Duisenberg's lesson for the ECB: stop worrying about the financial markets.

• Author: Krauss, Melvyn

It is almost two months now that the European Central Bank ruled out the possibility that eurozone interest rates would be going to zero. Then, that possibility was hedged at the last meeting of the ECB's Governing Council.

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Who knows what will happen? The ECB's attempt to manipulate market expectations in a constantly changing economic environment is causing it to lose credibility at a time when confidence in financial institutions already is severely shaken.

It doesn't have to be this way. The ECB should take a page from Wim Duisenberg's playbook (itself strongly influenced by German Bundesbank practices). The former ECB president did not plan his monetary policy moves months or even weeks in advance, much less announce them in public. He would wait until the last minute--then make up his mind.

Even though he has left the scene, Duisenberg's way of running Europe's monetary policy has turned out to be particularly relevant for today's volatile economic environment.

The pioneering Dutchman cared little for what markets thought, according to his close associates. Preparing markets for interest rate moves was what former Federal Reserve chairman Alan Greenspan did--and he would have none of it.

Occasionally, Duisenberg even would purposely wrong-foot markets to keep them off balance. He told me so himself. It wasn't that the first ECB president was hostile to markets (though they would grow hostile to him)he just wanted to maintain a maximum amount of freedom for the Governing Council to act.

After all, circumstances change--the economy and the Governing Council can be moody and hard to predict. Duisenberg was a consensus politician, who understood that consensus inside the Governing Council could be a variable thing.

The ECB's decision to raise interest rates by 25 basis points last July is a classic example of what can go wrong when the ECB pre-announces its interest rate moves.

When the July rate hike was decided the month before in June, the economy was one way. When the rates, in fact, were increased in July, the economy was another. These days, a month can be an eternity.

But rather than lose face, the ECB went through with an obviously bad policy move--raising rates in a deteriorating economic situation.

This was not a wise choice and raised serious questions in the market about the judgment of ECB policymakers. In fact, since last June, there has been a noticeable decline of ECB credibility in the markets.

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