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Euro gets German defense
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May 28, 1999: 8:23 a.m. ET
As single currency struggles, Bundesbank's backing is louder than ECB's
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LONDON (CNNfn) - As Europe's new common currency, the euro, fights to fend off a dreaded slide towards "parity" -- or equivalence with the U.S. dollar -- it is finding its staunchest defender in Germany's Bundesbank.
Before the European Central Bank supplanted the Bundesbank in January as the paramount maker and breaker of European monetary policy, Bundesbank officials routinely attempted to shore up the German mark with supportive comments.
With the shift to the euro, that role was, in theory, relegated to the ECB -- whose powers include setting European interest rates and, in certain cases, intervening to prop up the euro.
But as the euro touched a lifetime low near the $1.04 level Thursday, the ECB made only mildly supportive comments, dampening market speculation about an intervention.
Instead, it was a Bundesbank official -- president-designate Ernst Welteke -- who leapt to the euro's defense Friday, even as the euro staged a modest recovery, edging up to just below $1.05.
In remarks to CNN's World Business This Morning, Welteke said he was concerned about the euro, stressing his displeasure with the parity threat posed to the single currency less than five months into its life.
"I am not happy about this," Welteke said. "I am concerned about this development and this development has to stop. We can see that this helps the export situation, but the confidence in the (financial community) and the public is concerned with this."
The remarks were by far the strongest alarm signal yet issued by any member of a central bank in the 11-nation euro zone.
Those remarks, along with comments by the Bundesbank's chief Hans Tietmeyer that he would not be pleased if the euro were to decline further, were seen as underpinning a mild rebound in the euro Friday to $1.0495 in late morning.
On Thursday the euro hit a record low of $1.0455 in Europe before bouncing back. A day earlier, the currency had begun to drift down after European finance ministers permitted Italy to record a larger deficit than allowed under a European stability pact.
Though the ECB expressed its displeasure with what bank officials viewed as political largesse towards Italy, the bank did not signal any intention to take remedial action.
Welteke, in a measure of his frustration, said he disapproved of the leeway given to Italy, but acknowledged to CNN "There's no way for central bankers to mix in decisions on the political side."
Monetary policy at its limit
Welteke also expressed his belief that monetary policy had reached the limit of its ability to foster growth and employment in the European economy. "When interest rates came down…to 2.5 percent it was all monetary policy could do."
Robert Pryor, a European economist with HSBC in London, said he thought it was natural that a German central bank official should jump to the euro's defense.
Throughout its history, he noted, the Bundesbank's role was to galvanize the mark, once the linchpin of European currencies, to which many other banks calibrated their monetary policy.
"The whole purpose of it being there was to boost the internal purchasing power of the Deutsche mark," Pryor said.
Now, he added, "the power base has switched a bit, to countries that are not so concerned about the euro."
The Bundesbank also carries heavy influence within the ECB, where it holds two seats on the 17-member board, or 12 percent of the votes.
Many economists say the ECB has been willing to tolerate a weaker euro as a way of promoting Europe's exporters, for whom a softer currency makes their products less expensive abroad.
But Pryor also suggests that some of the euro's misfortunes of late -- it is down more than 10 percent from its launch level of $1.17 on Jan. 1 -- may be undeserved.
"All the gloom possible is hitting the euro, it's almost all one-way," he said. "It's been hit by a lot of bad news, and markets seem to have got incredibly gloomy about Europe."
That view was echoed Friday by Deutsche Bank chief executive Rolf Breuer, during a seminar at the bank's Frankfurt headquarters.
"I have no reason to believe that this credibility is coming into doubt in Europe," Breuer said.
--from staff and wire reports
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