Tietmeyer puts revaluation firmly on the EMU agenda

Bundesbank president Dr Hans Tietmeyer knows that his every phrase is parsed and analysed. So it was no accident when he mentioned to a group of journalists in Frankfurt, in the course of a discussion on currency conversion rates for monetary union, that the revaluation of one currency was still possible.

While Dr Tietmeyer did not mention any currency by name, one journalist present at the dinner immediately wrote down "Ireland" in brackets in her notes. The pound is the only revaluation candidate among the prospective ERM members and there is no doubt but that the Bundesbank president was referring to the Irish currency.

His remarks are important, as they precede a period of intense debate - and quite possibly market turbulence - as the EMU starting date draws ever closer. Next spring, EU leaders will sit down and decide which states will join. By then, at the latest, they will also have decided the mechanism by which currency rates will be set. And this is where Dr Tietmeyer's comments come in.

The Bundesbank president was asked how the decision would be made on the setting of exchange rates entering EMU. One way, he said, would be to use average exchange rates over a prolonged time period in the run up to the locking of currencies on January 1st, 1999. The second possible method for calculating the conversion rates would be the current central ERM parities, he said. "There are some issues in favour of this," he said, appearing to express a preference for this method. And then, addressing this idea, he said that it would be possible for one currency - in other words the pound - to be revalued.

Revaluing a currency means moving its central rate in the ERM upwards. And the case for a revaluation of the pound's central rate in the final locking of rates is obvious - at least at current exchange rates. At the moment, the currency is trading at DM2.67, 26 pfennigs above its DM2.41 central rate. Joining at the current central rate would imply a sharp fall in the currency's value, not the appropriate medicine for a booming economy.

Of course, there is no saying how currency values will move in the months ahead. The main reason why the pound is so strong in the ERM is that it has been pulled up in sterling's wake. Recently there have been signs that the British currency may have reached its peak and could head downwards, which could allow the pound to fall back in the ERM band.

The Government will - wisely - hope to keep its powder dry for the moment on the revaluation issue, to see if a fall in sterling will remove the need for such a move in the months ahead. And here Dr Tietmeyer's speech carried some good news, as he appeared to suggest that the decision on how to lock exchange rates would be made next spring, at the same time as the leaders decide who will join.

There had been some speculation of an early decision on the conversion issue at next month's EU finance ministers meeting, which could have put pressure on the Government here to clarify its position on revaluation.

Revaluing the pound too soon could leave us exposed in the run-up to entering the single currency, particularly if sterling was subsequently to fall sharply.

The immediate focus will now be on the meeting of EU finance ministers on September 13th and 14th. Despite Dr Tietmeyer's hint that this meeting will not decide how currencies will be fixed, it could still see a substantive discussion on the issue. Whatever the outcome, the revaluation of the pound has now been put firmly on the markets' agenda. This should make investors wary of selling the pound. And, in time, it will focus attention on the gap between short-term interest rates here and in Continental Europe, which will mean a fall in Irish rates sooner or later. If the EMU bandwagon remains on track, the only question remaining will be how long the Central Bank can stop Irish rates from starting to fall.