France's New Reign Of Terror.

• Author: ENGELEN, KLAUS C.

Paris is waging a not-too-subtle campaign to oust ECB President Wim Duisenberg.

The French demanded as a price of German unity the destruction of the mighty Bundesbank. Germans had to give up their beloved Deutsche Mark. The French succeeded. But so far their moves to post a Frenchman at the helm of Frankfurt's European Central Bank have failed. Chirac may turn out the loser.

There is a potentially explosive issue dominating private discussions among European central bankers, financial officials, and market participants: the growing fear that a bitter leadership battle may weaken the credibility of the European Central Bank (ECB) and push the euro even lower.

Ever since March, when Jean Lemierre, president of the European Bank for Reconstruction and Development (EBRD), raised the issue of ECB President Wim Duisenberg being committed to step down in 2002 instead of serving out his full eight-year term, EU governments, central bankers, and the financial markets have been put on notice that Paris wants to have a Frenchman at the helm of the ECB next year.

At the recent informal EU finance ministers' meeting in Malmo, Sweden, Belgian Finance Minister Didier Reynders, who presently serves as chairman of the so-called Eurogroup, called on Duisenberg to declare at what time he intends to step down. That was seen as an escalation of the French-led campaign against the Dutch ECB head, who has presided over the euro's fall from over $1.15 to a low of 85 cents.

But Germany is fighting back. German Finance Minister Hans Eichel and his predecessor, Theo Waigel, gave recent interviews to Handelsblatt, Germany's leading financial and economic daily, in which they strongly backed Duisenberg. "There is no reason for starting a debate now about succession," Eichel declared. "Duisenberg is elected for a full eight-year term and he does an excellent job." Waigel, who played a crucial role in getting Duisenberg elected, added: "The ongoing talk (by the French) that there was a secret agreement about limiting Duisenberg's term is false. After all, I was present." In coming out so strongly in favor of Duisenberg, the two heavyweights of German finance have sent a clear, bipartisan message to Paris: Stop undermining "Mr. Euro" by talking about a an early changeover at the ECB.

Yes, there have been ample reasons for criticizing the way the former Dutch central bank governor has been acting as "Mr. Euro." There have been off-the-cuff statements that were clearly counterproductive, given the ECB's primary orientation towards securing price stability. With Duisenberg at the helm, there has been poor communication and a lack of transparency. But the way the French have been trying to push Duisenberg out of his job by 2002 is irritating not only to many European central bankers but also other EU finance ministers and governments. Announcing the end of his term next year would make him a "lame duck" and impede the strong ECB leadership that is needed today more than ever as Euroland is pulled down by slow growth in the world economy.

The French-led public campaign to dismantle "Mr. Euro" has been going on for years. Ever since his July 1997 move to Frankfurt to head the European Monetary Institute, the forerunner of the ECB, the French have given him a hard time. What some call the "Duisenberg-Trichet dilemma" raises some major questions: Will the first president of the European Central Bank serve out his full term that ends in May 2006? Or, will Duisenberg, now 65, step down earlier? Was there a deal at the EU Summit in Brussels in May 1998--as French President Jacques Chirac claims--for...