Delicate Task: Managing Coin of the Realm

FRANKFURT, Germany —  The bank, only 6 months old, has no deposits of its own and fewer employees than Santa Barbara Bank & Trust. The imitation leather furniture and potted ficus in the lobby might seem more at home in a neighborhood muffler repair shop.

But don’t be mistaken: Western Europe’s answer to the U.S. Federal Reserve System, the new European Central Bank, is immediately going to be one of the 800-pound gorillas of global finance.

The ECB and the central banks in 11 Western European countries that it now officially leads will have to manage a gigantic money mass worth $4.2 trillion, or more than twice the annual U.S. federal budget.

And during the next 3 1/2 years, the bank headquartered in an office tower in downtown Frankfurt will be in charge of one of the most audacious economic projects of modern times: instituting a single currency, the euro, for 11 nations of Western Europe.

The new money officially comes into being Jan. 1. Euro nations will lock in exchange rates of national money and governments and businesses will start keeping accounts in euros.

In the first quarter of 1999, the European Central Bank, or ECB, will supervise the start of printing operations for a sum total of 13 billion euro bank notes in seven denominations. On New Year’s Day 2002, the euro will go into wide circulation alongside national currencies and by the middle of that year, those currencies will have been phased out.

Willem F. Duisenberg, a plain-speaking, chain-smoking Dutchman who has been chosen as first president of the ECB executive board, should become as familiar a figure to Europeans, and many outsiders, as Alan Greenspan, the Fed chairman, is to Americans.

Duisenberg’s appointment was a messy, undignified affair that seemed to bode ill for the euro endeavor. In May, at a European Union summit, French President Jacques Chirac filibustered until Duisenberg, according to the French, agreed to serve only half of the ECB president’s normal eight-year term.

France’s objection was that the 63-year-old former chairman of Netherlands’ central bank was too close to the Germans.

Chirac said he got the deal he wanted, but Duisenberg lately has been saying he might stick around for the full eight years.

“I honestly think he hasn’t made up his mind,” said Maria do Rosario Almeida, head of the ECB press division.

The May events initially made it seem the ECB could be a cat’s paw for Western Europe’s politicians. All euro zone governments, with the exception of those in Spain and Ireland, are now left-of-center or Socialist-led, and are faced with slowing growth. In the past, the reflex on the left has been to spend tax money to fight joblessness or jump-start the economy.

The ECB’s mission, though, is strictly defined by the 1992 Maastricht Treaty that created the bank along with the euro. It is keeping prices stable, period. It is not supposed to bail out defaulting governments or provide a healthy jolt to their economies. And Duisenberg has been firm: The bank must be immune to outside pressures.

“We make our own judgments, take our own decisions in view of our own analysis,” he told reporters this fall.

In the ground-floor lobby of the ECB, housed on floors 23 to 36 of a skyscraper that used to be occupied by a German trade union bank, workmen in denim overalls were still wiping down metal trim on the walls and doing last-minute touch-ups with cans of spray paint one recent morning. However, Duisenberg and the five other members of the bank’s executive board--men from France, Spain, Italy and Germany and a woman from Finland--have already much to reassure experts and the markets that they know what they’re doing.

“For the moment, we have possibly the best central bankers available in Europe,” is the judgment of Eckhard Schulte, senior economist and ECB watcher at the Industrial Bank of Japan’s Frankfurt office.

Early this month, the central banks in all euro zone countries cut their benchmark interest rates, and 10 (Italy, the lone holdout, joined later) agreed to set a uniform 3% interest rate for the euro’s debut.

The concerted action proved it was possible to arrive at a single monetary policy for the diverse euro zone.

What the ECB doesn’t have yet is broad public support or trust. It has been based quite intentionally in Germany’s financial capital and patterned after this country’s own ferociously independent central bank, the Bundesbank. But many Germans would prefer to keep their own national currency, the mark. In other euro nations, some groups object to yet another pan-European institution making decisions that affect their lives.

If the euro causes or coincides with economic downturn or disruption, the ECB will be one of the first targets for popular fury. Already in the Netherlands, a band of squatters opposing the euro attempted to crash a Christmas party for staff of the Dutch central bank, pelting a building in Utrecht with eggs and smashing windows.

The ECB still “must sell their policy, and do it everywhere in Europe,” said Yves-Thibault de Silguy, in charge of monetary affairs at the European Commission, the executive arm of the European Union.

Along with governors of the 11 national central banks, Duisenberg and ECB Vice President Christian Noyer of France are supposed to meet twice a month to define and execute monetary policy, manage reserves in the member banks’ vaults and promote the smooth operation of foreign exchange and payment systems.

It’s still early, of course, but a report from the Organization for Economic Cooperation and Development, a Paris-based planning group for the industrialized world, is already voicing some doubts.

Will the central bank of, say, Finland or Spain be willing to inflict genuine pain on the local economy for the good of Europe in general? the report asks. And will the lopsided advantage in staff--more than 53,000 employees of the national central banks, versus 560 at the ECB--mean the national banks control information flow and forecasts, and to some extent the decisions? (For comparison’s sake, the U.S. Federal Reserve has more than 23,000 people on its payroll. Santa Barbara Bank & Trust, with $1.6 billion in assets, has 688.)

“Many tasks will be decentralized, because it’s the 11 national banks that have the manpower,” ECB spokeswoman Regina Karoline Schueller said. “We’re confident we know what we’re doing.”

Heir to a monetary institute that began planning Jan. 1, 1994, for the euro, the ECB opened for business June 1 in a 23-year-old office building rechristened “Eurotower” in its honor. It has no assets. Salaries, rent and other expenses are paid from interest on a $4.6-billion fund created for the purpose by the national central banks.

Ironically, though Britain is one of four European Union members not adopting the euro on Jan. 1, English quickly has become the working language at the ECB.

On Oct. 13, the bank defined its task as keeping Europe’s inflation rate, now running at a postwar low of 0.7% in Germany, to 2% a year or less. Some market watchers expect additional interest rate cuts in early 1999 to make credit easier and pump more money into Europe’s economies to counter flagging growth.

Duisenberg, though, has made it clear that he wants to keep the current rate in the near term. And even before the euro’s official debut, he has put participating governments on notice that the European Central Bank is determined to act as it alone sees fit.

Politicians are certainly free to give advice to the ECB, the Dutch central banker said, but “it would be very abnormal if these suggestions were to be listened to.”

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Economics Guru

A brief look at the first president of the European Central Bank’s executive board, Willem F. Duisenberg:

- Born: July 9, 1935, in Heerenveen, Netherlands

- Education: Economics degree and doctorate from University of Groningen

- Career highlights: On International Monetary Fund staff, 1965-69; professor, University of Amsterdam, 1970-73; Netherlands minister of finance, 1973-77; president of De Nederlandsche Bank, 1982-97.

Source: European Central Bank

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From Many Into One

Starting in 1999, the European Central Bank (ECB), core of the European System of Central Banks (ESCB), will be responsible for the monetary policy of the 11 countries that are taking part in the first wave of the economic and monetary union (EMU).

What Is the ESCB?

The ESCB consists of the European Central Bank and the national central banks of all 15 European Union member states.

Austria

Belgium

Finland

France

Germany

Ireland

Italy

Luxembourg

Netherlands

Portugal

Spain

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EU members not participating in the economic monetary union:

Denmark

Greece

Britain

Sweden

What is the ECB?

The European Central Bank defines and implements monetary policy for the 11 member nations. It is the core of the ESCB.

ECB Responsibilities

- Set interest rates for the euro zone

- Hold the official reserves of the EMU members

- Promote the smooth operation of payment systems

- Conduct foreign exchange operations

The New European Currency

The single European currency is scheduled for launch Jan. 1, but actual money will not be in circulation until 2002. It does not matter which country euro currency originates from. It can be used in any of the EU countries merging their monetary policies.

How It Will Happen

- Jan. 4, 1999: Euro nations lock in exchange rates of national money. Governments, businesses start keeping accounts in euros; European Central Bank starts running EU monetary policy.

- Jan. 1, 2002: Euro comes into common circulation alongside national currencies. After six months, national currencies disappear.

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Sources: Associated Press, European Central Bank

* COMING FRIDAY

A special report on the euro as it launches.