Gold Row Roots Go Back To Berlin Wall Fall

Germanys dramatic gold row, an unprecedented power struggle over Europes single currency between Bonn and the Bundesbank, is a conflict that has been brewing since the Berlin Wall fell in 1989.

The bullion battle pits two men of huge resolve, Chancellor Helmut Kohl and his former protege and now Bundesbank president Hans Tietmeyer, in a showdown that may determine whether their careers end in triumph or failure.

In policy terms, it is a struggle of European vision versus economic reality, political deal-making versus technocratic precision, campaign trail enthusiasm versus bankers sobriety. The fact two allies so steeped in the consensus politics of old West Germany could end up at daggers drawn shows how far united Germany has come since the euphoric days of 1989-1990 when just about anything seemed possible.

 

The dispute stems from a goverment plan to revalue the gold and currency reserves of the Bundesbank, which has fiercely criticised the scheme. The proposal was floated as Bonn struggled to fill gaps in the budget in order to qualify for the European single currency.

The saga shows how thickly enmeshed European politics have become, so that even a towering figure like Kohl can get bogged down by factors as diverse as French insecurity, Italian budget fudging, Croatian independence and Bavarian power plays.

Kohls decision to dash towards German unity, announced three weeks after the Berlin Wall fell in November 1989, set alarm bells ringing in neighbouring France. Kohl said he wanted to work in a European framework but few believed him. He wont get anything from me until European unity makes a lot more progress, Francois Mitterrand huffed.

The French President vowed to commit Kohl to a single currency, a long-standing Paris goal to reduce Germanys economic dominance.

Mitterrand suspected Kohls refusal to set a date to start negotiating a monetary union was a sign a reunited Germany might drift away from the EU. Within weeks, he got Kohl to agree to start talks preparing for EMU in December 1990.

Bundesbank President Karl Otto Poehl disliked it but Kohl turned a deaf ear. In February 1990, Kohl humiliated Poehl by announcing a monetary union with East Germany on the same day as the unsuspecting bank chief publicly criticised the idea.

Shortly thereafter, Kohl agreed East Germans could exchange money at one-to-one with the deutschemark, an inflated rate Poehl warned would ruin the economy. His advice was ignored.

In April 1990, just before a special EU summit to discuss German unification, Kohl and Mitterrand agreed to another great leap forward a political union to accompany EMU.

It was a grand vision of a united Europe with one money, a common foreign policy, harmonised policies on social issues and immigration and a European Parliament with a real voice.

The Bundesbank, often seen as selfishly nationalist, backed this grand idea because it would create the political consensus needed to take tough measures like cuts in welfare programmes that might be needed to keep the currency stable.

A monetary union will prove permanent only if there is a dominant political will to take social measures to deal with the serious economic effects, president Helmut Schlesinger said a month before the Maastricht treaty was signed. In the last resort, this calls for a political union too.

But Kohl failed to come home from the Maastricht summit in December 1991 with the political union the Bundesbank wanted. What was worse, as seen from Frankfurt, was that he agreed under French and Italian pressure to a 1999 deadline for EMU.

Kohl boasted he had won an independent European central bank, the Bundesbank-style body whose autonomy the current gold row has put into question. Mitterrand prided himself on his coup in getting a firm date for the Bundesbank to shut shop.

What went wrong? Other EU members were less keen on the grand vision and Kohl, also pressing them to agree to recognise Croatia and Slovenia and involve British Prime Minister John Major in Europe as much as possible, had to make concessions.

EMU is all about abolishing the mark, a Bundesbank council member said. The mark will be abolished but all the other policies will not be internationalised as originally planned. We wanted political union to coordinate all this.

From then on, the Bundesbank campaigned for the tightest possible interpretation of the convergence criteria, fearing that anything less than strict adherence could backfire. Bundesbank council members also pressed for a two-speed monetary union, with only a hard core of EU states taking part in the launching phase in 1999.