As they gathered yesterday morning in a wood-panelled room on the 36th floor of the Eurotower in Frankfurt, the 17 members of the European Central Bank (ECB) knew that nothing they agreed on interest rates could save the euro from a fresh battering on the markets. The central bankers have watched the currency's descent this week with dismay, wearily repeating their mantra that the exchange rate does not reflect the fundamental strength of the economy in the euro zone.
The ECB President, Mr Wim Duisenberg, is adamant that the Bank does not take an attitude of "benign neglect" towards the exchange rate and he acknowledges that the euro's poor performance is undermining popular confidence in the new currency. But as the clamour for action to halt the decline grows, the ECB's monetary policy strategists find their room for manoeuvre severely limited.
Part of the difficulty lies in the fact that the ECB has chosen an approach to monetary policy which is deliberately lacking in activism. This means that, instead of tweaking interest rates to respond to immediate economic developments, the Bank attempts to guarantee price stability for the entire euro zone over the medium term - a period of about 18 months.
Thus, yesterday's interest rate hike was aimed at preventing inflation at the end of 2001 rather than boosting the value of the currency in the short term.
ECB monetary strategists compare their approach to that of a traditional cook who prefers to allow a dish to roast slowly in the oven rather than blasting it in a microwave.
Unfortunately for the central bankers, the weakness of the euro is already showing signs of creating inflationary pressure as a result of increased prices for raw materials, such as oil. The strategy of simply repeating that the euro's exchange rate does not reflect the strength of the euro zone is looking increasingly threadbare, not least because it begs the question as to why investors are apparently defying logic.
Some analysts blame the ECB for the currency's weakness, arguing that the Bank has failed to find a language that makes its intentions clear to the markets. Language is certainly a problem in a multi-lingual, multi-cultural institution such as the ECB and imprecise translations have created at least one mini-crisis for the euro.
Yesterday's Governing Council meeting was conducted in English, the official language of the ECB. But of the 17 members of the Governing Council, only Ireland's Mr Maurice O'Connell speaks English as his mother tongue. Although interpreters are on hand to help out if an individual central banker gets into difficulties, the scope for misunderstanding is enormous.
The ECB acknowledged last year that a mis-translation of remarks made by its vice president, Mr Christian Noyer, to the European Parliament gave traders the wrong impression about the Bank's intentions.
But some criticism directed towards the ECB centres less on a lack of linguistic clarity than on a perceived uncertainty of purpose. Thus, Mr Duisenberg insists that the ECB is not neglecting the euro's exchange rate, yet the ECB appears reluctant to take decisive action to turn the market around.
Although interest rates are likely to rise to 4 per cent within the coming months, the ECB cannot approach US levels (above 6 per cent) in the near future without strangling Europe's economic recovery. The most recent rate rises have had no beneficial effect on the markets and yesterday's was followed within minutes by a plunge in the euro's value to yet another record low.
The only remaining short-term option is intervention in the markets by selling some of Europe's dollar reserves in the hope of facing down the markets. The view in the Eurotower is that unilateral intervention is doomed to failure and for any such action to have a chance of success, it would have to be co-ordinated with the US and Japan.
Although the ECB can intervene alone at any time it chooses, it needs the backing of the euro zone's finance ministers to arrange a concerted intervention with Washington and Tokyo. The US is unlikely to agree to such action, not least because it needs massive injections of foreign investment to finance its enormous current account deficit - currently more than 4 per cent of Gross Domestic Product.
The ECB regards Washington's deficit problem as much greater than its own exchange rate difficulty and is convinced the remarkable rate of growth in the US will slow down sooner rather than later. Once this happens, the central bankers are confident the markets will recognise the fundamental strength of Europe's economy and start buying euros.
In the meantime, there is little Europe's monetary policy guardians can do apart from drawing the blinds in their Frankfurt tower as they wait for the selling frenzy on the markets to run its course.
