Central bankers are Delphic figures. They are supposed to be all-knowing, serious and solid, exuding confidence and authority. At the same time, however, they must maintain an air of unpredictability to keep markets from anticipating their moves. That is why last week’s comments by Mr. Wim Duisenberg, head of the European Central Bank, were inexplicable. They violated that last rule, and by implication, undermined his claim to be serious, solid and credible. That is the last thing that the euro, Mr. Duisenberg or the ECB needs right now.
Since it was launched on Jan. 1, 1999, the euro has lost over 30 percent of its value. Once considered a challenger to the U.S. dollar’s status as the world’s leading reserve currency, the euro has instead spiraled steadily downward, leaving serious damage in its wake. Companies that bought euros have seen their investments devalued. Mazda Motors, for example, announced last week that exchange-rate fluctuations, primarily in the euro, had cost the company over $1 billion last year.
The lack of confidence in the currency has cast a shadow over the entire European project, as was made clear by Denmark’s vote last month rejecting membership in the euro. Politicians worry that the ECB will have to boost interest rates to restore credibility in their currency; yet doing that would undermine the economic recovery that is now under way.
In the midst of these deliberations, Mr. Duisenberg declared last week that intervention to prop up the euro would be inappropriate if there were a war in the Middle East. Mr. Duisenberg was trying to live up to his commitment to make the ECB more transparent. That is always a good policy, given the impact of central-bank decisions and their distance from the general public. But his statement violated the basic law of central bankers: Never tip your hand when it comes to intervention.
Not surprisingly, the market took him at his word and the euro continued its slide, reaching an all-time low of $0.833. Just as damaging was the blow to Mr. Duisenberg. There was some speculation that he might have to be replaced, but that was quickly denied.
Even though his comments were a mistake — a fact that Mr. Duisenberg acknowledged and then followed with a promise to make no more such statements — he should not step down. First, he has no ready replacement. The man tipped to take over when he does step down, Mr. Jean-Claude Trichet, the governor of the Bank of France, is involved in an official French investigation of the troubled bank Credit Lyonnais. Given the fight that the French government waged over the appointment of Mr. Duisenberg — it is believed that a deal was struck by which he will step down halfway through his term and will be replaced by Mr. Trichet — there is little chance that anyone else could be considered for the post.
Just as important is that fact that Mr. Duisenberg’s resignation would look like political interference in the workings of the ECB. Indications that politicians were encroaching on the bank’s independence would do even more harm than Mr. Duisenberg’s gaffe.
But zippered lips will not end the euro’s woes. The currency’s continued slide is the result of relative weakness in the European economies. While some governments have reformed their markets and made companies more competitive, progress has been slow and there appear to be better investment opportunities elsewhere. Many of them are in the United States — that creates a demand for dollars, which further weakens the euro.
The obvious way to strengthen the currency is to raise interest rates. Rising oil prices and signs of inflation — prices in Europe increased 2.8 percent last month — could give the ECB a reason to act. But the bank has raised interest rates seven times already this year, and there are fears that another move could strangle the European economies.
That leaves intervention as a tool to fight off speculators. Last month, the ECB, the U.S. Federal Reserve and the Bank of Japan spent $5 billion in a surprise move to prop up the euro. It worked, but only temporarily, and the currency has since resumed its slide.
Mr. Duisenberg’s comments were only statements of the obvious: There is rarely stomach in the U.S. for intervention, especially when it weakens the value of the dollar, and even less during an election year. Still, he should have known better. He will not make that mistake again. In so doing, he will do Europe a real service. Not only will he resume that Delphic air that serves central bankers so well, but he will deprive the politicians of a scapegoat for their own unwillingness to embrace reform. That reluctance harms the euro’s credibility far more than Mr. Duisenberg’s candor.
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