THE EURO RESCUED (UNTIL NEXT TIME)
At the IMF, George Trefgarne escapes the protesters but still gets ambushed
Prague WHEN it came, we were all looking the wrong way. Speculation about a combined support operation to prop up the single currency had been increasing all last week. Michael Mussa, the economics counsellor of the International Monetary Fund, had peered at us through his thick glasses and demanded, 'If not now, when?' He was not the only one. The night before, in a fish restaurant in the shadow of the magnifi- cent Charles Bridge, another IMF official was saying, 'The question is: can they save the euro?'
But we were still caught on the hop. It will not happen during a US election cam- paign, we told ourselves. Alan Greenspan, mighty chairman of the US Federal Reserve, won't let them do it. Anyway, why should the Americans support the euro? It's not their problem.
The intervention began during lunch on Friday. Junior traders at investment banks in London, manning the desk while everyone else was out, suddenly found themselves taking euro/dollar orders from dealers at the Fed. For my part, I was in the north of the Czech capital, in a dis- used shipyard, talking to some demon- strators who had set up a 'convergence centre' there. There was a bottle of cham- pagne going for anyone who could find an Old Etonian campaigning against capital- ism, and I had just discovered a well-spo- ken chap called Martin who, promisingly, said he was from Berkshire.
But before I could pin him down my mobile rang. It was a friendly tip-off from the Bank of England. Naturally, my com- panions and I scrambled back into our Skoda taxi and hurtled through the cob- bled streets, although not before ascertain- ing that Martin had actually attended a comprehensive school near Newbury.
The intervention was a tactical success in that it was a surprise. But there have been disconcerting noises coming out of the G7, particularly from the Central Bank governors, and the euro remains under pressure. One cannot help wondering just how much they meant it. For one thing, currency dealers reckon that the total amount spent was only about $5 to $7 bil- lion, of which $3 billion came from the European Central Bank. As interventions go that is pretty small beer. In June 1998 the Fed and the Bank of Japan spent about $25 billion to prop up the yen. After the Plaza Accord in 1985 they spent about $100 billion. That still does not go far, given that the world's currency markets turn a trillion dollars over every day. Intervention is therefore more about send- ing a signal. But the relatively tiny sums committed by the Fed and, indeed, the Bank of England somehow lack conviction.
The operation was planned 24 hours before the bigwigs arrived here (perhaps it should be called the Conference Call Accord) at the request of the European Central Bank. When they showed up, we were expecting the governors to appear like Titus in Rome 'laden with honour's spoils'. But they were strangely subdued, saying only that it was a 'technical success'.
They should have been as happy as Larry. Only Larry was not that happy either. A couple of hours after the inter- vention had been completed, Mr Sum- mers, the US Treasury Secretary, was telling everyone that 'the strong dollar policy is still in place because it is in the national interests of the United States'. Needless to say, that was seen as contra- dicting the order to sell dollars and buy euros issued in the morning, and is why, by the close, the single currency had lost three of the five cents gained during the day.
The participation of the Americans was vital, as nobody in their right mind would bet against the Fed. It is said that a request for help was turned down earlier this month and the Americans were won over only after profits warnings from Gillette and Intel, both complaining that the weak euro meant their European earn- ings were down sharply. At one point last week, Intel's shares had lost 25pc, reducing the company's value by $100 billion.
As for Alan Greenspan, we have heard not a word. Maybe he was upset after dis- covering that the US Trade Department had banned Americans, from staying in the main hotel because the Libyans had bought it. More likely, he is worried that a weak dollar may give a short-term boost to exporters, but force him to raise interest rates. That would cause more damage to the American economy than a fall in profits at purveyors of male toiletries and microchips.
You would have thought Wim Duisen- berg, president of the European Central Bank, might have a spring in his step. Not so. He actually looked rather cross. He finds European finance ministers irritating as they will not undertake proper struc- tural reform and keep commenting on exchange rates, which is his patch. He skipped the last Ecofin meeting in Ver- sailles, claiming he could not make it because he was in Canada and Concorde was not working. Unlike his opposite num- bers at the Fed and the Bank of England, he has control over his bank's reserves and does not require political permission to use them. Asked if he was given a green light, he snapped, 'Certainly not.'
But it was our own Sir Eddie George, governor of the Bank of England, who looked the most uncomfortable. He had to sit next to Gordon Brown in the British embassy as the Chancellor did his best to talk the pound down. Mr Brown repeated five times, The current euro/sterling exchange rate cannot be justified by any long-term view of the economic funda- mentals.' Sterling has already fallen dra- matically against the dollar and it is Sir Eddie who has been holding the line against a rate rise. If it tumbles against the euro too, he may not do so again. He was 62 two weeks ago and can remember what it was like to have a weak currency — how it pushes up the price of imports, raises the cost of borrowing because foreign lenders are paid back less than they advanced, and reduces productivity by providing an easy way out for exporters.
He is also no fan of the single currency, which, as he said in Basle earlier this month, 'is fundamentally a political rather than an economic issue'. As for the Chan- cellor's policy of driving the pound lower against the euro — possibly towards a rate at which we could join — it is worth recall- ing what the governor said before the Treasury select committee in February last year. He warned that for Britain to pursue an exchange rate target 'would be a poten- tial conflict with the inflation objective, with ramifications for monetary and inter- est rate policy'.
After the G7 meeting, the Central Bank governors trotted off for their cus- tomary dinner without the finance minis- ters — an event they all look forward to as most of them have known each other for a long time. The euro's weakness has more to do with the differing growth rates of Europe and the US, rather than one-off moves in foreign exchanges. And there is also an underlying sense that the markets do not trust the project after all. The governors know this. They may have said they are prepared to intervene again, but their lack of enthusiasm is almost deafening.
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