No, minister: the bankers reign now

WHEN EUROPE officially consigned 11 national currencies to the scrapheap last week, only one prime minister was on hand to toast the historic moment: Jean-Claude Juncker of Luxembourg. Life at the helm of the EU's smallest member state allows Mr Juncker the luxury of two important jobs, and it was in his other capacity, as the country's finance minister, that he took his place at last Thursday's proceedings.

It was Europe's finance ministers who presided over the formal demise of the franc, deutschmark and nine other currencies last Thursday. And the finance ministers of the 11 nations taking part in the currency - known as the Euro-11 - have ambitions to mould the economic future of 280 million European consumers.

From their ranks came a deafening series of calls for economic and political integration. Italy's Carlo Azeglio Ciampi hailed the euro as a "decisive step towards ever closer political and institutional union in Europe". His more conservative Spanish counterpart, Rodrigo de Rato y Figaredo, called for a push "to co-ordinate economic policies and improve the well-being of our people". Underlining these new ambitions, France's finance minister, Dominique Strauss-Kahn, described the Euro-11 as nothing less than the new "economic government" of Europe.

But is it? And why does the continent's political elite seem bent on further integration rather than consolidating the momentous achievement of the single currency? The answers are linked to the fact that the Euro- 11 nations have surrendered control of monetary policy to Wim Duisenberg, the chain-smoking president of the European Central Bank. No one disputes that Mr Duisenberg is the supreme economic power-broker in Europe, the head of an institution which now sets interest rates in all 11 euro-zone countries .

The ECB guards its privileges closely, and is in a position to do so because its independence is enshrined in a treaty. Maastricht states that the ECB's primary objective is "to maintain price stability" - or low inflation. This gives Mr Duisenberg ample room for manoeuvre - much more, for example, than the governor of the Bank of England, who is obliged to hit an inflation target set by the government.

That the ECB was structured this way is no accident. Its model was the Bundesbank, seen by many as the engine of the post-war German economic miracle. As Jacques Delors, former president of the European Commission, once famously put it: "Not all Germans believe in God, but they all believe in the Bundesbank." But the unparalleled strength of the ECB, and its lack of any political counter-balance, has provoked outright warfare between the continent's bankers and its political leaders.

Mr Duisenberg, who secured his job after serving 15 years as governor of the Dutch central bank, is a "sound money" man par excellence. His agenda is expected to place control of inflation above all else.

Relatively uncontroversial a year ago, this outlook has been challenged by two developments. The first is economic, arising from the financial shocks in the Far East and Russia. With the global economy at risk from deflation rather than inflation, many have begun to argue that the emphasis should be switched in favour of growth.

On the political front, this sentiment has been bolstered by changes of government in Germany and Italy, both of which have moved to the Left. Early pressure by Oskar Lafontaine, the new German finance minister, for interest rate cuts, was seen as counter-productive - probably delaying reductions.

That leaves the politicians with only one viable alternative: closer co-ordination of economic policies designed to boost economic growth and job creation. Nor will there be any delay in attempts to start bringing this about. With Germany now holding the presidency of the EU, economic policy co-ordination, including closer alignment of tax regimes, is high on the agenda.

Although harmonisation of corporate tax would take years (each nation uses a different tax base), Germany is interested in laying down target "zones" for corporate taxation to stop countries undercutting each other and poaching inward investment. The European Commission has already been asked to produce a study of corporate tax systems in the 15 member states.

The next months will see tussles over moves to end "unfair" tax competition - the most clear-cut cases of inducements to inward investors - and to combat tax havens. But there are other, broader opportunities which most participants of the euro are keen to exploit. Each year EU governments agree economic policy guidelines which, although currently quite vague, could be made much more specific for each country. The 11 euro participants also produce programmes showing how they match up to the criteria for membership laid down in the Growth and Stability Pact. Again there will be pressure to show more integration, as there will be over targets for tackling unemployment.

The drive for closer economic integration derives as much from the new impotence of Europe's finance ministers as their visionary zeal. As one EU official put it: "I think it has dawned on the finance ministers that if they are not able to organise to define a clear direction, then the only clear, coherent voice of the euro will be that of the European Central Bank."

Focus, page 17; Leading article, page 20