BBC News Online: Events: The launch of EMU: Inside EMU

Codename Euroland

Steve Levinson turned private eye behind the euro curtain, determined to track down the strange powers of the greatest economic experiment ever.

I knew something big was going on. I knew it would happen in two weeks time and people were getting worried...

I knew the answers were here in Frankfurt. There'd been top level meetings. Men with briefcases flying in and out.

The project - codename Euroland - would affect 300 million people. A previously unknown group, the European Central Bank , was pulling the strings. I'd been told it was the greatest economic experiment ever.

Irish economist Jim Powers told me: "The European Central Bank is clouded in a veil of secrecy at the moment and ultimately that could prove very damaging and lead to serious political problems."

Richard Portes, from the Centre for Economic Policy Research, chimed in: "This will be a monetary area the size and weight of America in the world economy and the ECB will have to reflect that."

This is were I hoped to find the answers, the headquarters of the European Central Bank and the heart of a new economic empire created by the merging of 11 currencies into one. But it's shrouded in mystery. Little is known about how it will work or the powerful group of people who run it.

I quickly sussed out that a close-knit group of six is at the centre of power.

There are men from France, Germany, Italy and Spain. There is one woman, from Finland.
And there is a Dutchman, their leader, Wim Duisenberg. They call him "the president".

Once a fortnight they are joined by 11 others - governors of national central banks. All up they are 17 people, each of them has one vote. This is Euroland's governing council.

Their task is to set the single interest rate for the 11 countries in Euroland. But how they reach their decisions will be secret, there'll be no published minutes of their meetings, no voting records and no inflation forecasts.

Wim Duisenberg is not an easy man to get hold of, but I knew he'd be in the open in Frankfurt after the governing council's latest meeting. It was a chance to throw some light on his organisation and question him about its plans.

I put my point directly:
"When you were in London a couple of days ago you said you wanted the European Central Bank to be one of the most open central banks in the world, but it is still not your intention to publish minutes, votes or inflation forecasts. How do you reconcile these two positions?"

Wim Duisenberg stayed cool: "I reconcile these two positions by not defining openess as publishing everything that will be available, but by defining openess as explaining every decision, every consideration. Also the pros and cons and to be very open about that and to be frequent and immediate in that openness".

In the UK, where the Bank of England sets interest rates - and does publish minutes, votes and forecasts - this may seem an academic debate. After all, it will be three years at least, if at all, before Britain joins the euro.

But just across the border between Northern Ireland and the Republic of Ireland it's a different story. The people in Ireland have just two weeks before they hand over control of their interest rates.

Every household in Ireland will be affected. It's a country like Britain where people want to own their homes.

For Brian MacDonald today is moving day, he's taking on a new mortgage and, with his wife Deirdre, is moving to a bigger house.

But how much do they know about project Euroland and the fact that from January there'll be a single interest rate set in Frankfurt, not Dublin?

The MacDonalds don't realise it but the European Central Bank is already part of their lives. On the very day they moved, interest rates came down to 3%.

Ireland was one of 11 countries to cut rates that day. It was a deal struck in Frankfurt, cutting the mortgage payments of the MacDonald's. However some people see it as a worrying sign of things to come.

Jim Powers told me he was one of the doubters: "I think the Irish people don't realise at this stage that from next January 17 people, including one Irish person, will be making the interest rate decisions for Ireland in Frankfurt, and Ireland, at the end of the day, will have very little influence over the levels of interest rates which we will have to live with. I think there is not a realisation of that and once that realisation strikes home I think people could be in for a little bit of a shock."

Europe has brought the people here in Ireland nothing but good times. But a single interest rate, decided elsewhere, is a difficult concept to grasp.

From January the Central Bank of Ireland will become a regional branch of the ECB in Frankfurt and its governor, Morris O'Connell, will have just one vote on the governing council. But he's not worried about the power shift and sees no reason why the Irish should know which way he votes.

O'Connell told me: "I don't think it's appropriate that you should be announcing how each person may have voted, I think you're creating other pressures then, you're creating pressure on individual members to reflect just the national situation, the national viewpoint, where we are required under this treaty to take a European perspective on things."

One thing was becoming clear to me now. This treaty, the Maastricht Treaty, had a lot to answer for. It had created a powerful bank ... and deliberately put it out of the reach of politicians.

To restrict or change the Bank's powers would require a new treaty - and approval by all parliaments - which is just not going to happen.
The Bank's independence is guaranteed by the Treaty.

• It must not take political instructions
• Its executives are unsackable and serve for eight years
• It must report just once a year to the European Parliament.

The Bank says it will report to Parliament more often than that, but critics say this is still not good enough.

Richard Portes remains sceptical: "I myself do not think that there is sufficient accountability provided for in the Maastricht Treaty for the ECB to report to political authorities and, more importantly in a sense, to the public at large.

"There is an obligation for the governor to turn up at the European Parliament from time to time, but what he has to say, and how he says it, and the nature of the topics he has to cover and so forth, this is not prescribed in any way. He can turn up and read a statement, answer a couple of questions and leave."

And another question needed an answer: How would the Bank, and the people at the top, react in a crisis?

Some say the Bank may have inbuilt design faults, with 11 national interests delaying quick decisions, executives being outvoted by national governors and no power to supervise or rescue banks, in the way the Bank of England or US Federal Reserve can.

Whatever its faults, the European Central Bank and indeed the whole single currency project has reached the point of no return. But what are these people trying to do? They will set a European-wide interest rate of 3% and aim to deliver the low inflation that is their primary objective.

But can 3% be the right interest rate for both a booming economy like Ireland's and a sluggish one like Germany's?

And anyway, why worry about inflation when Europe's biggest economic problem is unemployment?

You only have to go down to the local job centre in Frankfurt to see the problem. Germany needs low interest rates to help find work for its four million unemployed. Barbara Müller is out of work for the second time in a year. She came from Poland believing jobs would be easy to find, but even prosperous Frankfurt has high unemployment.

Frankfurt has a tradition of attracting foreign workers, but as Barbara is finding out now, the jobs have dried up. One in three of the unemployed is an immigrant.

Back in Ireland, things could not be more different. But in Euroland, all countries have the same interest rate - and that's just 3%....

Dublin doesn't have enough workers, so it welcomes those from overseas. These chambermaids come from Italy. Ireland's economy is attracting people from all over Europe for whom there are few job opportunities back at home.

Dublin's spectacular growth is a clear sign of how different economies are being squeezed together.

In Dublin alone there has been a 20% increase in the number of hotels.

Ireland's bubble could soon burst. The problem is how to stop that happening once interest rates are set in Frankfurt.

Jim Power concludes: "I think it's going to be very difficult to get one interest rate to suit all. Clearly the level of interest rates which Ireland will inherit from Germany is not suitable for the economy and I think other regions throughout Euroland will experience pretty similar conditions over the coming years and that could ultimately result in pockets of high unemployment in certain regions of Europe and it is going to be very difficult for the ECB to set a level of interest rates to prevent that from happening."

But Morris O'Connell remains unperturbed: "Decisions will be taken from time to time that will not be in our best interests in the short term. Reducing interest rates this time is not in the best interest of an economy that's in a very buoyant mood, but we have no choice in this. You must look at this in the context of the larger picture and of the benefits we get in the longer term."

One way or another, the die is cast. The Irish and 291 million others enter a new economic era in the new year. Its a great experiment, being masterminded in Frankfurt, and they are the guinea pigs.

Events Contents

• Crisis In The Gulf
• The Money Programme
• The Dome Zone
• Indonesia
• Local Elections 98
• Newsnight
• Vote 99
• Budget 98

The launch of EMU Contents

• Euro home
• Euro facts
• Inside EMU
• The UK and EMU
• Audio and Video
• Euro converter

In this section

Euro case study: Siemens
Codename Euroland
New horizons for the euro investor
Consumer euro know-how
Euro bonus for travellers
Is your business ready for the euro?
Surviving in euro land
Crime without frontiers
Frankfurt vs London: The battle for supremacy
Will the euro rule the roost?
What is the ECB?
Banking on the euro