Paris, Monday, October 30, 2000 The Euro in Crisis, and Words Fail Its Guardian He May Talk Too Much, ECB President Admits

-------------------------------------------------------------------------------- By John Schmid International Herald Tribune FRANKFURT - Wim Duisenberg simply can't hold his tongue. By his own admission, the president of the European Central Bank is driven by a compulsion to explain. Given the smallest opening, he will talk ECB policy, intervention prospects, the world economy. His free-flowing words are as much a part of his character as his distinctive shock of white hair. ''I am direct - some say I am too direct,'' Mr. Duisenberg says. ''It is part of my character. Even if I wanted to change my character, I do not think that I could. It has been built up for over 65 years.''

The ECB is in crisis - shell-shocked by a battered euro - and many people believe the bank's biggest problem is its loquacious leader. In a special two-part series, the International Herald Tribune examines several reasons for the bank's woes. Top among them is Mr. Duisenberg's garrulousness and his lack of experience for such a high-profile job at the center of European monetary union.

But Mr. Duisenberg alone isn't responsible for all of the ECB's shortcomings. Tuesday's installment will examine the central bank's structural problems.

In recent weeks, as the euro's profound troubles have worsened, the spotlight has fallen on Mr. Duisenberg's character. In the eyes of many market players, the professorial president has sermonized the euro deep into its doldrums and eroded confidence in the central bank. Some economists and politicians have begun to question whether Mr. Duisenberg is in fact the right man to lead the ECB in this critical period. Establishing the bank's credibility is crucial to public acceptance of the young institution, which determines monetary policy affecting the lives, jobs and savings of 290 million citizens in the euro zone.

''Someone who is not always and completely vigilant with such responsibility is not doing his job,'' Deutsche Bank's chief economist, Norbert Walter, wrote in a recent commentary for a German newspaper. In France, Didier Migaud, a Socialist parliamentary deputy and an ally of Finance Minister Laurent Fabius, suggested that Mr. Duisenberg should account for himself before the European Union's court system. Mr. Migaud said that Mr. Duisenberg had undercut the euro as the ECB's tight-money policies had undermined growth and jobs.

Mr. Duisenberg's tenure at the ECB has been punctuated by gaffes that to many observers have only drained confidence in his leadership. The euro began its long descent shortly after its introduction in January 1999, falling 8 percent in its first three months. In April 1999, only four months into his stewardship, Mr. Duisenberg sent the euro spiraling further down by saying that the bank's policy on the currency was one of ''neglect.'' Around the same time, he said he was not bothered by the currency's weakness, only to add later that he would become concerned only if it fell further.

His most recent verbal mishap came on Oct. 16, when the Times of London quoted him as saying he did not think the bank would intervene in the currency markets in support of the euro if war were to break out in the Middle East. By revealing the central bank's intervention strategy, Mr. Duisenberg broke a cardinal rule of central banking, analysts said. The euro withered further following publication of the Times story.

The storm over his comments renewed doubts about Mr. Duisenberg's future at the bank. In the midst of his latest controversy, Mr. Duisenberg sat down to a previously scheduled interview with the International Herald Tribune in his 35th floor office. The 75-minute interview took place on the evening of Oct. 17, only hours after the ECB had issued a denial that he was prepared to resign his post. It also came two days before Mr. Duisenberg announced in chastened tones at a press conference that he would not give ''further comment'' on the Times interview, intervention or his future at the ECB.

In the interview with the Herald Tribune, Mr. Duisenberg did offer his thoughts on the effects of the weak euro, acknowledging that the decline had dented public trust. ''Does it make it more difficult to build the credibility and the confidence?'' he said. ''The answer is yes, but for the wrong reasons, but that apparently does not matter.''

Mr. Duisenberg is hardly the sole cause of the euro's descent. Europe's politicians have done their share of the damage. Chancellor Gerhard Schroeder of Germany sent the euro tumbling in September when he extolled the export-enhancing benefits of a weak euro for East German industry, strengthening the impression that the European political elite prefers a soft euro. And few dispute that the record U.S. expansion has drawn a record run of capital out of Europe and into the United States.

Mr. Duisenberg accepts criticism of his remarks, in so far as he deviated from a standing ECB agreement to utter uninformative, stock replies to questions on intervention, a source said. He was not pleased that his comments in the London paper were taken out of context and effectively translated into a general policy position, which was not his intent. He believes he was simply offering an honest reply to a specific question.

According to this source, Mr. Duisenberg chided himself for not anticipating that a hypothetical question could be taken out of context and given wider significance. ''Because we want to be open and transparent, we are more vulnerable than those who do not feel that need or do not have that need,'' he said. ''I think we have the need. We have to be open.''

To be sure, the bank has strong reason for wanting to explain its views. Mr. Duisenberg repeatedly emphasized the need to speak to the people of the 11 European states who have forfeited much of their national economic policy to him and what he calls a largely unknown, new institution. He feels duty-bound, he says, to create trust and confidence through openness and transparency.

''We explain like mad,'' he said. ''By giving speeches, by writing articles, by appearing before the Parliament, by engaging in the public dialogue with governments, with social partners. It is all explaining, explaining, explaining what we are doing, in order to be understood and thereby to gain the confidence of the people.''

The ECB, Mr. Duisenberg said, is more open and transparent ''than any other central bank.''

But Mr. Walter, the Deutsche Bank economist, believes the ECB's quest for transparency is part of its problem. ''The only thing that can help the euro now is studied silence and smart action,'' he wrote in the newspaper column for Die Welt. And an investment research firm, 4Cast, last year found that the euro fared best when the ECB said least.

''We are taking a risk by talking like we do,'' the ECB's vice president, Christian Noyer, said in a separate interview. Mr. Noyer said that officials of other central banks have told him that they would not dare to hold monthly press conferences immediately after their council meetings. The ECB is the only major central bank to give monthly press conferences whether the bank has something to announce or not.

The next press conference follows a meeting Thursday of the bank's governing council.

Mr. Noyer and others said the bank was well aware of the risks. ''We had no time to grow up,'' he said. ''We had to be immediately understandable because of the importance of our currency.''

Mr. Duisenberg himself had little time to ease into his job. In a meteoric career move, he won the top spot at the ECB after 15 years as the governor of the Dutch central bank. Cynics describe his old central bank as a branch of the Bundesbank because he shadowed Germany's policies on interest rates and currencies more exactly than any other EU central bank.

In the process of tethering the guilder to the Deutsche mark, Mr. Duisenberg also throttled Dutch inflation and earned a reputation as a hard-money hawk and staunch defender of central bank political independence. That helped him complete a midcareer ideological conversion. As a member of the center-left Social Democrats, he once advocated big-government deficit spending as Dutch finance minister. His about-face occurred in 1975 after a budget crisis forced him to slash spending and curb wages.

The Germans argued that the most politically agreeable figure to run the ECB as its first president must come from a small country to avoid the impression that currency union was a closed Franco-German shop. But in leaving the Netherlands, Mr. Duisenberg moved from relative obscurity into the spotlight as Europe's leading central banker. With questions swirling about his future, he seemed confident during the interview that his position was secure. ''Could someone else do a better job?'' he asked. ''I do not think so.''

He recognized that the debate over his performance or rumored resignation was not good, but added that it would also not be good for confidence in the euro if he resigned. ''You can be sure - and now I say, 'God be with me' - I will be here for years to come,'' he said, quoting a variation of the phrase engraved on the Dutch guilder, which says, ''God be with us.''

Mr. Duisenberg said he is unlikely to finish his eight-year term. Under French pressure at a 1998 European Union summit, Mr. Duisenberg agreed to step down in midterm to make way, evidently, for a French candidate to succeed him. In an official declaration at the time, Mr. Duisenberg said his age would probably prevent him from completing his term. The terms of that accord still apply, he said, quoting his May 1998 declaration.

Asked if he began the job with a confidence deficit because of the political horse-trading with France over his post, he said, ''Yes, it was a bad start.'' He added that he believed the public found it ''very hard to let that issue die.''

The intense focus worldwide on the fortunes of the euro appears to have taken its toll on Mr. Duisenberg. ''What I am becoming more and more weary about is all the attention that is being paid in the world, and especially the media, to the exchange rate of the euro,'' he said. ''As if the exchange rate of the euro is the euro and as if that determines the degree of success which the currency has. Which is by no means the case.''

But the euro's descent now has gone beyond a problem of confidence and inflation and begun to create a new dilemma. Its decline of nearly 30 percent since its birth 22 months ago has prompted a succession of interest rate increases meant to quell inflation from rising import prices and bolster the currency by sweetening yields on euro-denominated assets.

Partly as a result of that credit tightening, Europe's economies have begun to slow. Germany's six leading economic think tanks last week argued against further rate hikes. At the ECB's latest press conference in Paris, Mr. Duisenberg warned: ''The undervaluation of the euro is giving cause for concern that it might have adverse implications for the world economy.''

Drinking tea and smoking Marlboros during the interview in his office, Mr. Duisenberg was clearly in an expansive mood. He veered from a discussion of the U.S. current-account deficit and volunteered an apparently offhand view on the dollar, one that might seem surprising for a central bank governor battling his own weak currency. Referring explicitly to the dollar, he said: ''Having a strong currency is quite all right. I always say I am more interested in a stable currency than a strong currency, but that is another matter.''

Reflecting on his job, the craggy-faced Dutchman said he hoped to give the ECB a ''human face.''

''Not in particular my face,'' he said, ''but a human face.''

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-- Martin Thompson (mthom1927@aol.com), October 30, 2000