ECB to set euro exchange rates

Date: 03/07/1997

By Tim Jones

FRENCH government hopes of placing the foreign exchange rate of the euro under political control are set to fail, according to senior monetary officials.

Studies commissioned by EU leaders at the Amsterdam summit will confirm that, under rules laid down in the Maastricht Treaty, euro-zone finance ministers would have the right to set guidelines for currency policy, but the European Central Bank (ECB) would have an overriding commitment to keep prices stable.

This will come as a blow to the new Socialist administration in Paris. Prime Minister Lionel Jospin only agreed to sign the German-inspired budgetary 'stability pact' after commitments were made in Amsterdam to promote jobs and coordinate EU economic policies.

Worried that they will be swapping the franc for an overvalued euro, the French won backing from the summit for a re-examination of the Maastricht rules on who should determine the rate of the euro against the dollar and the yen.

However, early signals from those writing the report - the European Commission and the Frankfurt-based European Monetary Institute (EMI) - suggest that Jospin and friends will be disappointed.

Their reading of the key Article 109 (2) of the treaty, which allows euro-bloc finance ministers to formulate “general orientations” for exchange rate policy by a two-thirds qualified majority vote, suggests that real power will remain with the ECB.

Economists and lawyers in both institutions are assuming that “formal agreements” on exchange rate levels with the Americans and Japanese are many years away.

An agreement along the lines of the Bretton Woods system, where the world's major currencies were fixed against each other and backed by gold, would require unanimity among ministers and the support of the US and Japan. “Nobody believes that a Bretton Woods regime will appear in the first years of EMU,” said a monetary official.

It is much more likely that euro-zone ministers will be interested in setting guidelines for where the euro should be on the world currency markets.

These would be informal agreements along the lines of those concluded at New York's Plaza Hotel in 1985 to stop the dollar rocketing and at the Paris Louvre two years later to calm down currency volatility.

Both the Commission and the EMI are convinced that the phrase “general orientations” determines that ministers would not set strict targets for the ECB since these might undermine its monetary policy goals.

For its part, the EMI believes the article cannot restrict the ECB's room for policy manoeuvre since the same paragraph stresses that the guidelines “shall operate without prejudice” to the central bank's anti-inflation policy. Moreover, Article 105 - the opening article of the treaty's chapter on monetary policy - sets the maintenance of price stability as the ECB's “primary objective”.

In their studies, the two institutions are likely to agree that the “general orientations” would be based on Article 189 of the treaty. They would be classed as recommendations and, as such, “shall have no binding force”.

Central bankers think Article 109 (1-2) is merely an enabling clause for finance ministers, allowing them to set guidelines for the euro but not obliging them to exercise this right.

At the same time, the ECB would be guided by the fifth 'declaration' attached to the Maastricht Treaty which affirms that the EU “shall aim to contribute to stable monetary relations” through cooperation with non-euro countries.