Bundesbank chief cracks whip on gold deal

The German government yesterday sued for peace in its war with the mighty Bundesbank, and struck a "compromise" that was little short of unconditional surrender.

Frankfurt could keep its cursed gold for now, the Finance Minister, Theo Waigel, graciously conceded. The profits from 50 years of German frugality would eventually be grabbed by the greedy state, but not when it needed them most.

Under the new deal, dictated by Hans Tietmeyer, the President of the Bundesbank, the gold and its hypothetical profit will be safely locked away in the vaults until it is decided which countries have qualified for European monetary union.

Mr Tietmeyer swept into Bonn in the morning, and caught the government in the middle of a backbench rebellion. Three weeks ago, when Mr Waigel had flown to Frankfurt by helicopter to deliver the edict, the Bundesbank was forced to eat humble pie. Now Mr Tietmeyer was the guest, and that was not the only change of role.

The unelected civil servant, invoking the popular will, was facing a representative of a government no longer assured of its majority.

Two MPs had defected to the Bundesbank's side at the weekend. By yesterday morning, dozens more had informed their whips that their votes could not be relied on.

On the eve of a no-confidence motion, Mr Waigel could only retreat, happily accepting the "compromise" offered by the Bundesbank.

The book value of the gold, worth about DM50bn (pounds 18bn), would be brought in line with today's market prices. But while the revaluation would take place this year, two years earlier than planned, the proceeds would only flood into the state coffers next year.

The profits of the Bundesbank hoard will not be used, therefore, to massage the state's burgeoning debts in the qualifying year for Emu, and Germany will remain on course for busting the Maastricht criteria.

Mr Waigel now needs to find DM10bn to balance the books before the great European weighing-in early next year.

With borrowing banned by Maastricht itself and further taxes ruled out by coalition partners, the German government is expected to go for a clear- out of the family silver, starting with shares in state-owned companies.

The sums may still fall short of requirements, but the question of whether Germany will be able to perform its limbo-dancing feat is no longer the greatest concern.

Another senior Bundesbank figure, Edgar Meister, warned yesterday that Mr Waigel's confidence-destroying alchemy had already brought the timetable of monetary union into question. Germany's failure to keep the books straight has opened the floodgate to what German politicians contemptuously describe as "Latin" trickery. The smart money in the markets is on a soft euro; a cheap imitation of the once rock-solid Deutschmark.

It remains to be seen whether the Bundesbank, which has again demonstrated its virtual right of veto over the project, can live with that. There may yet to be a secret clause to the devil's pact struck by Germany's two most powerful money-men: one dictating the exclusion of Italy at all costs.