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France’s struggle to escape Bundesbank ‘brutality’
By David Marsh - published on 23/02/09 in Financial News
In the final part of the serialisation of his new book, The Euro – The Politics of the New Global Currency, Financial News columnist David Marsh reveals how the fiercely guarded independence of Germany’s central bank nearly forced France’s exit from the exchange rate mechanism in the week following Britain’s ignominious departure on Black Wednesday in September 1992. Only impassioned 11th-hour talks between German and French political leaders averted disaster and kept the grand project of monetary union in Europe from coming off the rails
When the larger-than-life frame of German Chancellor Helmut Kohl bustled into the Elysée Palace on the afternoon of Tuesday September 22 1992, a sense of impending calamity hung in the air. As Kohl arrived in Paris for talks with his friend, French President François Mitterrand, France faced a potentially disastrous devaluation – an outcome that was averted only after hours of extraordinary Franco-German brinkmanship and crisis management.
This was the countdown to the 11-month-long Battle of the Franc, largely fought behind closed doors between French and German monetary delegations – ending in agreement in August 1993 to widen dramatically the fluctuation bands of the semi-fixed rate European Monetary System and maintain the epic goal of monetary union in Europe.
The worst foreign exchange unrest for 20 years had broken out the previous week.
On Black Wednesday September 16, this resulted in the ignominious departures of Britain and Italy from the Exchange Rate Mechanism of the EMS. A near-unstoppable barrage of speculation had hit the British pound, the Italian lira and the Spanish peseta. Now the French franc was in the eye of the storm.
On Sunday September 20 the French electorate had voted in a referendum on the Maastricht monetary union treaty. The poll resulted in a tiny Yes majority – not enough to appease currency market operators, who massively sold francs and bought D-Marks. French and German ministers and officials, conferring in Washington for the annual meeting of the International Monetary Fund, immediately tried to stem the flare-up – but failed to agree on vital franc support measures. A key obstacle was the refusal of Bundesbank president Helmut Schlesinger to cut German interest rates.
Mitterrand, stricken by prostate cancer, was pale and drawn when he greeted Kohl on September 22. But he came straight to the point, telling the Chancellor – according to secret transcripts – that France might have no option than to leave the EMS. Kohl claimed to be unaware of the gravity of the crisis – prompting a Mitterrand tirade against the German central bank: “The speculation has been unleashed… I am aware of the independence of the Bundesbank, but what does it want? To remain the last one standing on a field of ruins? Because it will be a field of ruins.”
Kohl telephoned Washington, speaking to Horst Köhler, Number two in the German Finance Ministry (and now, 17 years later in Berlin, Germany’s federal president) for an update on the currency talks. Kohl tried to pacify Mitterrand: “They have told me the situation is not that serious.” Mitterrand retorted: “Only implacable political will can stop the speculation.”
Mindful of a furious row with Schlesinger the previous week over the Government’s desire for a cut in Bundesbank interest rates, Kohl blanched at another tussle with the obstreperous Bundesbank chief: “I cannot go over the head of the Bundesbank…This should not appear like political manipulation.”
Kohl broke off to make another call to Washington. This time he spoke to Hans Tietmeyer, the Bundesbank’s deputy president. The Chancellor reported to Mitterrand: “I told him [Tietmeyer] I would like a declaration from the governors within the next hour on maintaining the parity between the franc and the D-Mark. That is also his view. In addition, they will make available DM19bn to support the franc and the Bundesbank will lower money market rates below 9%.”
Kohl’s crucial conversation with Tietmeyer catalysed a restart of the stalled Franco-German talks in the US capital. Treasury director Jean-Claude Trichet (now, in 2009, president of the European Central Bank in Frankfurt), led a small French team for a tumultuous four-and-a-half bargaining session in the German delegation’s offices at the Sheraton Hotel.
The senior members of the French delegation, Finance Minister Michel Sapin and Banque de France Governor Jacques de Larosière, had left central Washington and were waiting to return to Paris by Concorde, readying themselves for a franc devaluation or an ERM exit that appeared well-nigh inevitable. Pitted against Trichet were German Finance Minister Theo Waigel and his key aide Köhler as well as the Bundesbank’s Schlesinger and Tietmeyer and three other German officials.
Trichet’s showdown at the Sheraton was the supreme test of his nerves and negotiating skills. “I felt I was ‘on the front,’” Trichet wrote in a handwritten letter to Mitterrand 15 months later, enclosing his own 12-page note of the meeting for the President’s perusal. In his December 1993 letter to Mitterrand, Trichet said that Kohl, speaking from Paris, had given the German monetary delegation in Washington an “instruction” to help the franc – a step that would break the Bundesbank Law upholding the central bank’s independence.
Trichet’s message to Mitterrand underlined striking – and long-lasting – differences in Franco-German perceptions about central banking independence. Years later, Schlesinger and Tietmeyer rejected Trichet’s interpretation and affirmed that Kohl left the final decision to the Bundesbank.
During the Sheraton Hotel talks, passions rose to great heights. Schlesinger argued that France had either to raise interest rates or devalue. The Bundesbank president initially refused to sign a declaration that the franc’s parity was inviolable. “If you are in the situation of the French franc, you devalue.
France has done nothing to defend the franc! Nothing serious!” Trichet was furious: “The German finance minister will understand that I am stupefied and indignant… This language is the language of breakdown.”
Kohl – ensconced in a Parisian restaurant after his talks with Mitterrand – telephoned Waigel and Schlesinger in Washington. During a break, Trichet took the future German president Köhler aside: “I told him with brutality that the Bundesbank (and Germany) were making a mistake if they thought they could treat us in the same way that England and Italy had been treated quantitatively and qualitatively. We were not comparable, neither economically nor politically nor strategically.”
After the phone calls with Kohl, the German side showed more conciliation, accepting a Franco-German declaration supporting the franc. After all-night preparations in Paris, the French and German central banks and finance ministries published a joint communiqué early on September 23, declaring the sanctity of the D-Mark–franc parity.
Accompanied by large-scale central bank intervention, increases in money market interest rates in France and cuts in Germany, the communiqué succeeded temporarily in quelling anti-franc speculation. However, the Paris–Washington struggle represented only the opening salvo in the drawn-out Battle of the Franc that lasted until the following summer – a series of bruising episodes in which de Larosière played a key role.
The UK Government, heavily damaged by Black Wednesday, watched the franc’s convulsions with keen interest. When John Major visited Mitterrand in Paris at the end of September 1992, the French President avoided giving him full details of the Franco-German support package – for fear of prompting Anglo-Saxon jealousy. “We have had to face up to a financial crisis which has been sudden, powerful and unjust,” Mitterrand told Major. “Without doubt there was a certain brutality in the attitude of the Bundesbank.”
The September 1992 turmoil marked a turning point in France’s long-running attempts to escape the Bundesbank’s “brutality”. This eventually resulted in the establishment of the European Central Bank that is now run by a Frenchman, Trichet – but has greater independence from government than even the Bundesbank ever had.
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