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Germany: Bonn Puts Pressure On European Central Bank

Munich, 5 November 1998 (RFE/RL) -- Only eight weeks before the new European Central Bank (ECB) takes over management of the monetary policies of most members of the European Union, it has come under pressure from Germany's new Finance Minister Oscar Lafontaine, who wants to change its focus.

When the ECB becomes operational on January 1 it will virtually be in charge of the economies of the 11 countries -- including Germany -- that have adopted the new EU single currency, the euro.

The new bank will be, in effect, the guardian of the euro. It will set interest rates that will affect Europeans in a broad range of ways, from steering overall economic growth to influencing mortgage rates paid by home owners. National central banks, such as Germany's Bundesbank, will no longer be in control of interest rates.

At the time the ECB was formally launched in July, its President, the Dutch banker Wim Duisenberg, said its chief concern would be to keep inflation low and to gain the confidence of EU citizens who are nervous about giving up their marks, francs, liras and other currencies for a new and untested form of money. Those policies were supported by the previous German government of Chancellor Helmut Kohl.

But since Germany's change of government last month, Finance Minister Lafontaine has said publicly that the bank should drop its preoccupation with keeping inflation low. Lafontaine, who is head of the Social Democrat Party, argues that the battle against inflation has largely been won. In his view, the Bank should now focus on the EU's high unemployment and should lower interest rates to encourage businessmen to create new jobs.

Today, Lafontaine presented his views to the ECB directly at a meeting of its governing council in Frankfurt. President Duisenberg said in advance that he did not expect to be swayed by the minister's arguments. Duisenberg does n-o-t believe that lower interest rates and easier credit will create new jobs and increase economic growth.

Duisenberg said that, instead, governments should focus on economic restructuring and fiscal discipline. Other critics have argued against Lafontaine's proposals by suggesting that they would politicize the bank's operations by undermining its mandated independence from politics. Lafontaine denies that he wants to infringe on the autonomy of the central bank or breach its rules. In an interview a few days ago he said: "I don't want to put the bank under pressure. The only people under pressure are those who have lost their jobs, and we have to help them."

A German economist focusing on European issues, Peter Harden, said today that Lafontaine's proposals should not be considered in isolation. He says several European countries have come forward recently with ideas for changing the planned direction of the European Central Bank to make it more responsive to political demands.

France, Italy and Portugal are among countries which have proposed some change of direction. The French Prime Minister, Lionel Jospin, has frequently pressed for a political counterweight to the ECB that would hold regular meetings with the bank and bring political issues to its attention. Another suggestion is for a so-called "economic government" made up of European finance ministers.

Critics of these proposals charge that they could undermine the original plans for an independent bank operating free of political influence. The model for such independence was Germany's own Bundesbank, which is highly respected for being largely untouched by politics in deciding matters like interest rates. Harden believes the debate now underway is important for all countries joining the euro in less than two months and for those Central and East European countries which may be able to join in coming years. He said: "The political independence of the European Central Bank is vital. People and politicians in many countries have doubts about the euro and they need to have faith in the (ECB) as the guardian of that currency. In Germany at least, they rely on the central bank to act like the Bundesbank. They want it to keep the currency stable, not be swayed by changing political considerations."

The controversy over the ECB's role affects all countries that plan to adopt the euro later. Like the 11 which will join initially, they will also have to agree to allow their monetary policy to be managed by the bank.

When the ECB was launched four months ago, it was described by some commentators as an "extraordinary leap of faith" by the 11 participating governments. One commentator said that "it marks the first time that countries have voluntarily surrendered control over such a precious piece of sovereignty as their own money to an independent council which does not have to answer to any Government."

Duisenberg has made no secret of his opposition to Lafontaine's arguments that lowering European interest rates would encourage business to create new jobs. He told a meeting of EU central bankers in Frankfurt earlier this week that small reductions in interest rates were unlikely to spur new investment and hiring. He said: "One quarter of a point, more or less, is not the main driving force in consumer and investment spending."

Instead Duisenberg urged European governments to face up to the need to restructure industry so that it would be possible to create new jobs. Inside Germany, some critics have suggested that Lafontaine's pressure on the ECB to lower interest rates is really an expression of the new Left government's reluctance to take other approaches that would be politically unpopular at home. Several German critics argue that the only way to create new jobs is to overhaul the generous welfare and social system that makes it highly expensive to hire workers in Germany. When all benefits are taken into consideration, the cost of German labor is about $32 an hour.

But Germany's labor unions have told the new Social Democrat-led government that they will not accept any moves to cut back on welfare and social benefits. The government fears that any effort to do so could lead to nation-wide strikes, causing further damage to the economy. This attitude leaves the government searching for other means --including changing the direction of the European Central Bank.