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Last updated: April 20, 2008 7:39 pm
Market conditions for central bankers’ life stories have scarcely been better. Alan Greenspan has found more media resonance than he perhaps wanted for his accounts of his years as US Federal Reserve chairman: he has had to fight against being cast as the scapegoat for the global financial market turmoil.
Otmar Issing, who was chief economist at the European Central Bank for its first eight years, also had a gripping story to tell. Despite the scepticism that surrounded its birth, the ECB will on June 1 celebrate its 10th anniversary with its standing high. The euro is established as a strong world currency. The talk among economists is about whether it might usurp the dollar’s dominance. The ECB has established hawkish credentials when it comes to inflation: unlike the Fed, the ECB has held its main interest rate steady as the financial crisis has unfolded.
In writing Der Euro, his account of the euro’s launch and early years (in German with an English version to follow), Issing could have taken the same approach as Mr Greenspan: a lively, personal account with insights into the politicians with whom he interacted and with palatable doses of economics.
But those who know his preference for finely honed argument and discretion over soul-searching and personalisation – as well as his past as an economic professor at Würzburg university in southern Germany – will not be surprised that Issing has written more of an economics-lite textbook, or a “how-to-do-it” manual on the creation of a monetary union that now includes 15 countries and a population larger than that of the US. That means some dry passages and too many references to European Union treaty paragraphs.
Nevertheless, this is a textbook with a difference. Issing was persuaded to add some personal context that brings it alive – for instance the significance of Europe’s economic integration to someone like him, born in 1936 Germany, “who walked to school through the rubble of his completely flattened home town” but would later “make friends in countries where according to his schoolbooks the enemy lived”.
He also cannot avoid evoking the tensions that surrounded the euro’s launch. While working previously at the Bundesbank, Issing was sceptical; he feared politicians had not fully understood the consequences of surrendering national control over monetary policy and worried that members’ economies had not converged sufficiently.
He claims surprise that the German government wanted him to move to the ECB, especially as he had clashed with Theo Waigel, then finance minister, over the Bonn government’s plans to use proceeds from revaluing the Bundesbank’s gold reserves to plug holes in the government’s budget.
More to the point, Issing makes clear that the euro’s success was not a given. The uniqueness of the euro’s launch created serious problems. Not only was the lack of timely and consistent economic statistics woeful. There was no guarantee that previously established relationships between economic variables would apply after the “regime change” – that is, in the new eurozone.
In the end, under Issing’s guidance, the ECB opted for a “two pillar” strategy that combined monetary analysis with a more general economic analysis of shorter-term inflationary pressures. Rather than strict “inflation targeting”, the ECB uses inflation forecasts as only one input in its decision making. Had the policy not worked, Issing suggests, he would have resigned – which would have dealt the infant ECB a
Another reason why this is more than a textbook is that Issing is opinionated. ECB watchers will enjoy his criticism of using “code words” to signal interest rate changes ahead – a practice used repeatedly by Jean-Claude Trichet, the ECB’s president, since it started raising interest rates in late 2005. Issing’s early misgivings have not disappeared. He discusses the potential pitfalls of leaving national governments in control over so many other economic levers – including fiscal policy. The euro, he concludes, remains an experiment whose outcome “is likely to remain uncertain for a considerable time to come”.
The reader is left with the feeling that Issing is like the proverbial academic – he has discovered something that works in practice, but he is not sure how it works in theory. Still, he is touchingly proud of what was achieved. He recalls a lunch in the ECB’s first year with Christian Noyer, then ECB vice-president. “We discovered that his father, a French soldier, had been interned in a German prisoner of war camp at the same time as my own father was in France with the German occupying forces. Over 50 years later, the sons of these two combatants were working together in the ECB.”
The writer is the Financial Times Frankfurt bureau chief
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