View fron Frankfurt: Bundesbank must dance to politicians' tune

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When a self-assured body like the Bundesbank feels it has something important to convey, it rarely opts for the quiet-word-in- your-ear approach in central bank corridors. Instead, it grasps the loudhailer and bellows until it is sure everyone has got the message. Recent weeks have seen an onslaught of speeches by its central council notables, resounding to the theme of Europe's common monetary future.

The Bundesbank has been setting out its views on how we proceed from here, the beginning of the second phase of European monetary integration, to full, irreversible union. Moreover, it has clearly stated how best that union should be structured and managed. Behind the specific arguments lies a more fundamental signal that should be heeded by those, notably in Britain's political class, tempted to believe that European monetary union is yesteryear's pipe-dream. It is still very much on the Continental agenda. If one steps back from the surface effervescence about the level of interest rates, the issue that will dominate monetary debate in the coming years is clear - EMU. In saying so, loudly and repeatedly, Hans Tietmeyer and his fellow hard men at the Bundesbank scarcely bear out the Majoresque taunt of rain-dancers.

The Bundesbank is pursuing a twin-pronged strategy, at the same time defensive and offensive. It wants to confine the nascent European Monetary Institute, forerunner of a European Central Bank, to a minimum range of activities for the entire second stage. It is also campaigning vigorously for the eventual Eurofed, and the monetary policy it pursues, to be in the Bundesbank's own image.

To take the defensive manoeuvres first. The Bundesbank is acutely aware that this second stage, because of its intermediate character, is the most perilous. It believes a number of European partners, notably the French and Italians, are tempted by the potential this stage offers for reining in the mighty mark. Talk of common monetary targets, and concerted interest-rate action, is seen to be part of this foot-in-the-Bundesbank- door approach.


The German response has been a rough attempt to slam the EMI's own door shut fast. The Bundesbank is busily reminding the world that this institute, based in Frankfurt, is meant to have no operative powers. Monetary policy is to remain the sole preserve of national central banks and governments. Any premature shift towards monetary union would undermine member states' incentive to meet the strict economic convergence criteria for the final stage of EMU, leaving the union in some half- Europeanised limbo. One cannot divide responsibility for a currency - it is either all national, or all supra-national, warned Mr Tietmeyer. The Bundesbank followed this up by declaring it would not give the EMI any currency reserves to manage, as allowed under the Maastricht treaty. It wants to curb from the outset any notion of a progressive move towards monetary integration during stage two.

The seeds of such thinking are planted, however, in the body of the EMI. As Alexandre Lamfalussy, the institute's president, said at the inaugural meeting in Frankfurt in January, 'We cannot look at the present situation as a stable, perfect balance until one moves into a blissful state of monetary union'. He spoke of ambiguities and built-in difficulties, between the national exclusivity of monetary policy in stage two, and the EMI's duty to promote co-operation and co-ordination. The Bundesbank has been quick to draw its line. Co-operation is fine, says a senior official, but we see the room for co-ordination as very narrow, no more than it is today.


The offensive prong is based on the Bundesbank's unshakeable belief in its own superiority. What is good for the Bundesbank is better for Europe. By adopting its proven stability methods, a new European Central Bank will immediately wrap itself in a much-needed mantle of credibility, Mr Tietmeyer argued. The Bundesbank is unimpressed by other monetary policy efforts, such as Britain's direct inflation rate targeting, or an exchange-rate target. Moreover, the Bundesbank sees other instruments in its armoury, such as minimum reserves, as indispensable for a future European Central Bank. An indication of the seriousness with which it is preparing its Euro- campaign is the recent reduction in German minimum reserve requirements. Part of the aim was to lower the hurdle of acceptance for those European partners that do not employ such reserves.

The Bundesbank has no illusions about the difficulties of monetary union. But it is not ideologically opposed to this goal. Rather it is deeply sceptical, and acutely vigilant, intent on seeing that the strict convergence criteria of Maastricht are unflinchingly adhered to. This is why the Bundesbank rejects the idea of a timetable for EMU. Monetary union should occur when all the conditions are right, not by promulgation from on high.

But even if the Bundesbank believes such conditions will not emerge for some time, the speed of its opening European offensive underscores its awareness of the need to prepare for other eventualities. From the bottom of a recessionary hole, the world looks bleak.

But who would have predicted that already by last December the main currencies of the ERM would be back in their narrow bands? In two years' time, with the European economy much more robust, and budget deficits being reduced, there may be a rather different perspective on what is desirable and achievable. Above all, the European political will may be strengthened.

Not long ago, the Bundesbank learned a crucial lesson. In 1990, it opposed monetary union between western and eastern Germany. But, for all its protests, it had to bow to the primacy of politics and government. The day Germany's politicians decree European monetary union to be on, the Bundesbank must obey. As a senior official put it: we want to be ready.