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.