How low can it go?

WIM DUISENBERG'S reputation won't get a fillip from the renewed slide in the euro this week. Just as it began to look as if the furore over his widely criticised interview had died down, and the currency was steadying a little, market sentiment hardened against the euro once more. It fell to new low levels on October 25th: at one point it was trading at 82.99 against the dollar, compared with its previous record, set on October 18th, of 83.24.

The trigger for the latest slide was an interview with the President of the European Central Bank (ECB), Wim Duisenberg published (in London) on the morning of Monday, October 16th. In it, he said several things that, in effect if not intention, discouraged people from holding euros. He pointed out that currency intervention would not make sense if the euro were to fall because of a deepening of the political crisis in the Middle East. He acknowledged that the American government would be reluctant to join in another intervention exercise so close to the US presidential election. He also indicated that the ECB might raise interest rates if higher oil prices started to push up inflation still further. In being so indiscreet about matters central bankers normally refuse to discuss, Mr Duisenberg undermined the effect of the co-ordinated intervention excerise which the ECB, along with the Americans, the Japanese and the British, undertook on September 22nd. His comments also weakened the impact of the 0.25% rise in interest rates which the ECB had announced on October 5th.

Much, though not all, of what Mr Duisenberg said would strike a sympathetic chord not just with his fellow central bankers around the world but with many economists too. The trouble is not what he said, it is that he said anything at all. Central bankers are often criticised for being too secretive, but when it comes to foreign currency intervention secrecy is essential. To announce that you will—or, as in this case, will not—intervene is to tell currency speculators all they need to know to make money at your expense and to ensure that the intervention will not achieve its objective.

People have been queuing up to point this out to Mr Duisenberg. Some European politicians have been openly critical of him. A couple of his ECB colleagues on the governing council, the governors of the Bundesbank and the Belgian central bank, insisted that intervention remained an option: their comments were as close to a reprimand as you will ever see from one central banker to another. But after their meeting on October 19th, Mr Duisenberg's deputy (and possible successor), Jean-Claude Trichet, governor of the Bank of France, said Mr Duisenberg had the full backing of his colleagues. Mr Duisenberg said he would not comment at all on intervention matters in the future.

The ECB's credibility has been damaged not so much by the fall of the euro as by its response to that fall. Critics have argued that the ECB has been inconsistent, even incoherent. For a long period the bank seemed relaxed about the euro's depreciation against the dollar. A weaker euro helped exports from the euro area and thus helped speed a sluggish economic recovery. But as the decline continued, so the risk of its feeding through into higher European inflation grew. Euro-zone inflation is lower than that in the US, but the latest figures (released on October 17th) show that it is continuing to rise (up from an annual rate of 2.3% in August to 2.8% in September).

The ECB is clearly worried about inflation—it raised interest rates for the seventh time on October 5th. (Mr Duisenberg said on October 19th that the rise in oil prices would mean euro-zone inflation stayed above the target rate of 2% for longer than previously anticipated.) And the intervention organised on September 22nd was a clear demonstration of the bank's growing concern about the euro's value. It's much easier for a respected central bank, like the pre-euro Bundesbank, to convince the markets that it means business than one, like the ECB, which still has to establish its anti-inflationary credentials.

There's another factor which complicates the ECB's task. A wide range of experts, including the IMF's managing director, have argued that the euro is seriously undervalued against the dollar when the relative economic performance of the United States and the euro-zone countries is taken into account. Certainly, sharp falls of the kind seen this week are at least partly the result of short-term speculative movements. But most of the decline in the euro has been fuelled by long-term capital flows as investors seek to exploit what they see as better investment opportunities in the still buoyant American economy.

European governments are pressing ahead with structural economic reforms intended to improve the euro area's competitive position relative to the US. But many euro-zone countries still have higher taxes and more rigid labour markets than America. Productivity growth remains much weaker in Europe than America and Europe is still slow to exploit the benefits of the communications revolution. The long-term health of the single European currency depends on European governments as much as on the ECB.