Bundesbank rejects weak euro

Date: 24/07/1997

By Michael Mann

THE Bundesbank has issued a stern warning to those seeking to put the euro's exchange rate against the dollar at the centre of economic policy-making after the launch of the single currency in 1999.

In an exclusive interview with European Voice, Bundesbank vice-president Johann Wilhelm Gaddum stressed that the fight against inflation within the euro-zone should remain the main pillar of future European Central Bank (ECB) policy.

“It is quite clear to observers that there are some voices in Europe who are interested in a weak currency as, in my view, a wrongly understood strategy to aid exports,” said Gaddum, referring to recent comments by leading French politicians.

His remarks came in a week when the dollar went to a six-year high, reflecting market fears that the euro will be weak and open to manipulation by politicians.

“In the treaty it says clearly that the goal of the ECB is to ensure price stability. This correlates to what one calls a strong currency. It is not the job of the ECB to follow an exchange rate orientated monetary policy,” he insisted. “I know the impression exists that we can follow a different line once the ECB is in place. If we want Germany to be in this club, no other policy is possible.”

German resistance to driving down the euro's exchange rate against the dollar has been strengthened by growing fears in Frankfurt that the inexorable rise in the US currency could increase inflationary pressures in the German economy.

“There is a slight overvaluation of the dollar showing itself. This might lead to price pressure on imports. Large inflationary pressures cannot be seen for the moment. Such developments always take time,” warned Gaddum. “However favourable it may be for our exporting industries, we view the development in the dollar market with a certain concern.”

Gaddum also echoed the view of Bundesbank chief Hans Tietmeyer that clarity would be needed before the end of the year on the rates at which the currencies going into EMU will be set against the euro.

This is vital both to fend off the danger of currency speculation in the run-up to the launch of the euro and to stop governments devaluing their way into the single currency.

“An early announcement of the procedures for setting the conversion rates might reduce currency speculation,” said Gaddum, adding that September's informal meeting of finance ministers should focus on a “discussion which will have to be intensified during the autumn”.

The banker rejected any suggestion that countries could enter the single currency below their central rate in the Exchange Rate Mechanism. “I think that central ERM rates are a good basis for setting the conversion rates at which the currencies of the participating countries are irrevocably fixed,” he said.

Gaddum also hinted that the Bundesbank might now be more open to a degree of flexibility on the Maastricht convergence criteria than it would have been a few months ago. While insisting that economic performance would have to be rigorously scrutinised, Gaddum stressed that he was “not a follower of the 'decimal point' discussion”.