Speculators turn their sights on Europe

Speculators turn their sights on Europe

By Mark Milner

LONDON: Asia's central bankers must be getting fed up with
finding their currencies in the speculators' sights. Last Friday,
the Malaysian ringgit, the Philippine peso and the Indonesian
rupiah were all on the skids again. Not to worry. Help may be at
hand, from a majority of members of the European Union.

The genus of the Asian currency crisis lay in the fact that
many Southeast Asian countries had effectively pegged their
currencies to the dollar. That gave the speculators a fixed
target at which to aim because central banks felt obliged to
spend their foreign exchange reserves defending them.

Now that most of the links have been broken, the speculators
will be looking for fresh opportunities. Europe could fit the
bill. The likely 11-strong group set to sign up for the first
wave of monetary union at the beginning of next year are
scheduled to pencil in as early as May the parities at which
their currencies will subsequently be merged into the euro.

As a result, the speculators will have the thick end of eight
months in which to try their luck against a whole range of
targets whether the parities chosen are based, say, on either
existing central rates in the exchange rate mechanism or some
more market-related method.

There are good enough reasons for giving markets timely
warning. Simply picking the market rate on the last trading day
of this coming December would, for example, open up opportunities
for manipulation.

But the current strategy does carry risk. Currency fluctuation
is by no means dead, though to be fair it is far more muted than
it once was among the countries most likely to make the single
currency first time round.

That, however, is based on the increasing market perception
that the political will behind monetary union will be sufficient
to see it to fruition. The real test is yet to come. The world's
currency players may be convinced monetary union is going to
happen on time with a credible number of countries making the
starting line up.

It may prove a different matter when they start to see actual
numbers -- both the economic data on which members are chosen and
the parities at which their currencies will be locked in. It
could soon be time to fasten seatbelts, there is bound to be
turbulence ahead.
Horse trading

Speaking of May, it will be interesting to see if Europe's
leaders have by then got round to deciding just who will run the
European central bank -- becoming, arguably, one of the most
powerful (and least accountable) figures in Europe.

France's decision to put forward Jean-Claude Trichet, the head
of the country's central bank, in opposition to the candidacy of
Wim Duisenberg, the current head of the European Monetary
Institute and the man initially expected to be a shoe-in for the
ECB job, has already meant intense lobbying among the governments
of the member states which will decide the issue of who will head
Europe's central bank.

And the horse trading over the ECB is likely to embrace the
election process for the presidency of the European Bank for
Reconstruction and Development where Jacques de Larosiere is due
to step down from the presidency at the end of the month. Though
the EBRD is by no means an exclusively European preserve,
European Union member states do control a majority of the votes.

The Belgian newspaper De Standaard last Friday came up with an
interesting variation on a theme already floated by the country's
finance minister Philippe Maystadt -- that the first eight-year
presidency at the ECB should be shared between Duisenberg and
Trichet.

The De Standaard's variation was that the split would be
achieved by imposing an age limit on the post of Europe's central
bank chief. That would mean Duisenberg could take on the job at
the beginning of monetary union but would have to stand down part
way through the first term. De Standaard suggested that the deal,
which it said had been brokered by Luxembourg Prime Minister
Jean-Claude Juncker, would also see Maystadt move to the EBRD.

On the face of it, the split term might appear to hold some
attractions. It can at least be billed as a compromise which
would avoid some unseemly public squabbling over Euro-jobs for
the boys -- though the squabbling will still go on in private
over the EBRD and, later, the top post at the European Investment
Bank.

Central bank hawks -- a common enough breed in Europe these
days -- are unlikely to be impressed, however. Both Duisenberg
and Trichet are highly regarded but the position of the ECB
president was designed to reassure financial markets that the man
or woman at the top would be independent of political pressure.
The chosen way was to give the incumbent only one term in office
but to make it a long one.

Consequently, splitting the term between Duisenberg and
Trichet in direct response to French political pressure is hardly
likely to add to the credibility of presidential independence.

Indeed, there are those who would argue that the French put
forward Trichet's name in the first place precisely because the
administration was concerned about the absence of political
accountability.

With Britain having taken on the EU presidency for the next
six months, the role of honest broker in the affair of the ECB
president has fallen to Tony Blair. Tricky.

A story in the true spirit of Christmas has arrived,
belatedly, from the Falklands. The Islands government has taken
pity on the poor South Koreans whose currency has been so
battered of late. Usually, the Koreans fork out around pounds 12
million a year to fish off the Falklands. This time round, in
view of the circumstances, they can pay less, and later.

-- Guardian News Service