Whatever happened to gentlemanly behaviour?

THE THING about gentlemen's agreements is that no one, apart from those who agree them, is meant to know of their existence. It works like this. You and I agree on a course of action which neither of us likes very much, but we think a reasonable compromise in the circumstances. Since subjecting it to public scrutiny would involve one or both of us in loss of face, and the credibility of what we are doing would as a consequence be undermined, we have to trust each other to carry it out without formal contract. It's our little secret, just between you and me.

The fiasco of a deal that was hammered out in Brussels last weekend over the presidency of the European Central Bank, under which Wim Duisenberg "voluntarily" cuts short his term and makes way after four years for Jean- Claude Trichet, was meant to be a gentleman's agreement too. Unfortunately it fell a long way short of the model.

First, the manner in which it was born was the very reverse of gentlemanly behaviour. It was hard-fought brinkmanship right to the end, and it is impossible to avoid the conclusion it wouldn't have happened at all but for the fact that the very future of the euro was threatened.

Second, having apparently agreed it with all parties, Tony Blair then announced it to an incredulous world, thus breaking one of the cardinal rules of the gentleman's agreement - that it shouldn't be made public. This was because the French insisted it be made public, so there could be no question of it being reneged on, and so that everyone would know La France had scored a victory. Plainly Jacque Chirac does not believe either in modesty or gentlemen.

Later Mr Blair tried to gloss over the reality even further by saying that long ago Mr Duisenberg had made it clear he would not serve the full eight years in view of his age, which is 62. So he was always going to go early and there's nothing new about that. But though Mr Blair might like to believe nothing of significance has happened, the rest of us know differently.

Third, Mr Duisenberg then denied there had been an agreement as such, describing the notion of the plan outlined by Mr Blair as "absurd", and saying it was not impossible he would stay longer than four years. So much for gentleman.

All this is in marked contrast to the gentleman's agreement everyone suspects exists between the British Chancellor, Gordon Brown, and the Governor of the Bank of England, Eddie George. It will be recalled that Mr George was recently awarded a second five-year term, to run from July. For choice, the Chancellor would have had a change at the top, but a lack of credible alternatives, not to mention pressure from the Prime Minister and the City, eventually persuaded him that continuity was the better path.

However, no one would find it in the least bit surprising if Mr George retired with a gong before his second five-year term is up, having by then seen through the important tasks of separating the bank's supervisory from its monetary policy functions and established the credibility of the bank as an independent determinant of interest rates. If there is such an agreement, it is not admitted to.

The whole point of these things is that though there might be a political fix, it should not be seen to exist. The effect would be to undermine the credibility of an institution which is meant to be free from political interference. In the shenanigans over the ECB, the politics of the situation was as visible as a 32-tonne truck. It would have been impossible to miss it. Mr Duisenberg then went on to irritate the wound further by described the manner of his appointment as "absurd".

The upshot is that the integrity of the ECB has to some extent already been compromised. To what degree, and whether in the long run it matters very much, are more difficult questions to answer. Much depends on how Mr Duisenberg steers his course. So what sort of a man is he, and what can the markets expect of him?

Certainly, he seems of strongly independent character, unafraid to speak his mind whatever the embarrassment caused. That's got to be positive, as perhaps is his liking for country music, which distinguishes him quite markedly from other grey-suited central bankers. Before MEPs this week, he gave a bravura performance of some daring, insisting, among other things, that the Bank of England's practice of publishing the minutes of its monetary policy committee meetings was wrong. Not for 16 years would that happen with the ECB, he said, since the effect was to encourage market speculation and harden positions within the board.

OK, so transparency is out. If the ECB is to be truly independent, then it has to be so in private, he seemed to be saying. This is probably not such a good sign, demonstrating that Mr Duisenberg does not understand markets as fully as he should. If the markets know nothing about the decision- making process, they will speculate even more actively. Will it be the Italians, Spanish, Germans or perhaps even the Irish who get the upper hand in monetary policy this month? All this will be grist to the speculators' mill. There is a real chance of chaos as politicians trumpet their national interest into this vacuum of knowledge.

Mr Duisenberg is also known as an inflation-busting hawk. Recently he was voted in a poll of analysts the most hawkish central banker in Europe. Judging by his record, we ought to expect a hard-line, ultra-conservative approach to policy. With the pound already decisively off its peak against the mark, financial markets are beginning to anticipate just that. The change in sentiment is tangible.

Even two months ago it was still fashionable to think of sterling as a safe haven from a weak euro. Now it seems that sterling's strength may have been a cyclical thing after all. Further, the euro might be operated as a hard, strong currency, the more so after last weekend's fiasco, since the ECB will have something to prove. So many European leaders are puffing out their chests and talking in terms of the euro rapidly becoming a reserve currency capable of looking the dollar in the face that perhaps we should expect nothing less.

These are early days, however, and we shouldn't count on any such outcome. The ECB is not De Nederlandsche Bank, the small and perfectly formed central bank where Mr Duisenberg earned his reputation. Keeping the lid on a potentially unruly 17 member multinational board is a different order of challenge altogether. Certainly, this will not be a board capable of being managed on the basis of agreement between gentlemen.