bain_y_howells__monetary_economics__policy_and_its_theoretical_basis

404 MONETARY ECONOMICS
about the policy likely to be followed by the central bank was increased by
the tendency of members of the Executive Board to make conflicting statements
about the euro. The markets did not like this apparent lack of leadership.
Nor were they convinced that the ECB would, despite its constitution,
be truly immune from political pressure. This concern was strengthened
by the confusion over the length of the term of office of the first
President of the ECB, Wim Duisenberg of the Netherlands.
Duisenberg was appointed in 1998 to serve an eight-year term.
However, there had been conflict over his appointment because of the fear
of some member states, notably France, that Duisenberg’s approach to policy
would be too conservative and that monetary policy might be deflationary.
It was generally understood that there had been a behind-the-scenes
agreement that Duisenberg would not serve his full term of office and would
be replaced by a French nominee, although the exact terms of the agreement
were unclear. There was a widespread view that Duisenberg would serve
only four years, although he consistently denied this. In the event, in
February 2002, he announced that he would be retiring from the job on his
68th birthday, on 9 July 2003. By then, he will have served just over five
years of his term of office.
Pause for thought 13.12:
If there had been a fear on the part of some member countries that Wim
Duisenberg would be a too conservative President of the ECB, why did the value
of the euro rise slightly, when, in February 2002, he announced his retirement?
In addition to the worry about leadership, because the euro was a new
currency, there was no firm view as to the long run exchange rate indicated
by economic fundamentals. The starting exchange rate of the euro was
simply a weighted average of the values of the 11 participating currencies
at the end of December 1998. There was no reason to believe that the new
currency would behave in the same way as this weighted average had done
before 1999. Indeed, it was probably the case that recessions in the major
economies would have a more depressing impact on expectations about the
future of the European economy than was suggested by the weights applied
in the old ERM.
Under these circumstances, other factors that might normally not have
had much impact on the currency provided additional excuses for selling the
euro. These included the resignation of the president and members of the
European Commission and the NATO bombing of Serbia and Kosovo. The