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Wednesday, September 27, 2000
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Bluffs, intervention take Europe and summit on economic roller-coaster ride By Christopher P. Winner The World Bank and International Monetary Fund (IMF) summit had hardly promised such fireworks. The excitement began Sept.19, when the IMF's chief economist, Michael Mussa, suggested the European Central Bank (ECB) should consider intervening to prop up the troubled euro. The flagship European currency has lost about 30 percent of its value against the dollar since its introduction in January 1999. "Circumstances for intervention [to prop up a currency] are relatively rare, but they do arise," Mussa said during the presentation of the IMF's biannual World Economic Outlook. "One has to ask, 'If not now, when?'" At first, the European officials -- embarrassed by the high-profile remarks -- raged against the machine. German, Portuguese and ECB officials all thrashed Mussa, who was defended by IMF chief Horst Kohler, a German. But then, an unusual thing happened. Before debate turned to full-blown acrimony, the ECB, Washington and Japan intervened. It was the first concerted central bank action in five years, and came on the eve of the meeting of Group of Seven (G7) finance ministers. That the U.S. Federal Reserve agreed to the intervention immediately muted criticism from the European banking establishment against Washington. The bankers had insisted the U.S. Federal Reserve would not act on the near-eve of a tight presidential contest that features a lively economic debate between Vice President Al Gore and Texas Gov. George W. Bush. They were convinced Fed chief Alan Greenspan would favor his domestic economy over complaints from scorned U.S. exporters. Moreover, despite inflation, the feeble euro is assisting Europe's export-driven economy. Why intervene? In the end, a wish for currency stability -- an IMF hallmark -- won out over laissez faire. It was, in fact, as if Washington had come to the private rescue not only of the euro, but also of the two embattled institutions, which it tutors through funding. Both the IMF and World Bank are Washington-based and have long been criticized for being unable to influence major policy. But within 36 hours of Mussa's comments, its chief donor put its dollars where the IMF's mouth was. So while the intervention hardly saved the euro, it successfully -- strikingly, in fact -- defanged a potentially unpleasant debate between the banking institutions and Europe, which was clearly mortified by the tone of Mussa's remarks. It also had enormous face-saving importance, allowing the ECB and German officials to appear more aggressive. Immediately after the euro maneuver, Bundesbank President Ernst Welteke circled his European wagons. "The ECB council is responsible for deciding these things [intervention] ... It was conducted very well and it showed a coordinated response was possible. There had been some doubt about that in the past." It was hardly apparent, after Mussa's remarks, what Welteke meant by "the past." Nor was it clear whether the intervention would actually help the overall reputation of the currency, since intervention by definition can suggest profound weakness. Wheels within wheels Yet there was a vital second layer. As the anti-globalization debate, which focuses on the fate of poor nations, gathers steam, the idea that IMF would dwell on the weak euro -- the reigning symbol of European economic independence and virility -- seemed inadvertently to place European Union nations in the same boat with the developing world. The G7 action squarely restated an obvious but fundamental priority: whatever their differences, the fortunes of the Western economies are what matters to the world's bankers. Still, for a long heartbeat, Prague was a tense place for the guardians of the global economy. Mussa, intentionally or otherwise, drilled into the euro's tender gums -- a painful place for months as the currency, which has yet to inspire faith among investors, dropped unchecked. Little wonder Europe lashed out. "Michael Mussa should concentrate on his job instead of giving his advice to the European Central Bank," a German government representative told reporters in a background briefing. While IMF chief Horst Kohler, once an economic adviser to former Chancellor Helmut Kohl, practiced damage control, defending Mussa and insisting "intervention cannot be taboo," the fact that a key economist would publicly embarrass the currency stunned the summit. Kohler's nationality, and his longtime association with German financial structures, did not help. More than any other European nation, Germany has struggled to contain fallout from the euro's under-performance. Public sentiment is strong that Berlin should not abandon the Deutsche mark, a move that would effectively bury the euro and compromise the 15-member EU. On the eastern front, where the Czech Republic trades actively with the EU and measures the fortunes of its crown against the euro, the intervention won praise. Czech National Bank Vice Governor Oldrich Dedek said the action was in the interests of "small, open economies that suffer from the currency instability." The Czech Republic is such a market and has watched the crown reel, mimicking the euro. Yet as the EU moves into Central Europe, pushing toward an eastern expansion likely to include Prague by 2005, the euro's instability, further eroded by recent global hikes in oil prices, is likely to remain on trouble's agenda for months to come. Christopher P. Winner's e-mail address is cpwinner@praguepost.cz More business stories
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The Prague Post, a weekly newspaper published in the Czech Republic.
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