European 'super currency' under fire

April 21, 1991|By Ian Johnson | Ian Johnson,Special to The Sun

FRANKFURT, Germany -- Chastened by its experiences with currency union last year, Germany's influential central bank is leading an attack against the quick creation of a European "super currency."

Leaders of Germany's Bundesbank, which is the most important financial institution in Europe, have been saying over the past few weeks that plans by the European Community to unite its 12 currencies by 1997 could lead to the sort of economic problems that Germany now is facing after having united East and West Germany's currencies last July.

Unless Europe's economies begin to act more harmoniously and unless a proposed European central bank is at least as independent of politics as is the Bundesbank -- two unlikely events -- European Monetary Union (EMU) should be delayed beyond its proposed 1997 start up, Bundesbank President Karl Otto Poehl said.

"Without success in coordinating economic and monetarpolicies and without achieving a greater convergence of performance, the prospects of EMU do not become credible or realistic," Mr. Poehl said.

Mr. Poehl's hard line has put the German government in a difficult position. It says it is committed to European unity, and it does have the final decision on the matter. But because Mr. Poehl is considered the most influential financial politician in Europe, his backing is crucial for the federal government's credibility. Talks with officials in Bonn and Frankfurt reveal that 00 now only a few visionaries in the Foreign Ministry and the Chancellery promote rapid progress toward EMU.

A conference of finance ministers met this month in Luxembourg but could not reach agreement on how the central bank should be organized. More meetings are planned later this year.

Mr. Poehl's opposition to quick monetary union stems partially from his view of German monetary union, which he called a "catastrophe" economically. Overnight, two different economies were rammed together, which forced weak east German companies to sell their second-rate products for west German marks. No one wanted the suddenly expensive goods, so many companies went bankrupt, forcing the west Germans to pump billions into the disintegrating east German economy.

The Bundesbank fears that EMU could lead to a similar sort of massive money transfer within Europe. Richer European countries, such as Germany and France, would have to pour money into weaker economies, which would become stricken by unemployment.

"Who would pay for all that?" asked Ulrike Roy, a Bundesbank spokeswoman.

In addition, the Bundesbank views the attempts by east German workers to demand quick wage parity with their western counterparts as ominous for Europe. Mr. Poehl and other bank leaders have said the demands are threatening to cause inflation in Germany and are being held in check only by the Bundesbank's commitment to strict monetary policies. If wage demands became widespread after EMU and a European central bank were not as independent as the Bundesbank, inflation could follow.

Basically, Europe's economies must first "converge" to more equal levels of development before a common currency makes economic sense, Mr. Poehl said. Right now that convergence is not taking place, he said.

Most economists agree that the Bundesbank conditions for EMU are sound. Based on their experience of low inflation and moderate growth under the Bundesbank's independent policies, the Germans want the European central bank that will look after the new currency to be independent of politics. They point out that institutions such as the U.S. Federal Reserve often are pressured by politicians to loosen interest rates for short-term reductions in jobless rates, usually just before an election. In the long run, this usually refuels inflation.

The French and the British, however, are suspicious of such independence and want the bank to be more directly accountable to the European Parliament. The British also do not want a European central bank to replace the member countries' national banks, which is a precondition for Bundesbank approval of EMU.

The Bundesbank envisions the national banks surrendering control of monetary policy and becoming only arms of the independent European central bank, perhaps located in Frankfurt.

What is especially new in these positions is the Germans' hard tone. Mr. Poehl has become increasingly strident in stating Germany's need to have a European central bank "at least as independent as the Bundesbank."

Germans, he argues, have had their experience with hyper-inflation in the 1920s and now would not tolerate the 9 percent or 10 percent inflation that is common in France and Britain.

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