Commentary: Ditching Duisenberg Won't Save The Euro

European Central Bank President Wim Duisenberg has a habit of putting his foot in it. But the gaffe he made in an Oct. 16 interview with The Times of London was his biggest yet. His mistake was to hint that there would be no further central bank intervention to support the euro this side of the U.S. Presidential election on Nov. 7.

That violated the first lesson from Central Banking 101: Always keep 'em guessing. "It's hard to believe [Duisenberg] made those comments," says Carlo Monticelli, co-head of European economics at Deutsche Bank. "Discussing intervention strategy in public is something a central banker should never do."

No wonder the foreign exchange markets reacted immediately, driving the sickly currency down 1.5 cents to within a whisker of its Sept. 20 low of 83.3 cents. In the unkindest cut of all, the euro rallied briefly on rumors that Duisenberg was on his way out. Then it dropped to a new low of 83.86 cents on Oct. 18. The issue of intervention--and possibly Duisenberg's big mouth--looked likely to dominate the ECB's governing council meeting on Oct. 19 in Paris.

So should the powers that be give Duisenberg the heave-ho? Privately, European finance ministers described his latest comments as either "inept" or "unfortunate." In the staid protocol of Finance Ministries, those phrases amount to a vitriolic denunciation. And the designated successor, France's Jean-Claude Trichet, has credibility with the markets as a hard-currency type.

But even though ousting Duisenberg might give some Europe politicians a moment of savage glee, currency traders in London say it would damage the ECB's battered credibility still further if Duisenberg had to resign before euro notes and coins are introduced in January, 2002. More important, removing Duisenberg from the scene would do next to nothing to solve the problems plaguing the ECB and, by extension, the euro.

The real issue is political. European leaders have not been willing to delegate enough power to the ECB to make it a credible central bank. Even Alan Greenspan would have trouble running this outfit. And the ECB needs a strong, political counterweight--which is exactly what Greenspan has in the U.S. Treasury, a powerful organization that can back interventions and speak with one voice to the markets. To provide that counterweight, euro-zone governments need to coordinate their economic and fiscal policies far more effectively if they are ever to convince the markets that they have a single economy and that the single currency project is going to succeed.

TOO BIG. Structural reform is a must. The lines of authority linking the European Commission in Brussels, the national governments, and the ECB are anything but clear and transparent. And with 17 members, the ECB's governing council of 11 national central banks and six ECB executives is too large.

The council's size explains why the ECB often seems hesitant and indecisive and why officials are seemingly incapable of speaking with a single voice when they discuss exchange-rate and monetary policies in public. The problem will get worse as the euro club expands: Greece is due to join any day. The cacophony convinces traders that the ECB does not have the focus and collective will to intervene massively in the markets--even though the ECB has ample reserves to do so.

Is there a solution? Long-term, the monetary union's members have to get a lot more active on reforming everything from labor markets to tax codes. But that will take years--maybe decades. In the short term, the ECB could work on shrinking the governing council to manageable size. That means national central banks would have to band together to reduce their number. A Benelux central bank would have to emerge, for example, or an Iberian one.

But that reform will take a mighty effort to suppress Europe's national egos. In the meantime, the euro will wobble. To be sure, no country is talking about abandoning the single currency. And though opinion polls show that many Europeans don't like the euro, especially in Germany, there's no public groundswell for ditching it.

But the further the euro falls, the more problematic it is for business and the economy. Robin Marshall, director of European research at Chase Manhattan Bank in London, predicts the euro will go to 75 cents before bottoming out. If so, it will raise fresh doubts in Europeans' minds about its viability. Maybe the politicians will finally come to their senses, reform the ECB, and vastly improve the way they themselves operate. But until they do, whoever runs the ECB will fight an uphill battle.

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