Stable euro holds key to EU’s future economic success in

Date: 24/07/1997

FROM the 12th floor of the massive Bundesbank building on the outskirts of Frankfurt, the bank's vice-president Johann Wilhelm Gaddum enjoys a bird's-eye view of Germany's financial centre.

He may be less able to see what is going on in the EU capitals, but very little passes the genial Gaddum by.

Among all the speculation about who will and will not make the grade when it comes to selecting members of the 'euro club', the 67-year-old Gaddum - former finance minister of the state of Rhineland-Palatinate and a Bundesbank board member since 1986 - is keen to make one thing very clear. For Germany, the central pillar of European economic policy must be stability.

“I can only warn: one cannot change the European Central Bank's monetary tasks as laid down in the Treaty of Maastricht. Governments and national parliaments have tied themselves politically to a policy of stability,” he insists.

Gaddum's view is in sharp contrast to the recent utterances of certain leading French politicians, who have suggested competitive devaluation of the euro to enhance EU export opportunities.

“Generally, countries do best when they adopt a stability-orientated monetary policy. This leads to low capital market rates and a stable monetary framework,” insists Gaddum, adding: “You can see that with Germany which has very low capital market interest rates compared to the rest of Europe.”

It is no great surprise that the number two at the Bundesbank refuses to be drawn too much on the rights and wrongs of the last-minute measures being undertaken by some governments to squeeze their way into the first wave of EMU.

But there is a hint of flexibility in what he says, particularly on the Maastricht Treaty's requirement that public debt should be approaching 60&percent; of gross domestic product at a satisfactory pace.

“The debt criterion has been discussed rather less of late, because people seem to have accepted that it will be impossible for many countries to reach it, and we are looking - with certain justification - at the elasticity the treaty offers,” he says.

This will give succour to those considering a possible trade-off between France and Germany, given that the former could well miss the deficit criterion and the latter the public debt criterion.

It will also greatly encourage the likes of Belgium and Italy, with their severe debt problems.

Gaddum stresses, nevertheless, that the two central qualification criteria are intrinsically linked. “The deficit criterion obviously indicates to what extent a state is in a position to move in the direction of respecting the debt criterion.”

He also takes an open-minded approach to those countries which, to some observers, have taken 'quick-fix' measures to meet Maastricht's tight guidelines which are a far cry from the 'sustainable convergence' set out under the treaty. Speaking before the publication of the latest French economic forecasts, Gaddum stressed that judgements should be reserved until definitive information is available next spring. The French public audit showed a budget deficit of 3.5-3.7&percent; of GDP, and coincided with new taxation measures to raise 4.8 billion ecu which the French hope will cut the deficit by 0.4&percent; of GDP.

“If the French figures turn out as is currently being forecast, that may act as a particular stimulus to the French government to improve the situation. The treaty sets out that sustainable consolidation should be achieved, and of course it matters what the results for 1997 and 1998 will be.”

Although the true story of how the figures were arrived at will not be reflected in the final economic performance indicators, Gaddum stresses that all measures taken by governments should be borne in mind. “These can make the results relative.” This is particularly true in the case of France, where some commentators believe creative accounting involving 6 billion ecu of France Télécom's pensions liabilities could have taken as much as 0.4&percent; of GDP off the expected budget deficit for 1997.

“Measures which are simply 'one-off' measures will be included in the assessment of the Maastricht criteria when the decisions are taken in spring next year,” says Gaddum.

Italy is another case in point. In this case, the vice-president is positive about the massive cut in the budget deficit ratio from 6.6&percent; of GDP last year to close to 3&percent; this year, but adds: “It depends how such an improvement was made. If it is because a country has managed to borrow on more favourable terms by reducing the interest burden, then that is a genuine relief. If they succeed - and this seems to be the case in Italy - in changing from short-term to longer-term borrowing, that is a real step towards consolidation.”

But Gaddum is at pains to stress that he is in no way “a follower of the 'decimal point' discussion” which seems to be occupying the minds of so many EMU commentators.

Looking ahead to a lively debate which is likely to last throughout the autumn and into the crucial spring 1998 period, he urges an early decision on how conversion rates are to be fixed, and marks himself out as a believer in the central Exchange Rate Mechanism rates as the most appropriate. Each ERM member is assigned a central rate both against the ecu and every other currency in the mechanism. They are allowed to fluctuate by 15&percent; either side of this rate.

He also dismisses fears that it would be problematical to launch a single currency project among countries where prevailing interest rates were so much at variance.

“We already have a process of bringing long-term interest rates more into line. This will give states leeway to bring short-term rates closer together. You can observe that in Italy and Spain. Extra room has been opened up for convergence of short-term rates to the lower levels of other countries,” he says.

As to German rates, Gaddum agrees with the view of the Bundesbank's chief economist Otmar Issing that, “on the basis of developments so far this year, I see no room for a further cut in interest rates”. But he cautions that any decision the Bundesbank council makes will depend on what is contained in the June economic situation report, particularly the development of the money stock M3.

Clearly, the state of the German economy is causing the Bundesbank a certain degree of concern. Although the weakness of the mark in relation to the dollar has not yet fed through into inflation, Gaddum admits that “we are observing the development in the dollar market with a certain concern”.

Stressing repeatedly the favourite German mantra of stability, Gaddum digs his heels in when there is any suggestion that the euro should be established at a relatively low level against the dollar for the benefit of the export trade.

But he refuses to be drawn on the wisdom or otherwise of German Finance Minister Theo Waigel's most recent budgetary package, designed to bring the German deficit within the 3.0&percent; parameter necessary under Maastricht.

“We are assuming that the German government's goal will be reached. We have no reason to doubt that,” he says.

He is also keen to gloss over the recent high-profile disagreement between the bank and Waigel concerning the latter's plan to revalue the country's gold reserves, seen by most as a far from subtle piece of 'book-cooking'.

But through gritted teeth, Gaddum denies any suggestion of the bank putting its foot down simply to make a point. “We apply the national laws for accounting. It was simply not acceptable to do anything different,” he says.

He is optimistic about perhaps the most serious recent threat to the German economy, the rise in unemployment, believing that it has now plateaued.

“We expect that in the course of this year, investments will strengthen again and this will have a positive effect on the labour market,” he says.

Ever careful not to be dragged into the murky waters of political wheeler-dealing, Gaddum is unwilling to comment on French pressure for a Frenchman to head up the fledgling ECB in place of president-elect Wim Duisenberg.

With consummate diplomacy, he concludes simply: “I respect Wim Duisenberg enormously.”