Oskar Lafontaine resigned Thursday, not only from his post as German finance minister but also as president of the Social Democratic Party, or SPD, the ruling party elected last Sept. 27.
Lafontaine had become a real thorn in the side of business and the
European Central Bank
, and so the shocking news can only be good for European markets and the euro. So far, the yield curve has flattened and the euro has spiked up 2.3 cents against the dollar and 2 yen against the Japanese currency. The European Central Bank, or ECB, is now perceived as free to cut rates because of the resignation, and European stock markets could rise nicely, too.
Rumor of the resignation surfaced at
in London, where the fixed-income crowd heard it first. They were paying close attention because, all week, a rumor has been making the rounds that Lafontaine wanted to impose a tax on derivatives. Other proposed taxes had infuriated
, the largest German insurance company, which threatened to stop buying
(German government bonds) and to move its headquarters out of Germany.
Meanwhile, Lafontaine was also blamed for the falling euro, a trend which began right after the first week of the launch. From $1.17 on its first day of existence, the euro fell to $1.08 this week with most analysts predicting $1.05 (or, in a worst case scenario, $.95). At that point, the ECB would have to take action, probably by intervening in the foreign exchange market.
During these months, Lafontaine and his deputy
issued a steady stream of widely quoted statements pressuring the ECB to cut rates to boost growth. It would have been OK for the German finance ministry to take this stance if Lafontaine had not been such a pest about it, and, worse, if he had not threatened to violate the
limit on fiscal deficits as an explicit alternative to lower interest rates.
The European Central Bank was civil -- albeit exasperated -- when it responded that, before it could act on the request, it would need more information on inflation in euroland. It also pointed out that the falling euro was tantamount to a rate cut anyway. A rough consensus emerged that the ECB would cut off its nose before it would cut rates, if doing so would be interpreted as bowing to political pressure.
Lafontaine also orchestrated a three-country agreement for foreign exchange-rate stability by setting target bands around the dollar, euro and yen. The U.S. attitude is that setting such targets only invites the foreign exchange market to shoot at them.
Now the ECB is free to cut if it wants to, and because a cut is already built into forward rates, the euro
rally. It's too soon to say how much and how far, since there are still many strains within the European Monetary Union. Only today,
said that the euro is destined to be weak because of tensions inherent in a common currency without a common fiscal policy. While Lafontaine's departure opens the door for the ECB to ease rates, it may not -- in part, because it disapproves of the recent German metalworkers and public sector union deals. These deals were settled for a higher wage rate than was justified on the basis of expected productivity gains.
The ECB feels that its job, above all else, is to maintain price stability -- and to follow policies that transcend national interests for the good of euroland. Lafontaine was so strident and caustic that his credibility was questioned -- Ex-
, for one, put his money on the politicians winning out over the ECB. Now that a level playing field has been reestablished, the ECB can earn its reputation -- for better or for worse. In these early hours, the market is hoping it doesn't squander the opportunity.
Barbara Rockefeller is the principal behind Rockefeller Treasury Services, a Stamford, Conn.-based independent research firm specializing in foreign exchange forecasting and best-practices currency management. A former currency risk manager for Citibank, European American Bank and Brown Brothers Harriman, Rockefeller has advised major multinational corporations and global fund managers since she founded RTS in 1991. She holds no positions in the currencies or instruments mentioned in this column, although holdings can change at any time. She can be reached at her investing
Web site, or via