Leading Article: Minor miracle in Frankfurt

BY AUTHORISING only a modest cut in German interest rates yesterday, the Bundesbank dashed hopes raised by Sunday's announcement of an impending downward adjustment. Those feelings of disappointment are natural, but they are also illogical. In reality, a minor miracle occurred: for the first time, the Bundesbank acknowledged the role of the mark as the anchor currency of the European exchange rate mechanism (ERM), and - however minimally - bowed to pressure from the money markets and Germany's European Community partners.

The council, directors and staff of the Bundesbank deserve sympathy rather than obloquy. They have never asked that the mark should serve as a reserve currency, a role into which it has been forced by default. Their constitutional mandate is to support the government's economic policy, with full independence in choosing the means to do so, and to 'safeguard' the German currency. Their success over the years has forced the mark into the role of anchor currency that was played pre-1914 by sterling; subsequently, if briefly, by the gold standard; and for some 25 years after the Second World War by the dollar.

It is a role for which the Bundesbank was never equipped, and which is in many ways incompatible with its constitutional independence: a government-controlled central bank would be better placed to adjust to external pressures. It may even be that in making yesterday's move the Bundesbank was acting ultra vires. The dual nature of its present role has been thrown into relief by the unification of the two German states and the severe distortions that have resulted. German interest rates have been kept high in order to reduce the inflationary pressures created by the huge cost of reviving the economy of eastern Germany. Those pressures were never foreseen when the mark became the linchpin of the ERM. They have forced the Bundesbank into a difficult position. Its first duty is to protect the currency of a nation traumatised in the early Twenties by runaway inflation. At the same time, it is increasingly held to account for the effects of its decisions on the economies of its EC partners.

The lira became the most spectacular recent victim when the gap between the Italian currency and the mark became too wide to be contained within the ERM. Its devaluation by 7 per cent on Sunday is the first such realignment for five years, bringing to an end a brief era in which the value of currencies appeared to be durably fixed within the ERM's margins of fluctuation. John Major has pitted his own reputation against the currency markets by vowing that sterling will retain its present relationship to the mark. If the French vote 'yes' in Sunday's referendum on the Maastricht treaty, his nerve may not be too severely tested; but the effects of a negative verdict cannot be confidently predicted.

Everyone will use the events of the past few days to support their own convictions and prejudices. Many will have resented the spectacle of European governments hanging on the decision of a meeting in Frankfurt. But the strength of the mark is a fact of economic life, ERM or no ERM. An alternative, and perhaps more logical, deduction is that a single European currency, responsibly managed by all member states, would be better for all concerned - not least the Germans.