Controversial Duisenberg leaves mixed legacy at ECB

EUROPEAN Central Bank (ECB) President Wim Duisenberg’s reputation rose and fell with the euro, and as a sign of his mixed legacy he leaves office today with the 12-nation currency where he found it: worth about $1.17.

Duisenberg masterminded the glitch-free introduction of the new money in an $8 trillion economy with 300 million consumers. He was criticised by political leaders for waiting too long to cut interest rates as the fastest growth in a decade, in 2000, gave way to the slowest in 10 years in 2003.

Along the way, the plain-speaking 68-year-old Dutchman confused financial markets and upset European Union governments by making off-the-cuff musings that gave mixed messages over interest-rate policy and hastened the euro's slide against the dollar during the common currency's first two years.

"You can't afford to misspeak, and he did that occasionally,' said Allan Saunderson, chief monetary analyst at Eurozone Advisors.

Duisenberg's successor, Bank of France Governor Jean-Claude Trichet, promises to be "a more polished act".

From its location in Frankfurt to its inflation-fighting monetary strategy and independence from political control, the ECB was designed to be a European version of the Bundesbank, the German central bank that turned the deutsche mark into Europe's economic anchor after World War II.

Duisenberg took office in 1998 when the reputation of US Federal Reserve Chairman Alan Greenspan was at its height, and endured repeated criticism that the consensus-driven ECB stifled business in Europe by lagging the Fed's rate-cutting curve.

European economic growth reached a 10-year peak of 3.5% in 2000 and has slipped every year since. The EU predicts growth of 0.4% in 2003, the weakest pace since 1993. It tabs US growth at 2.8%, putting Europe behind the world's largest economy for the 10th out of 11 years.

Duisenberg's 18-member policy-setting panel has eased borrowing costs seven times since the start of 2001, compared with 13 times for the Fed. While the ECB's main rate, at 2%, is the lowest in a half-century in the euro countries, it remains above the Fed's 1%.

The slower pace of rate cuts was dictated in part by the ECB's surprise at the suddenness of the economic slowdown, in part by its focus on beating inflation and in part by a need to show its independence in the face of political interference, analysts including Saunderson said.

Duisenberg "was always resilient in the face of exceptional difficulties and often ill-informed criticism," Maurice O'Connell, a former Bank of Ireland governor who served on the ECB council from 1999 to 2002, said in an interview.

During the economic boom, he prodded governments to put public finances in order. When the slowdown set in, he chastised them especially Germany, France and Italy for ignoring his appeals and putting Europe's economic health at risk.

"You were warned,' Duisenberg told finance ministers Wednesday in Venice, Italy, after the EU predicted the German and French deficits would stay above legal limits through 2005.

"The rules were not designed just for the good times, but also for the bad. The difficulties that some of you now face do not provide grounds for tinkering with the rules," he said.

Where Greenspan and the Bundesbank's last pre-euro president, Hans Tietmeyer, practiced studied ambiguity, Duisenberg spoke his mind and said things central bankers aren't supposed to say.

"This is it," Duisenberg said after the ECB's first rate cut, by a half-point to 2.5% on April 8, 1999. Investors assumed the ECB wouldn't do any more for the economy, and the euro slid 2% over the next three weeks.

Asked by The Times of London on October 16, 2000, whether the ECB would buy euro in case the Middle East crisis sparked a renewed plunge in the currency, Duisenberg said: "I wouldn't think so."

The euro fell to an all-time low of 82.31 US cents 10 days later.

The currency began life at $1.1668 on January 3, 1999. It traded below $1 from February 2000 to July 2002 and peaked at $1.1933 on May 27, 2003. It bought $1.1640 at 10.08am in Frankfurt today.

"Some people thought that he wasn't precise enough," Matti Vanhala, currently Finland's representative on the ECB council, said in an interview. "Of course, it's not his job to be precise enough. But in the beginning, that annoyed some people."

The public-relations snafus overshadowed technical achievements such as the smooth transition to the euro for electronic payments on January 1, 1999 the official birth of the monetary union and the distribution of 15 billion bank notes and 50 billion coins without a hitch three years later.

Duisenberg entered public life as Dutch finance minister in 1973, when the oil shock and inflation hailed the demise of Keynesian pump-priming economics and led to the rise of monetarism.

As head of the Dutch central bank from 1982 to 1997, Duisenberg functioned as the Dutch arm of the Bundesbank, copying German interest-rate moves to keep the guilder in a virtual monetary union with the mark.

Duisenberg moved from Amsterdam to Frankfurt in mid-1997 to run the ECB's precursor, the European Monetary Institute, and was the uncontested candidate to take over the bank until French President Jacques Chirac nominated Trichet in November 1997.

Chirac battled with former German Chancellor Helmut Kohl over the ECB at the May 1998 Brussels summit to lay the groundwork for the euro, letting Duisenberg have the job on condition he step down before his eight-year term ends to make way for Trichet.

"This is no laughing matter," Chirac said at the time.

The agreement set a precedent for political meddling with the central bank. In the ensuing years, Duisenberg was confronted with rate-cut demands by politicians from Kohl's successor, Schroeder, to Belgian Finance Minister Didier Reynders, head of the panel of euro finance ministers in 2001.

"I hear, but do not listen," Duisenberg said of the political chorus on April 11, 2001, after the ECB refused to follow the Fed, Bank of England and Bank of Japan in cutting rates. It didn't act until a month later.

The ECB's main job, set in 1991 by governments that had wrestled with double-digit inflation a decade earlier, is the pursuit of "price stability". Economic growth comes second. The Fed has a twin mandate to promote stable prices and employment.

During the euro's first 57 months, the ECB missed its goal, inherited from the Bundesbank, of keeping inflation at "below 2%" on 29 occasions. Inflation was 2.1% in September.

Asked last month in his farewell appearance in the European Parliament if the ECB made any mistakes in its first five years, Duisenberg said: "The short answer is: I can't think of any."