The Minister's Heresy
Oskar Lafontaine questions Germany's traditional reverence for the independence of the central bank
By JAMES L. GRAFF/BRUSSELS

For most of the post-war era, monetary rigor seemed a peculiarly Teutonic virtue. German politicians of all stripes touted the independence of the Bundesbank--scourge of inflation, heart of the Wirtschaftswunder--as the sole suitable model for a unified European monetary system. At the European Council summit in Dublin in December 1996, they applied the stern tutelage of the "stability pact," forcing member countries to lay out detailed programs for attaining budgetary health and setting financial penalties for fiscal backsliding.

Later, the government of Helmut Kohl battled to limit the power of the "E11" forum of euro-zone finance ministers, which it viewed as a French bid to undermine the independence of the European Central Bank. And in May 1998, Germany's then Finance Minister Theo Waigel's legendary eyebrows were drawn to daggers as he fought to install the like-minded Dutchman Wim Duisenberg as the E.C.B.'s first president. The outcome of that long night, which saw Duisenberg allegedly agreeing to retire early to make room for a French successor, was condemned in Germany as a dangerous departure from the model of a wholly independent Bundesbank.

Against that background, the shrill conflict between Germany's new Social Democrat Finance Minister, Oskar Lafontaine, and Frankfurt central bankers at both the E.C.B. and the Bundesbank has an air of irony, even heresy, about it. "I don't believe in the sole saintly wisdom of the Bundesbank," Lafontaine said last month. Since then, he has repeatedly called on both the Bundesbank and the E.C.B. to consider not just stability in their monetary policy, but also growth and employment. To that end, he has explicitly demanded that interest rates, which are now set by the Bundesbank but will fall under the E.C.B.'s jurisdiction on Jan. 1 next year, be lowered. Lafontaine made the point last Thursday to Bundesbank president Hans Tietmeyer, who will retire next August--making way, Lafontaine hopes, for a less austere successor. Tietmeyer bowed slightly to the new mood in calling the discussion "desirable," but he warned against shifting "blame onto the addresses of central banks" instead of making difficult "structural changes." Tietmeyer spoke loudest, though, by refusing to lower interest rates.

For his part, Duisenberg wryly countered Lafontaine, saying that he considered it "normal" for politicians to give advice to central bankers, but "It would be abnormal if those suggestions were to be listened to." Indeed, from his point of view the spat is purely theoretical: the independence of the E.C.B. is firmly anchored in the 1992 Maastricht Treaty, and reopening it would call for unimaginable backpedaling, more nail-biting referendums, and chaos on the markets. But if theory matters anywhere, it's in economics. "We're likely to see a deep-seated and longstanding conflict in Europe between politicians on the left and central bankers," says Thomas Mayer, managing director at Goldman Sachs in Frankfurt. "With monetary union, the classic instrument of priming the pump by spending isn't available. These guys want to use monetary policy where Keynes used fiscal policy, and that's a paradigm the central bankers reject."

Even though many of them would in fact like to see interest rates come down further and sooner, Germany's E.U. partners are uneasy about its newfound mettle for meddling. "For years we were given lessons by the Germans about the need for an independent central bank," says Christian de Boissieu, economics professor at the Sorbonne. "Now over the last two weeks we've seen them engaged in a lot of old-style French behavior." De Boissieu fears a pattern of blame and censure is being established. "When the central bank is asked to lower interest rates, its normal response is to oppose it," he says, particularly in this sensitive period of establishing independence. "There's a danger that Lafontaine's public statements will actually deter an interest rate cut rather than accelerate it."