Compromise on central bank to face market test

Europe's single currency pro ject faces a test of credibility on the markets this week after the weekend compromise over the appointment of Mr Wim Duisenberg as president of the European central bank.

Financial markets will scrutinise reaction to the deal; some analysts said yesterday the impression of political interference could encourage European central bankers to assert their independence and raise interest rates.

In Dublin, economists said they did not foresee an overly negative reaction in the markets as a result of the compromise reached. The difficulty over agreeing who would head the institution and the need for some sort of compromise has been clear for some time, they said. Both Mr Duisenberg and his likely replacement in about four years, Mr Jean-Claude Trichet from France, have the confidence of the markets, they said.

"It's a bit unedifying the way it was cobbled together at the last minute but I don't believe that will affect the credibility of the process," Mr Dermot O'Brien, chief economist with NCB, said.

Ultimately the new central bank will be judged by its actions. "Noone expects that the new board will be open to political influence as a result of this row. There is no suggestion of that," he said. He did not see any ramifications for the deutschmark.

Mr Jim Power, chief economist with the Bank of Ireland, said it was unlikely there would be much of a reaction. "It has been obvious for the last few weeks that there was going to be a compromise. I don't think there will be anything too strong arising out of it."

Any negative reaction to the deutschmark would be mild and temporary, he predicted. "I would expect it to reassert itself very quickly." He said Mr Trichet had every bit as strong a track record as the Dutchman, Mr Duisenberg, who was backed by all the other EU states apart from France.

"I don't think the markets have a problem with Trichet. It may be that when he takes over the French may try to exert political influence. And it does show, from the long-term point of view, how the French and the Germans never get on very well from a financial point of view."

Mr Power said he expected the ECB to move to assert itself quite quickly once established. He believed the Bundesbank would move to raise interest rates in the next six to eight weeks and would try to establish a rate of 4 or 4.5 per cent. However this would not stop Irish rates falling by 2 percentage points by the end of the year.

Ms Alison Cottrell, an international economist at US broker PaineWebber, said: "You have a central bank which is likely to assert itself. That all adds up to a strong euro."

Some analysts thought monetary officials would seek to shore up their credibility with a coordinated interest rate increase in the core European economies, perhaps before the German elections in September.

"The deal will delay the credibility of the ECB, not derail it,` argued Avinash Persaud, a currency economist with J.P. Morgan in London.

(Additional reporting Financial Times services)