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Bonn Fiscal Furor Tarnishes Hope for European Currency

Germany: The Bundesbank balks at finance minister's plan to revalue gold holdings.


BERLIN — An unusual row between the German government and this country's stoutly independent central bank, the Bundesbank, is throwing new doubts on plans to create a new European currency that might one day rival the dollar.

The troubles stem from a recent proposal by German Finance Minister Theo Waigel to change the way Bonn's gold reserves are valued. By introducing new accounting methods, Germany could boost the paper value of its gold by about $9 billion--just enough, theoretically, to reduce the German budget deficit to the level required if this country is to participate in the European Union's single currency, as hoped, in 1999.

Mainstream economists say there is nothing inherently wrong with Waigel's proposal--in fact, Germany now uses gold valuation methods that are far more conservative than those of any other nation in Europe.

But the finance minister's timing could not be worse. He made his suggestion earlier this month, just after a commission reported that Germany's 1997 tax revenue would fall so far short of projections that Germany probably would not qualify for the much-desired currency union.

When Waigel reacted with a new gold accounting system, he aroused instant public suspicion that Bonn was trying to cook the books, tainting the international credibility of a country normally viewed as a bastion of fiscal probity.

"There's a problem of public trust involved," said a staff economist at a business-funded think tank. "If Waigel had done this two years ago, there wouldn't have been any problem. But now, it seems like a panic reaction."

On Wednesday, the revered Bundesbank rejected Waigel's gold concept, saying it "could be construed as an attack on Bundesbank independence."

Opposition politicians began calling for Waigel to resign.

On Thursday, however, Waigel came back swinging, saying he had no intention of either resigning or abandoning the gold plan.

"I repeat: This approach does not infringe on the independence of the Bundesbank in any way," he said.

The coalition government of Chancellor Helmut Kohl has the votes in the German lower house, the Bundestag, to make Waigel's gold revaluation proposal law. However, the Bundesbank could mount a lengthy and damaging tactical battle by refusing to transfer the proceeds to Bonn in the current fiscal year, when Waigel needs them.

Such a dispute between Germany's politicians and its central bankers has not been seen since unification in 1990, when the Bundesbank fiercely opposed a decision by the Kohl government to convert East Germany's near-valueless currency to the stable West German mark at one-to-one parity.

The new dispute is already arousing glee among other Europeans, some of whom do not want a new European currency at all and others who want it but are miffed by what they see as a holier-than-thou attitude on Germany's part.

"We are not becoming like the Germans, but they are becoming like the Italians," said Antonio Martino, former foreign minister of Italy, a country whose fiscal rectitude has been questioned by Germany in the past.

Kohl has staked his personal prestige on the European monetary unification, which requires countries to hold their budget deficits to 3% of gross domestic product if they are to qualify for admission.

In the years since the admission criteria were set, however, Germany's public finances have been severely weakened by rising unemployment and tax shortfalls.

Attempts by Kohl's government to reduce the budget deficit by more conventional--and painful--belt-tightening measures have largely failed.

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