Financier to bank on

Date: 20/06/1996

WHEN it emerged last week that the US economy had generated an astonishing 350,000 jobs in May alone, President Bill Clinton stepped into the television lights and directed his comments at one man.

This may look like a runaway boom, he said, but there is still no need to raise interest rates, particularly in an election year.

The president's message was aimed not at the average American, but at Federal Reserve Chairman Alan Greenspan. The country's chief central banker scours the economy for the earliest traces of inflation. If he sees it, up go interest rates and - at least theoretically - down go consumer demand and the feel-good factor.

Five years from now, EU politicians could well be knocking at the door of Willem Frederik Duisenberg.

The president of the Netherlands' central bank has been chosen by his peers to take over as president of the European Monetary Institute in July 1997 - less than a year before it transforms itself into the European Central Bank (ECB).

Their recommendation is expected to be endorsed by EU leaders at their summit in Florence this weekend.

It may not be in his contract but the 60-year-old Dutchman is also expected to take the reins as the ECB's first president.

This is pay-back time for the Dutch. They offered to play host to the EMI as well as the new European Bank for Reconstruction and Development, but were gazumped by Frankfurt and London.

When their former Prime Minister Ruud Lubbers applied for the job of European Commission president, his scepticism about German reunification was still too fresh in the mind of Chancellor Helmut Kohl and he was vetoed. His subsequent attempt to become NATO secretary-general was blocked by the Americans.

But making Duisenberg one of the world's most powerful men would be recompense enough.

At the moment, very little is known about him outside the Netherlands and the closed world of central bankers, where he has been a star for the past 14 years.

Tall and craggy-faced with a shock of white hair, he stands out among his small, bespectacled colleagues. When he speaks the standard several languages of the Dutch professional classes, his voice is deep and nicotine-lined.

Duisenberg was born and raised in Heerenveen, in the northern dairy region of Friesland, a place reputed to nurture the country's most down-to-earth and stubborn people.

“That is an advantage in his job,” says an aide. “Every central banker should be stubborn because politicians are always trying to influence you both overtly and in more subtle ways. At least with him, it is built in from birth.”

Educated at the University of Groningen, Duisenberg left to join the staff of the International Monetary Fund in 1965 where, for four years, he enjoyed the sparkling lifestyle of the Bretton Woods civil servant and indulged his passion for golf and the music of Johnny Cash.

He was enticed back home in 1969 to act as adviser to the governing board of the Nederlandsche Bank, the Dutch central bank, then moved across to Amsterdam University as professor of macro-economics.

In the meantime, he had joined the Partij van de Arbeid (PvdA).

In 1973, the PvdA formed a centre-left government under Joop den Uyl, who managed to convince Duisenberg to join his cabinet as finance minister.

In his two years at the helm of economic policy, Duisenberg acted in ways that would make him cringe as a central banker but were perfectly explicable at the time.

In 1973, the industrialised world was hit by the first 'oil shock' as OPEC began to flex its muscles, withheld supplies and caused prices to rocket.

Every developed country reacted in the same way and tried to support demand in the economy to avoid a recession.

The new Dutch minister was no exception. He responded to the oil shock with a huge fiscal stimulus, leading to a growth in public spending from 48&percent; of gross domestic product in 1972 to 55&percent; three years later.

Nevertheless, his critics believe the fiscal injection had as much to do with expanding the public sector in line with PvdA goals as with cushioning the effects of rising oil prices.

“Remember, it was the first time the centre-left had ruled the Netherlands for a long time,” says a veteran Dutch economic journalist. “They thought it was paradise.”

Recession followed in 1975 and Duisenberg tried to rein in public spending.

Placing cash limits on state expenditure, he told his sceptical party colleagues that the deficit - then only 3.6&percent; of GDP - had to be financed on the capital markets and the costs would mount unless they showed a willingness to tackle the problem.

Ironically, it was when the centre-right took over in 1977 that spending really got out of control, and it was not until the early Eighties that the Netherlands managed to return to a path of stability.

“He surely learned a lesson from that time,” says a colleague. “It was easier for him to make the change in policy because he had not been a full-time politician, coming instead from an academic background.”

Duisenberg spent the last months of his government career as a member of parliament, but then quit in 1978 to join the board of Rabobank Nederland. In 1981, he moved over to the Nederlandsche Bank, finally becoming its president in 1982.

At the time, eyebrows were raised. Was it really appropriate for a former minister to take the reins at an independent central bank? Fourteen years on, nobody could doubt his success in the job he was given. His goal was to stabilise the guilder and keep inflation under wraps. This he has unquestionably done.

Within a year of taking the job, Duisenberg was faced with a general realignment of the Exchange Rate Mechanism. To his horror, Lubbers allowed the guilder to devalue slightly against the mark, contrary to the advice of his finance minister.

Duisenberg was determined not to allow this to happen again. The guilder had to become a surrogate mark.

Ever since then, he has pursued a hard-guilder policy, pegging the currency at about 1.1270 per mark.

Just how successful he has been was demonstrated in late July 1993 when the ERM came under massive attack. Even currencies such as the Belgian franc or the Danish krone which had been seen as solid and part of the ERM 'core' suffered at the hands of speculators and frightened investors. It was only the guilder that held fast.

When other countries, including Germany's French 'sweethearts', were given 15&percent; bands for their currencies to trade in, the Dutch were allowed to keep their narrow bands with a pledge of Bundesbank support.

“In the longer term, it is better for us to have this fixed link with Germany,” says a Duisenberg aide. “Thirty percent of our exported goods go to Germany and a predictable exchange rate against the mark is important as well as delivering low inflation and interest rates. You could say that we already have a monetary union with Germany and interest rate changes are only made to sustain it.”

This provoked a mixture of annoyance and envy among other policy-makers, who felt Duisenberg was too close to the Bundesbank and its president Hans Tietmeyer. “We had traditionally thought of him as the porte-parole for the Bundesbank,” says one.

Since he has been talked about as the new president of the EMI, cynics say they have noted a change in his behaviour.

“During meetings of the EMI council, he used to begin every sentence with 'As Hans said...' but now he says 'I think that...',” says an official.

It seems the leopard is already changing his spots - something he will have to do if he is to guard his independence and win the trust of those who already fear German domination of the single currency zone.

Despite the heavy workload Duisenberg faces as EMI president, colleagues expect him to find time to indulge his passion for golf. At the annual meeting of the International Monetary Fund and World Bank in Madrid in 1994, Duisenberg failed to turn up for a meeting with Dutch bankers. Later, it transpired that he taken part in a golf tournament organised by the hosts - and won.