France's New Reign Of Terror.

Paris is waging a not-too-subtle campaign to oust ECB President Wim Duisenberg.

The French demanded as a price of German unity the destruction of the mighty Bundesbank. Germans had to give up their beloved Deutsche Mark. The French succeeded. But so far their moves to post a Frenchman at the helm of Frankfurt's European Central Bank have failed. Chirac may turn out the loser.

There is a potentially explosive issue dominating private discussions among European central bankers, financial officials, and market participants: the growing fear that a bitter leadership battle may weaken the credibility of the European Central Bank (ECB) and push the euro even lower.

Ever since March, when Jean Lemierre, president of the European Bank for Reconstruction and Development (EBRD), raised the issue of ECB President Wim Duisenberg being committed to step down in 2002 instead of serving out his full eight-year term, EU governments, central bankers, and the financial markets have been put on notice that Paris wants to have a Frenchman at the helm of the ECB next year.

At the recent informal EU finance ministers' meeting in Malmo, Sweden, Belgian Finance Minister Didier Reynders, who presently serves as chairman of the so-called Eurogroup, called on Duisenberg to declare at what time he intends to step down. That was seen as an escalation of the French-led campaign against the Dutch ECB head, who has presided over the euro's fall from over $1.15 to a low of 85 cents.

But Germany is fighting back. German Finance Minister Hans Eichel and his predecessor, Theo Waigel, gave recent interviews to Handelsblatt, Germany's leading financial and economic daily, in which they strongly backed Duisenberg. "There is no reason for starting a debate now about succession," Eichel declared. "Duisenberg is elected for a full eight-year term and he does an excellent job." Waigel, who played a crucial role in getting Duisenberg elected, added: "The ongoing talk (by the French) that there was a secret agreement about limiting Duisenberg's term is false. After all, I was present." In coming out so strongly in favor of Duisenberg, the two heavyweights of German finance have sent a clear, bipartisan message to Paris: Stop undermining "Mr. Euro" by talking about a an early changeover at the ECB.

Yes, there have been ample reasons for criticizing the way the former Dutch central bank governor has been acting as "Mr. Euro." There have been off-the-cuff statements that were clearly counterproductive, given the ECB's primary orientation towards securing price stability. With Duisenberg at the helm, there has been poor communication and a lack of transparency. But the way the French have been trying to push Duisenberg out of his job by 2002 is irritating not only to many European central bankers but also other EU finance ministers and governments. Announcing the end of his term next year would make him a "lame duck" and impede the strong ECB leadership that is needed today more than ever as Euroland is pulled down by slow growth in the world economy.

The French-led public campaign to dismantle "Mr. Euro" has been going on for years. Ever since his July 1997 move to Frankfurt to head the European Monetary Institute, the forerunner of the ECB, the French have given him a hard time. What some call the "Duisenberg-Trichet dilemma" raises some major questions: Will the first president of the European Central Bank serve out his full term that ends in May 2006? Or, will Duisenberg, now 65, step down earlier? Was there a deal at the EU Summit in Brussels in May 1998--as French President Jacques Chirac claims--for Duisenberg to step down in 2002, the half-point of his term, so that a French candidate, Bank of France Governor Jean-Claude Trichet, could take over the ECB reins? Wouldn't such a deal--if it ever existed--constitute a violation of the Maastricht Treaty? These questions are stirring growing uncertainty about who will be calling the shots at Frankfurt's ECB tower. And uncertainty is something the markets don't like.

Duisenberg said publicly right after his appointment that there was no such deal. Responding to Chirac's assertions, he made clear that he had not given his "word of honor" to serve less than a full term.

Since the French launched the new round of quibbling over the ECB leadership, the Dutchman has taken a non-committal position. He says he personally doesn't know yet, so he can't say how long he will serve. As soon as he comes to a decision, he has promised, he will give enough notice for the EU heads of state and governments to select a new ECB president.

But Lemierre, head of the treasury at the time of the Brussels EU Summit, told the Italian newspaper La Repubblica that Duisenberg had definitely agreed to step down by the middle of next year. "I know that [Duisenberg's term] is four years (i.e., until 2002), but nobody knows when he will step down in 2002."

Finance officials, central bankers, and market participants got the impression that the EBRD president, who succeeded IMF Managing Director Horst Kohler at the helm of the London-based bank early last year, was making a pitch for the job with the backing of Chirac.

To some observers, the French campaign against the blunt and conservative Duisenberg doesn't come as a surprise. They point to the possible nightmare that France's political establishment is facing in 2002.

At the end of next May, the term of the ECB's Vice President, Christian Noyer, a former French financial official, runs out. This could mean that France, the second largest economy in Euroland, could be left without a Frenchman in the executive board of the ECB for years to come. The EU leaders might want to fill Noyer's slot with someone from another EMU-member country for a full eight-year term. After all, other EMU member countries also want to be represented on the ECB executive board.

Should Duisenberg live up to his reputation as a strong-willed and somewhat stubborn Dutchman, he might stay in the job as "Mr. Euro" well into his full term. The un-elected, all-but-irremovable ECB president could be holding the European economy's reins for some years to come. Not even a French government could force him out.

This means that the major contenders for the French presidency--conservative Chirac and socialist Prime Minister Lionel Jospin--could be facing elections on April 21 and May 5 empty-handed: with no Trichet or any other Frenchman in the leadership race on the executive board of the European institution that decides France's monetary and economic destiny. As it may turn out, by opting for only a four-year term when he sent Noyer to Frankfurt, Chirac made a questionable bet. For Chirac and Jospin, a European Central Bank without French representation on the decision-making board would be a politically unbearable situation. After all, the Euro-project was pushed by Pads as a price for supporting German unity. The French aim was to dismantle the power of the independent Bundesbank, abolish the mighty D-Mark, and give the "Grande Nation" more direct influence in setting Europe-wide interest rates and monetary policy.

But the Frenchman who was supposed to succeed the Dutchman is caught in a scandal at home. Nobody knows how long the French judiciary will take to decide whether to start formal litigation against Trichet or clear his reputation. As director general of the French Treasury in 1992, Trichet had oversight duties in supervising banks and state companies. French state attorneys accuse him of covering up falsifications in the accounts of then state-owned Credit Lyonnais to give the rundown bank time to recover on it's own strength.

Trichet's ominous problems with France's judicial system have opened the field for other possible French candidates for the ECB presidency. Although neither the Elysee nor the office of the prime minister would comment, there is speculation that both Chirac and Jospin consider Trichet too much of a die-hard supporter of Duisenberg's strong anti-inflation monetary policy. Both are said to push other French candidates who support policies that promote stronger growth through lower interest rates. Lemierre isn't considered qualified enough because he has no experience as a central banker. There is speculation that if Jospin wins the presidential elections, he would like to put finance minister Laurent Fabius--who also has no experience as a central banker--al the helm of the ECB.

Ironically, since France launched a new round of political warfare over the ECB presidency, support for Duisenberg to stay on as "Mr. Euro" has grown. That became evident at the BIS annual meeting in Basel. There, several central bankers--although not speaking on the record--did not hide their disgust for the French government's campaign to force "Mr. Euro" out. "If Duisenberg loses his nerve and the French succeed at one of the next EU summits to impose a Lemierre or Fabius on the EMU member countries, I would recommend to buy a lot of euro-puts," a European central banker said sarcastically. Another noticed "a growing opposition among central bankers in the Euro-zone to accept a Duisenberg successor who hasn't been an outstanding central banker." Should Trichet not make it because of his legal problems, warns this central banker, "All bets are off." He sees "formidable resistance [from central bankers] in the ECB to a non-central banker from France to succeed Duisenberg."

Another central banker at the Basel meeting sees the succession issue at the ECB in a broader perspective: "European central banks are losing power and influence not only through the process of coordinating monetary policy, but also through the Europe-wide trend toward a single regulator. Central banks are pushed out of bank supervision, with governments calling more and more of the shots in supervising financial markets." The key message emanating from the central bankers from Basel: If EU leaders think they can select a politician and not an experienced banker to succeed Duisenberg, they will face not only firm opposition from the central banks in the world but also from the markets. They had better not test what the markets can do to the battered euro. Even a well-respected, all-around politician with lengthy experience, say, Luxembourg's Premier Jean-Claude Juncker, would not qualify. The newest development: Juncker's suggestion to Frankfurt journalists that he had been approached about succeeding Duisenberg (an offer he rejected) was not viewed well by Eichel, who said, "we should stop talking about it." Juncker's indiscretion displeased the Bundesbank and central banks from the larger countries. They see it as the smaller ECB members making trouble. Officials from the larger countries say Juncker has stooped to the level of Belgian Finance Minister Reynders.

Trichet, although severely damaged in his chances to inherit the ECB presidency, puts on a brave face as he makes the global conference circuit. As a former head of the Paris Club, a veteran G7-deputy, a principal negotiator of the Maastricht Treaty, and the central banker behind the "franc fort," Trichet is seen by the markets--together with Duisenberg--as the "alter ego" of the legendary Hans Tietmeyer, the last president of the Deutsche Bundesbank before this once powerful institution lost it's D-Mark power. Trichet "is an outstanding central banker and in my view the only imaginable candidate the French can propose to succeed Duisenberg after he steps down," says Jurgen Stark, the Bundesbank's Vice President.

At the recent International Monetary Conference, a meeting of the chairmen and presidents of the world's largest banks, Trichet made clear that "Duisenberg is a formidable ECB president who has the respect and confidence of all," and that "of course, Duisenberg had been elected for a full term."

The trouble is that Chirac still insists--while Duisenberg and others, like the Germans, vehemently deny--"that there was a deal" for Duisenberg to step down in mid-term. As Chirac said in an interview with the BBC on June 14, 1998, "That's the agreement, and Mr. Duisenberg, who is a gentleman, has given his word on it, which I am not doubting."

Chirac was referring to a compromise between France and Duisenberg worked out by the British EU presidency. The French considered the compromise a precondition for their accepting Duisenberg, who was elected ECB president in a unanimous vote by all EU leaders: Trichet would serve the second part of the eight-year term. It was reached during the longest EU summit lunch in history, a session in Brussels that began May 2, 1998 and lasted until the next day.

But when the other participants--in particular, the Germans--give their side, the story is quite different, in particular, as to the grand finale of the ECB election drama. In the mn-up to the special summit in Brussels in early May 1998, the British, who had the EU presidency, were thought to have reached a compromise that the French, the Dutch, and the Germans could accept.

There exists a political memorandum drafted by the British presidency that, in effect, spells out a partition of the eight-year term for the ECB presidency between Duisenberg and Trichet. This compromise memorandum, published by Handelsblatt, shows that the EU leaders--German Chancellor Helmut Kohl included--were prepared to mislead 300 million Europeans about the true election process for the top post of the ECB. It also shows that the EU leaders were ready to commit a grave violation of the Maastricht Treaty at the birth of the ECB, the most important new institution established under the treaty (see The Compromise Proposal By The British EU Presidency in this article). There are indication that under mounting pressure, Duisenberg was also ready to accept a four-year term.

The Compromise Proposal By The British EU Presidency

(This is the English translation from a German version of the
original text.)

"Duisenberg will be elected in full compliance with the Maastricht
Treaty for eight years. Successor will be a French candidate, who
equally would be elected for eight years. Duisenberg has given notice
that he would not serve out the full term. We have urged upon him to
stay until the transition phase--the introduction of Euro-banknotes
and coins--will be implemented as spelled out in the resolution of
the European Council of Madrid.

FOR THE PRESS:

Question: When will Duisenberg step down?

Answer: When Euro-banknotes and coins will be introduced. That is,
January 1, 2002. There is a short period of some weeks for the
introduction of national currencies. Details as to transferring his
duties will be subject of talks between him and his successor."

Under the Treaty, the ECB president is elected for an eight-year term without strings attached. But the purpose of the EU leaders' compromise was not only to attach strings to the election of Duisenberg, but also to provide instructions as to how the newly elected ECB president should cover up the Treaty's violation. So it was spelled out how Duisenberg would have to present his election by the EU leaders (for only four instead of eight years) to the press.

But as high-stake games go, the final outcome turned out quite different. In the final stage of the "longest lunch," it was old-style political blackmail of coalition partners that saved the EU leaders from committing an unforgivable sin. Upon learning that German Chancellor Kohl would be ready to yield to the French demand for halving Duisenberg's eight-year tenure, Kohl's government coalition partners forced him to back away from the proposal.

Then German Finance Minister Waigel, head of the Bavarian Christian Social Union (CSU), insisted that Kohl let the special EU summit go bust rather than expose the Bonn government to a defeat at Germany's Constitutional Court in Karlsruhe for a grave violation of the Maastricht Treaty. And Klaus Kinkel, foreign minister and head of the Free Democratic Party (FDP), threatened to leave the Kohl governing coalition "the next day." Together with Tietmeyer, then-president of the Bundesbank, Waigel and Kinkel convinced Kohl that accepting the compromise memorandum of the British EU presidency would mean a certain verdict by Germany's constitutional judges against the whole project of European Economic and Monetary Union.

Having been put on a leash by his coalition partners, Kohl, who intended to give in to French demands, stood his ground: With the Dutch in tow, he refused to accept the British EU presidency compromise going into the final vote. The drama ended with the EU leaders electing Duisenberg for a full eight-year term--with no strings attached.

This explains why French President Jacques Chirac didn't get the British EU presidency's compromise accepted in the early hours of May 3, 1998, and why Wim Duisenberg can claim that he was elected for a full eight-year term.

Should the ECB President resolve to stay where he is until 2006, Chirac and Jospin face an unpleasant prospect next spring. The conservative and socialist candidates for president of the Fifth Republic will have to stand before the voters and admit that the "Grande Nation" has no Frenchman in a position of influence within the most powerful economic institution in Europe. Sacre Bleu!

Klaus C. Engelen is the International Correspondent for Handelsblatt in Dusseldorf, Germany.