Calamity for Euro Goes Far Beyond Gaffes by Central Bank President

By JOHN-THOR DAHLBURG, Times Staff Writer

PARIS--The euro continued its relentless decline this week, plumbing all-time lows, and some Europeans are blaming "Dim Wim." That would be Wim Duisenberg, the Dutchman who is president of the European Central Bank, whose unguarded comments were responsible for one of the euro's latest beatings on world markets.

A prominent French Socialist parliamentarian has suggested impeachment, and critics are poking fun at him. But some currency specialists say Duisenberg is being made a scapegoat, and that changing the ECB's leader won't solve the euro's woes. "You ask the critics what they would do differently and the answer is lengthy stuttering," Graham Bishop, a Britain-based independent consultant on European financial affairs.

Duisenberg's latest misstep came in an interview this month when he seemed to rule out another concerted intervention by the world's central bankers to shore up the euro. For traders, it was practically an invitation to renew their attacks on the currency, which they did. Ernst Welteke, head of the Bundesbank, Germany's central bank, issued a dry but stinging rebuke to Duisenberg that a central banker shouldn't telegraph his moves. Cristobal Montoro, Spain's finance minister, demanded that a "single voice" be authorized to speak on the euro's behalf. Chastened, Duisenberg said he will talk about interventions only after they occur.

The 65-year-old Dutchman has saved his job for the time being, winning public endorsement from the central bank's governors and the executive commission of the European Union. But Duisenberg, who headed his country's central bank for 15 years, has become a figure of ridicule in the world's business media and counting houses. Europe's chief central banker is now frequently called "Dim Wim," and in French, "Wim le Gaffeur," or Wim the Bungler. "He is not doing his duty," Norbert Walter, chief economist of the Bundesbank, complained this month. Valery Giscard d'Estaing, the former French president who was one of the euro's founding fathers, has called the choice of Duisenberg as ECB head "an error in casting."

The supreme insult came when unfounded rumors of Duisenberg's pending resignation made the euro temporarily rise in value. A term-sharing deal reached at the outset of Duisenberg's term calls for him to step down halfway through the eight-year run. But the Frenchman who is supposed to succeed him, Bank of France Gov. Jean-Claude Trichet, is hobbled by his own problems: He is under judicial investigation in connection with the near-bankruptcy of the Credit Lyonnais bank. Some European countries would undoubtedly object to Trichet receiving the ECB job while suspicion hangs over him. Duisenberg therefore may end up serving out the entire term. His critics, including the French, who were hostile to his selection and forced the term-sharing deal with Trichet, seem to have decided to mute their criticism for fear the credibility of the euro will be eroded.

Meanwhile, the common currency of 11 member countries of the European Union hit record lows against the U.S. dollar and Japanese yen this week, dipping Thursday to 82.29 cents, the nadir since its Jan. 1, 1999, birth. The currency enjoyed a surge against the dollar Friday on fresh evidence of a U.S. slowdown, closing at 84.03 cents in New York. The euro's anemia comes despite the coordinated intervention Sept. 22 by the U.S. Federal Reserve, ECB and central banks of Britain and Japan. The central bankers bought up billions of dollars worth of euros when its value dropped below 86 cents. As this week showed, the action provided only a brief respite.

Now, some traders are predicting the euro's value will plummet to 80 cents--a drop of nearly 32% relative to the dollar over its brief lifetime. The reasons are multiple, and, according to some economists, not wholly rational because the euro zone's economies are growing faster than they have in a decade. "I recently was up at one investment bank in London, and it took me three hours to work my way across the trading floor," Bishop said. "Everyone wanted to know: Why is the euro falling so fast?" Analysts can provide some answers. But many, including Bishop, believe the euro's decline can't fully be explained by objective factors. Depressing the currency's value is a strong outflow of capital being spent by Western European countries to snap up assets in the United States. Dutch banking group ING this week was said to be buying up dollars to fund its reported $5.1-billion purchase offer for the financial services divisions of Aetna. Leery of what the shrinking euro might do to the value of their holdings, Japanese investors also have been selling off euro-denominated assets in large quantities. "Many have been throwing in the towel," Tony Northfield, head of currency research at ABN Amro Bank in London, told business newspaper Financial Times. Some economists believe the euro is also jinxed by the U.S. political calendar. With elections so close, they conjecture, the Federal Reserve and Treasury Department won't hazard a repeat of last month's bailout of the euro. Without U.S. participation, chances are slim other central banks would attempt a rescue. That puts more pressure on the currency.

"The market is attracted by the smell of blood because it thinks there will be no intervention before the American elections," Sonja Helleman, analyst at Dresdner Kleinwort Benson Bank, told Agence France-Presse news agency. For now, the euro exists chiefly as an accounting unit. In 2002, it is to be issued in coin and bank-note form and quickly replace the national currencies of the European Union member nations that have officially adopted it: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain and, as of next year, Greece. In the meantime, Bishop cautioned Americans not to glory too much in the euro's difficulties.

"If the capital inflow to the United States stops, Europe has developed serious alternative capital markets," he said. "If the dollar turns [downward in value], the U.S. will find there is a serious alternative. Americans should be careful about thinking the dollar will go on and on.'

http://www.latimes.com/business/20001028/t000102961.html

-- Martin Thompson (mthom1927@aol.com), October 28, 2000

Answers

An Alan Greenspan? Duisenberg is not.

-- JackW (jpayne@webtv.net), October 28, 2000.