fifa?

Michael Calvin's Last Word

For the good of the game: why on earth don’t we leave Fifa?
HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

Scientists hail daily pill that protects against HIV infection

Breakthrough in battle against global scourge – but will the NHS pay for it?