Monetary marathon man

Date: 10/09/1998

EARLIER this year, EU leaders waged a rancorous, agonisingly drawn-out battle over the presidency of the European Central Bank which threatened to undermine confidence in the incipient institution's much-trumpeted independence, anchored in the Maastricht Treaty.

The resolution of that bruising altercation was messy, but the selection of Dutchman Wim Duisenberg to head the ECB for at least four years did much to contain the damage.

No less credible was the appointment of Germany's Otmar Issing - a bona fide central bank heavyweight and champion of price stability - as the ECB's chief economist and, along with Duisenberg and four others, a member of the executive board.

The more things change, the more they stay the same. In many regards, this adage applies to a comparison between the ECB and the Bundesbank, which will pass on the monetary policy-making torch to the pan-European institution next year.

Not least, both central banks boast a no-nonsense inflation fighter at the helm (Hans Tietmeyer, in the Bundesbank's case) backed by a hawkish monetarist as chief economist. In each case, the supporting role belongs to Otmar Issing.

He is a natural choice for the ECB, given his impeccable international central banking reputation. But his nomination this spring by Germany, while largely expected, was uncertain until the last minute since it, too, threatened to become a casualty of political infighting.

Issing, who was considered the Bundesbank's most hawkish council member (he topped the charts in the 'Hawk-o-meter' rankings compiled by the Bloomberg news agency), does not suffer fools gladly when it comes to inflation and central bank independence.

German Finance Minister Theo Waigel opposed his nomination to the ECB, angry with Issing's central role in torpedoing Bonn's plan last year to revalue the Bundesbank's gold reserves and use the windfall to cut the federal budget deficit during the feverish drive to qualify for EMU.

In the end, realpolitik prevailed in Bonn. Germany had made a loud case for ECB independence and pushed for a Duisenberg presidency. It would have undermined that position had it nominated Waigel's favourite, State Secretary for Finance Jürgen Stark, a political insider since chosen to become Bundesbank vice-president.

No better person than Issing was available to embody Bonn's insistence on “stability-oriented” monetary policy for Europe.

The ruggedly handsome Issing has been likened by some to a gracefully ageing James Bond (the Sean Connery version). He may well have figured prominently in the behind-the-scenes brokering which led to Bonn's acquiescence in the Brussels deal for Bank of France president Jean-Claude Trichet to take over the ECB helm from Duisenberg, who supposedly inked an early retirement plan.

It seems reasonable to speculate that Chancellor Helmut Kohl's grudging approval of the arrangement may have required a quid pro quo in the form of Issing getting an eight-year term - the longest among the initial four 'at-large' ECB directorate members.

To continue with the Bond metaphor, Issing (perhaps he should be dubbed 008) is Germany's special agent charged with preventing French intriguers from damaging the stability of Europe's single currency.

Issing thus functions in German eyes as a guarantor that Frankfurt will remain a bastion against any French temptation to reflate.

Issing was born in 1936 in Würzburg, a baroque city in Franconia in the northern lowlands of Bavaria. Ironically, he is less than one year younger than Duisenberg, who has coquettishly stated his intention to step down early from his ECB post because of his allegedly advanced age. Issing, assuming he serves his full term, will be 70 when he retires.

Issing, married with two sons, racked up a brilliant academic career before joining the Bundesbank directorate in 1990. A PhD by the age of 26 was followed by a post-doctoral thesis in 1965. For the next 25 years he held professorships in Marburg, Erlangen-Nuremberg and, most notably, Würzburg.

The author of two standard works on monetary theory and policy, the erudite Issing also notched up extensive, valuable practical experience as a member of the federal economics ministry's advisory council and, more significantly, as a member of the German government's council of economic advisors (Five Wise Men) in 1988-90.

Charming and sharp-witted, the refined yet modest Issing laces his speeches with references to European high culture; not surprising for a man who began his college studies with a focus on classical philology. The soft-spoken Bavarian humanist is valued by journalists for his patient approachability. Yet he remains the consummate central banker, unfailingly exhibiting a well-honed prudence, lest his comments irresponsibly feed the ravenous financial markets.

A classical music aficionado and wine connoisseur, Issing is also an athletic talent, having once shone as a sprint champion (100m and 200m dash) in the seniors' category in his home state of Bavaria.

In view of his long and crucial term at the ECB over the next eight years, however, he may soon need to adapt to the role of marathon man.

A fervent advocate of the market economy, Issing is not without his critics. Keynesians frequently complain that his 'inflation is never dead' caveats neglect Europe's high unemployment levels. He counters that monetary policy is not the solution and points to the vexing structural problems that bedevil job creation.

He is equally untiring in counselling the need for continued budgetary consolidation at the national level and for a proper policy mix to ensure that ECB monetary policy is not overburdened.

Issing has also acquired a reputation as a Eurosceptic, based on his uncompromising insistence that the EMU convergence criteria be strictly met on a sustained basis.

His sharp warnings about the risks involved in creating a monetary union before the establishment of political union have led some to suggest that he secretly opposes the single currency, an unsubstantiated charge which probably overshoots the mark.

Despite his monetarist rigour, Issing is a pragmatist, and it seems a little unfair that some economists have dubbed him 'Mr Money Supply'.

Not a blazing dogmatist, he concedes that the ECB should adopt a money supply target but would be wise to complement this with elements of direct inflation targeting.

Indeed, he recently told a group of journalists over dinner that a singular dependence on monetary targeting would be “far too risky” as the ECB seeks to navigate shoal-ridden financial waters. The chances are good that Issing will persuade his ECB colleagues to accept a combination of monetary and inflation targeting.

But one thing is certain: orthodox or not, Issing is an unwavering exponent of what the Germans call Stabilitätskultur, and relentlessly tough on inflation.

When the ECB settles on its monetary policy strategy, the man who spearheaded the campaign to tighten Bundesbank monetary policy last autumn will have had an authoritative say in shaping the new bank's approach to securing price stability in the euro-zone. He is certain to wield an influential stick.

It would be rash to claim that the ECB is a mere clone of the Bundesbank. On paper it is more. In practice it will remain less until - and unless - it earns the reputation and public acceptance now enjoyed by the German central bank.

Otmar Issing will be only one member of an international cast, but it is a safe bet that he will establish himself as a key player on the European financial scene and strive to ensure that the ECB and the Bundesbank can one day be mentioned in the same breath when it comes to a successful track record on monetary stability.

Issing is no less than the embodiment of the Bundesbank catechism at the European Central Bank.

BIO