Europe’s money man

Date: 07/12/1995

'Name five famous Belgians' is a favourite game often played by Anglophone cynics. Once you have got past Jean-Claude Van Damme, Hergé and Audrey Hepburn, you often start to run into problems.

Now name one Belgian of Hungarian origin who, in the coming decade, could well be feted or condemned as a key architect in the creation of a single currency for Europe. Ummmm.

The answer is Alexandre Lamfalussy, the president of the European Monetary Institute - the EU's embryonic central bank. Nobody could accuse this quiet, unassuming 66-year-old career banker and economist of being famous, but those who have dealings with him realise how important he has been in the building of a monetary union.

Back in 1988-89, Lamfalussy sat on Jacques Delors' committee which looked into the feasibility and desirability of a single currency. Six years later, as the EMI president and chief spokesman for the EU's 15 central bank governors, he helped broker a deal on how the transition to a European currency should be managed.

Finding agreement between the governors on the myriad issues involved in the transition had been expected to be long and arduous. For a long time, the deadline for agreement at this month's Madrid summit looked like a typical piece of excessive EU optimism. But, in fact, Lamfalussy was able to go to the 29 September informal meeting of finance ministers and central bank governors in Valencia with a 'provisional agreement' on the administration of a currency change-over.

The deal had been done only days before in the council of the EMI in Frankfurt. Just a week earlier, senior monetary officials were predicting failure at Valencia and a damp squib of a summit in Madrid.

But differences between the French and German representatives - the Bundesbank President Hans Tietmeyer and Bank of France Governor Jean-Claude Trichet - were smoothed over and a consensus reached.

“The fact he reached a consensus that could be presented to the Ecofin is a major achievement,” said a central bank official who followed the talks closely. “He was able to bring about a consensus among these 15 super-egos and the ministers of finance accepted it. That is quite something.”

Born in Kapuvar, on the Hungarian border with Germany, in April 1929, Sandor Lamfalussy (as he was then) left the country in 1949 as the Iron Curtain descended across Europe. “He actually saw the barbed wire going up. It made him think his route of escape would soon be closed,” says a friend.

From there, this son of a forestry official went to Vienna, obtained a visa from the Belgian consulate and flew to Brussels via Munich. He studied economics at the University of Louvain and then at Oxford, where he received a doctorate in 1957.

From 1955, Lamfalussy held a variety of positions at the Banque de Bruxelles and attracted national attention with a paper published in 1961. This identified a Belgian 'disease' of low investment and poor growth rates resulting from deep-seated structural deficiencies in the economy. In 1975, he became executive director of Banque Bruxelles Lambert.

It was time for a career change. He left for Switzerland to head the monetary and economic department of the BIS in Basle, before becoming its general manager in 1985. It was one of the most senior but invisible jobs in world banking, a role perfectly suited for this adopted Belgian. “He's very Belgian,” says one observer. “He is the prototype of a prudent, low-profile banker with strong values.”

That was the very reason Lamfalussy was later picked for the EMI job: his low-key personality would not threaten to turn an institute into a rival central bank.

During the Intergovernmental Conference called to insert a commitment to economic and monetary union into the EU's founding treaties, Delors and his supporters pressed hard for the setting up of a European Central Bank during the so-called 'second stage' of monetary union. Bonn, and most particularly the Bundesbank, would not countenance any loss of monetary sovereignty during stage two.

What they were prepared to accept was a collegiate gathering of central bankers. This would be called the European Monetary Institute, just in case you thought it might be a bank in its own right after all. It would group together the EU's 15 central bank governors for regular meetings to exchange views on monetary policy and give opinions to finance ministers on areas within their competence. The central banks could choose to pool foreign currency reserves to help the EMI administer the European Monetary System, but that was up to them.

Most importantly, the EMI would have a president. He would be an administrator and the face of the institute to the outside world.

In 1993, the search began for a candidate. The usual names were heard, including former Italian prime ministers and Commissioners. Wim Duisenberg, the veteran president of the Dutch central bank, was a hot tip, but killed off speculation after saying he would only do the job if he could combine it with his existing post.

The EU's committee of central bank governors met every month in the Basle headquarters of the Bank for International Settlements, the central banks' central bank responsible for ensuring the smooth running of the world's banking system. What about the president of the BIS, Alexandre Lamfalussy, they began to ask. “He met the criteria,” says a monetary official. “He had to be a senior man, non-political, familiar with the activities of the governors and somebody who could represent the governors to everyone else.”

Lamfalussy, who had been working in banking since 1955, was thinking seriously about retirement. “He wasn't that keen to begin with,” says an official, but “he fitted the bill and was persuaded of that”.

“The key was his experience with the central bank governors,” a colleague says. “He had known everyone for many years and he knew the work they had been doing.”

The European Parliament, which was raring to go with its first Senate-style hearing of a European appointee, was sceptical at first. The fact that most of them had not heard of him worried them. For some, the fact that he had the backing of the Bundesbank was a kiss of death. He was sent a written questionnaire and asked to respond, and then invited to a formal hearing before ratification in November 1993.

Then, as so often since, he won over potential critics. Lamfalussy was chosen to do two things: administer the EMI and act as its spokesman.

Central bankers will testify to his qualities in the former role. Because of the later-than-expected ratification of the Maastricht Treaty, the new president was given a minimal time-period to get the institute up and running in 1994. He managed that with the minimum of fuss, as well as achieving the compromises needed among some of the tough guys on the EMI council.

Central bank officials say this shows why it was necessary to have a quiet civil servant rather than someone who would compete with a man like Tietmeyer in the power game. “If you have someone who is so dominant that he dominates the national central banks, that is a minus,” says one. “You have to be able to try and converge the personalities into a common viewpoint.”

As spokesman, he has arguably done an even better job. Once the Exchange Rate Mechanism collapsed in August 1993 and its trading bands were widened to allow currencies to float in all but name, central bankers were keen to stop any attempt by politicians to try to narrow them again. In the months that followed, most central banks chose not to use their new room for manoeuvre and aggressively cut interest rates. They opted to maintain currency stability, even without formally tight bands. The central banks of the deutschemark bloc liked this. It meant a continued commitment to currency and price stability, without the inconvenience of having to spend vast amounts of cash in support of weak currencies.

Lamfalussy was the first to say clearly to the European Parliament that “Humpty Dumpty” should not be put back together again. His hearings at Parliament's monetary sub-committee are exercises in clarity and unusual candour. Even MEPs who don't like what he says cannot deny his skill in advocacy. He is helped by his intellectual confidence and his support for the idea of a single currency. “He's totally convinced of it,” says a colleague. “But while he knows all the advantages, he knows the risks. He has an inner conviction, but he's no propagandist.”

The man who is steering the EMI towards monetary union is also the man plotting its demise. The institute will be folded into the European Central Bank when it begins work as early as 1998. But will Lamfalussy still be there? His term ends in January 1997. “Who knows if he'll stay,” says a colleague. “He will be 67 next year, but the job will be only half over.”