Commentary: Is The Euro's Point Man Fighting The Wrong War?

Hard as Wim Duisenberg's job sounded when he was named future head of the new European Central Bank (ECB), it has gotten a lot harder lately. Even in good times, setting a single interest rate for all 11 economies slated to join European monetary union (EMU) did not look like a cakewalk. Now that economic turbulence is buffeting Europe, the task could be murder.

Yet Duisenberg faces a challenge that could be even more troublesome than the slowdown. Thanks to voters' weariness with conservative governments and the austerity required to qualify for EMU, left-leaning politicians have come to power in France, Germany, and Italy. Duisenberg's tight-money stance is intended to counteract their potentially inflationary influences. But so far, that stance seems out of line with other central bankers' efforts to control the damage in the global economy.

INFLATION HAWK. Just a few months ago, economic growth forecast at 3% for 1999 seemed enough to override any problems on the road to EMU. Now, led by Oskar Lafontaine, Germany's new Finance Minister, Europe's politicians are calling for increased spending to bring down stubbornly high unemployment. They have also been pushing for speedy interest-rate cuts, although the ECB's mandate is to establish credibility for the euro by being hawkish on inflation. But the pols don't give a hoot about making the ECB's life easier. "In the 1970s, we had a turn away from welfare-state liberalism. Now, on the eve of the millennium, we are getting a turn away from crude monetarism," says Denis MacShane, one of the British Labour Party's parliamentary experts on Europe.

Meanwhile, Duisenberg has been downplaying the danger of global deflation, saying his job is to hold inflation to 2%. Duisenberg is of course mainly worried about shepherding the euro to the starting line, and under most circumstances, his tough talk would be smart. But with U.S. Federal Reserve Chairman Alan Greenspan cutting rates to help ease the global crisis, Duisenberg is looking too parochial to be central banker of a currency bloc that aspires to rival the dollar. At the very least, he should have signaled that Europe was ready to pitch in to help the world economy--emerging from the shadow of Germany's hard-line Bundesbank and perhaps even suggesting a German rate cut. "The ECB has played its cards very badly," says David P. Bowers, European equity strategist at Merrill Lynch & Co. in London.

Bowers and other observers in the City of London worry that the tension between the ECB and the politicians will escalate. In the worst-case scenario, the Germans and the French might push for big spending programs and put so much heat on Duisenberg that he becomes even more resistant to rate cuts. The result: an overvalued euro that contributes to a sharp slowdown in Europe.

There is already talk of scrapping the tight budget criteria required of participants in the single currency. Big job-creation schemes such as new railways and roads are being floated at the European Commission. To finance them, some politicians have suggested raiding central bank treasuries or having Brussels issue new bonds.

But a debacle that spoils the euro's launch is far from inevitable. Although the recent sharp rise in world stock markets may prove fleeting, it could also signal an easing of the global financial crunch. If so, pressure on Duisenberg would diminish. The ECB is hinting privately that it will be more flexible next spring once the euro is out of the box. And the new German government's real intentions are still unclear.

But we may be seeing the beginnings of a power struggle that could expose the flaws in the blueprints for the new Europe. For example, some critics have always doubted that a strong central bank could be sustained without a strong central government. To prove them wrong, Duisenberg needs to get better at explaining how the ECB will contribute to sustaining a strong European economy. The new central bank needs a statesman.

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