Politics of the Euro update

["Lisa & Ian Murray" <seamus@xxxxxxxxxxxxx>]

[full article at http://www.iht.com/IHT/TODAY/THU/FPAGE/imf.2.html ]

Paris, Thursday, September 21, 2000
IMF Chief Sees Politics As Factor in Euro's Slide
Advice on Currency: Organize Intervention But 'Without Talk'


By Alan Friedman International Herald Tribune

PRAGUE - The head of the International Monetary Fund said Wednesday that
among the major causes of the euro's weakness was ''some uncertainty abut
the further political direction of European integration and enlargement.''
As the currency sank to a new low, Horst Koehler, the new IMF managing
director, said ''the Europeans should think through what the major causes
for the weakness of the euro are.''

In an interview with the International Herald Tribune, Mr. Koehler said that
''the Europeans have to be more clear that they are going to reform their
institutions to go with a process of achieving a more unified Europe.'' He
added that the Europeans ''should reach an

understanding of how they will handle the enlargement of the European
Union.''

While the weakness of the euro is generally explained by economic reasons,
such as the way that higher U.S. interest rates attract capital away from
Europe or the strength of the U.S. economy compared with Europe's, many
private-sector analysts also argue that the lack of clear European political
leadership has had a negative impact on market sentiment.

The European Union remains divided over how and when to allow Eastern
European nations to join and how to match economic integration plans with
greater political unity.

Mr. Koehler's remarks came as the euro fell Wednesday to a new low of 84.43
U.S. cents before recovering in 4 p.m. New York trading to 84.79 cents.
(Page 14)

Concerns about European economic growth have intensified as oil prices have
climbed. On Wednesday, prices hit another 10-year high after an industry
report showed an unexpectedly large decline in U.S. inventories. Signs of
slower growth in Germany emerged Wednesday in a report on a leading
business-confidence index, which fell in August for the third consecutive
month. In another sign of a weaker outlook, the Italian government reported
that the country's economy slowed in the second quarter.

Mr. Koehler, who is presiding over his first annual meeting of the IMF, also
weighed into the debate over whether the world's leading central banks
should launch a joint action to rescue the beleaguered currency.

The IMF chief bluntly told a news conference that ''there is no doubt that
the euro is heavily undervalued.'' He added that ''it is also clear that
intervention cannot be taboo because it is part of the instruments any
central bank or government has available.''

In an apparent reference to the almost daily and often contradictory
statements from European politicians, central bankers and finance ministers
about the euro's weakness and whether or not to intervene in currency
markets, Mr. Koehler said there should be ''less talk and more
coordination.''

While not wishing to pronounce on whether intervention was called for or
not, he said his experience in the 1980s and 1990s, when he served as deputy
minister of the Finance Ministry in Germany, suggested that ''a coordinated
intervention can work and should work, but without talk. Just do it, and
then talk.''

Mr. Koehler's remarks came amid a growing controversy in European capitals
over equally direct language used earlier in the week by Michael Mussa, the
IMF's chief economist, who worried that the weak euro could destabilize the
world economy. He called for intervention to save the euro, saying: ''If not
now, when?''

Mr. Mussa's remarks were attacked as ''inappropriate'' by a senior German
official Tuesday and by the governor of Portugal's central bank Wednesday.
Mr. Koehler defended the IMF's right to comment on the euro, saying ''the
Fund has to pay more attention to exchange-rate regimes, and no one should
be surprised that we speak up.''

The big question under discussion among officials in Prague is whether
Lawrence Summers, the U.S. Treasury secretary, is likely to remain cool to
European wishes for a joint action by Europe, the United States and Japan to
aid the euro.

On Saturday, Mr. Summers will meet his counterparts from Japan, Germany,
Britain, France, Italy and Canada for a gathering of the Group of Seven
industrialized nations. They are expected to debate the euro and to face a
French request for an emergency meeting with oil-producing nations from the
Organization of Petroleum Exporting Countries to discuss high energy prices.

When asked how he would advise the administration of President Bill Clinton,
Mr. Koehler said, ''I know from my own experience in the early 1990s that if
there is a case, then the United States has always been very constructive in
acting together.''

In the news conference Wednesday, Mr. Koehler was at pains to reassure both
anti-globalization protesters and unhappy poorer members of the IMF that he
would fight poverty, accelerate debt-relief programs for African nations and
seek to make the IMF more transparent.

''We are determined to bring the benefits of debt relief to as many
countries as possible, as rapidly as possible,'' he said, promising that he
would work with James Wolfensohn, the World Bank's president, to offer debt
relief to 20 countries by year-end.

Mr. Koehler also stressed the need to bring the benefits of private-sector
capital flows to emerging-market countries and showed an unprecedented
degree of sensitivity to complaints about the negative impact of
globalization.

''Globalization presents many opportunities but also has its downside,'' he
said, acknowledging that global growth had ''left out a huge part of the
world and the inequalities were in many ways a major problem in the new
millennium.'' Promising to accelerate change at the IMF, he said the IMF
needed to be ''more transparent and open.''

He added: ''The Fund should even go further in opening itself. I do think we
have to reform the Fund and be more focused.''

''We need to focus on the fact that the global economy is not working for
all nations.'' Mr. Koehler also said the IMF was reviewing its voting
procedures in order to make sure that all 182 member nations were fairly
represented.