How bank chief swooped to salvage the euro

From his office high up in a tower block looking out over Frankfurt, Wim Duisenberg, president of the European Central Bank, put the final seal on a dramatic bid to salvage the credibility of the ailing euro.

From his office high up in a tower block looking out over Frankfurt, Wim Duisenberg, president of the European Central Bank, put the final seal on a dramatic bid to salvage the credibility of the ailing euro.

So secret and market-sensitive was the decision from "Euro Tower" that the Dutch banker avoided the telephone, opting instead for the ECB's specially encrypted tele-conferencing network.

Those informed that battle with the powerful foreign-exchange markets was about to begin included the 17 members of the bank's governing council and the members of the European Union's economic and financial committee.

Even they learnt only a matter of minutes before the ECB, the US Federal Reserve and the Bank of Japan took the markets by surprise with a massive intervention to buy up billions of pounds' worth of euros. For the first time in many months the European politicians driving the ambitious project had some grounds for optimism.

France's Finance Minister, Laurent Fabius, said he "fully approved" of the measure, and Pedro Solbes, the European Commissioner for Monetary Affairs, described it as a "good decision".

As Brussels emptied for the weekend, surprised officials reacted with delight tinged with the knowledge that this was a defining moment for the fledgling currency. "This is big news," said one. "Nobody expected it. The central banks are not going to say what happens now but it has shown there is common concern about the level of the currency".

The idea behind the intervention was to burn the speculators who have sold the currency relentlessly and to try to provide a "floor" below which it will not sink. For a time at least, the operation worked. Interventions are rare, not only because they are complicated to organise but because they are high-risk.

Those that fail, such as the attempt to shore up the pound in 1992, leave the credibility of the policy in tatters.

But why now? Leaving aside the economic arguments, the weakness of the euro has become a growing political embarrassment. When it slumped below parity with the dollar, the currency's misfortunes were shrugged off, but its continuing weakness has undermined confidence, particularly in Germany, where the polls show growing dissatisfaction with the euro.

In May the finance ministers of the euro group issued their first statement indicating unhappiness with the level in a declaration that failed to move the markets. Over summer the slide continued. This week the currency plunged to its lowest level against the dollar.

Meanwhile, worries increased that a low euro could import inflation into the eurozone, requiring another rise in interest rates. That, in turn might choke off economic growth, further weakening the currency.

As alarm grew, eurozone finance ministers repeated their claim that the currency was undervalued when they gathered on 8 September at an informal meeting in Versailles. At the time Mr Duisenberg was attacked by several ministers for failing to attend in favour of a speaking engagement in North America. Yesterday some were wondering whether his transatlantic visit may have oiled the wheels of the dramatic internationally co-ordinated intervention.

A few days after his North American trip the ECB president told a committee of the European Parliament that the slump in the value of the euro was "clearly a cause for concern", and reminded the markets that intervention was "available" as an instrument. "I will fully inform the markets and you about intervention after it has taken place, not before," he told MEPs.

Meanwhile, another critical deadline was looming: the 28 September referendum on Danish membership of the euro.

A lead in opinion polls for the "yes" campaign evaporated and, as the euro slumped, opponents of membership gained a healthy lead.

A source in Frankfurt conceded that the vote in Denmark "may have played a marginal role" in the decision to intervene, although catching the markets off-guard was the most important factor.

He added: "If this proves helpful in the Danish referendum it will be welcome. It might have some effect, because the decline in the pro-euro opinion polls should probably be seen against the background of the euro's decline."

Not only might the intervention boost the prospects of a 'yes' vote, it also gives the markets a clear warning against dumping the currency in the event of a 'no' next week, thereby precipitating another crisis.

Such a strategy, of course, is dependent on the intervention working. For the euro, the stakes could hardly be higher.