The world's leading central bankers yesterday paved the way for a showdown with Mr Oskar Lafontaine, the German Finance Minister, by rejecting his call for international co-ordination to limit excessive currency movements.
Mr Alan Greenspan, chairman of the US Federal Reserve Board, and three European central bank governors said exchange-rate target zones were undesirable, old-fashioned and unworkable.
The comments are bound to reignite friction between central bankers and centre-left politicians in Europe, as Mr Lafontaine is seeking support from other Finance Ministers to establish target zones for leading currencies as a key pillar in global economic policy co-ordination.
Speaking via satellite at the European Banking Congress in Frankfurt, Mr Greenspan said target zones "might have been feasible 30 years ago. I think the world has changed to the point at which it is a quite unrealistic view of what can be implemented."
"I don't think it's feasible even if in the abstract we could make the argument that it is desirable. If euro-land is in recession and the euro is at the bottom of its target range, who in Europe is going to want to raise interest rates?"
Mr Greenspan was joined in a discussion panel by Mr Wim Duisenberg, president of the European Central Bank; Mr Hans Tietmeyer, president of the Bundesbank and Mr Eddie George, governor of the Bank of England. All four central bankers agreed that target zones were inappropriate.
Mr George said: "You could conceivably have such a wide band that it would be meaningless. You could have a narrow band and it would be impossible."
Mr Duisenberg claimed that target zones would pose a potential conflict with the ECB's mandate to achieve price stability.
Target zones are systems to prevent excessive exchange rate fluctuations. This could include an exchange rate mechanism by which currencies are allowed to fluctuate within a given band - such as the European exchange rate mechanism (ERM).
While central banks oppose target zones, several leading economists argue that they could help smooth exchange rate fluctuations - regarded as a significant cause of instability in financial markets.
Mr Tietmeyer also mounted a thinly veiled attack on the German Finance Minister, saying, "I hope that all German policy makers are listening very carefully to the words of the trinity" - a reference to the other three central bankers on the panel.
He warned Mr Lafontaine that "a permanent state of controversial political statements might cause markets to start to have their doubts" about the credibility of the new single currency.
