'Arrogant because we are good': The Bundesbank seems at the height of its power, but it is fighting for its life, says Hamish McRae

Europe has just seen an exercise in raw power, played out on the foreign exchanges. The Bundesbank scuppered the pound by hinting that sterling should be devalued, then giving minimal support when the markets took the hint; next it saved the franc, which would surely have been devalued without such determined support. The fall-out has yet to settle, but the immediate consequence was fury in Britain, where the Bundesbank found its alleged Nazi past paraded across the newspapers, while in France it was feted with almost equal verve.

The Nazi ancestry of the Bundesbank has been charted in a new book by the journalist David Marsh, the publication of which was rushed forward to coincide with the currency crisis. This shows how people who were prominent in the German business and financial establishment in the Thirties resurfaced in the Fifties.

Using this lineage to attack the Bundesbank now (which Mr Marsh does not) is absurd as well as deeply offensive. But the fact that the jibe can be made at all by paid-up Europhobes illustrates the degree of continuity in any society and, more pertinently, how the rest of Europe, and not just the British, regard the newly unified Germany. The Bundesbank is not perfect, nor is it all-powerful. But it is very good at its job, and as such is rather frightening. For the last 100 years there has been an immense economy at the centre of Europe. At the centre of that economy is the German central bank, serving German economic and political interests. Germany's economic and political record over this period has been, to put it mildly, uneven, as has the record of its central bank. But now, just as once again German industry dominates the European economy, the Bundesbank dominates European finance. Thus it has become central to what is sometimes dubbed the 'German problem', shorthand for the dominant role Germany has played for the last 100 years.

The Bundesbank was formally created in 1957, but its ancestry goes back to the Bank deutscher Lander, founded in 1948 by the British and Americans as a central bank for the western zones of Germany. Indirectly, it goes back to the Reichsbank, the hapless organisation that presided over the hyperinflation of the early Twenties. The president, Rudolf Havenstein, died of a heart attack brought on by the stress this caused. His successor, Hjalmar Schacht, became the servant of the Nazis in the Thirties: many of the senior staff of the Bank deutscher Lander and the regional central banks worked at the Reichsbank before the war.

The best way to catch a feel for the Bundesbank is to go there, for the contrast between it and the Bank of England could hardly be greater. The Bank of England is at the core of the City in a Twenties building that could hardly be anything other than a bank headquarters. You are greeted by pink-coated footmen. Inside you are escorted along cavernous marble corridors to drawing rooms where the senior staff sit behind their mahogany desks in slightly embarrassed splendour. The Bundesbank is on the outskirts of Frankfurt in a Sixties building that could easily be a hospital or the headquarters of a multinational. You are greeted by guards with sub-machine-guns. Inside you are led along cream carpets to suites where the senior staff show you to leather couches with polite self-confidence. One displays the symbols of power of two generations ago; the other the reality of power now.

The path from the ruins of the Reichsbank is much like the path of the German economy. In the immediate post-war period the staff sought, above all, to be competent technocrats. For some this was a refuge from a Nazi past; for more, simply a rejection of everything that had gone before. Inevitably, perhaps, people who had served the Nazis did re-emerge in prominent positions: Karl Blessing, president of the Bundesbank during an extremely important phase in its development from 1958-69, was a key member of the Reichsbank board in the Thirties and spent much of the war organising German industry's war effort. He narrowly escaped being charged for war crimes.

Today the bank is run by a disparate group. The president, Helmut Schlesinger; his predecessor, Karl-Otto Pohl; and his designated successor, Hans Tietmeyer, are all very different people: crudely, the sybarite, the academic and the puritan. But they have in common the fact that they all come from humble families and have made their own various paths to the top.

The senior staff of the Bundesbank will pride themselves on being right: 'We are arrogant because we are good.' The record supports this, for the Bundesbank has presided over the world's strongest currency. True, it has been helped by the political climate in Germany: governments will tend to support increases in interest rates, partly on the ground that this rewards savers and partly because it reflects 'firmness'. Contrast that with the tenor of the political debate in Britain. But the staff do not always call the shots: on the Bundesbank's council they are outnumbered by representatives of the regional central banks.

Now the Bundesbank is at a turning point. Despite its competence and its independence, it has never been all-powerful within Germany. Unification showed this. It may determine Europe's interest rates, but it did not decide the rate at which the Ostmark, the old East German currency, should be converted into the mark. That decision - one-for-one - was made by the German government, against the advice of the Bundesbank. The next issue is a bigger one: to what extent will the Bundesbank cede power if Europe is to have a single currency? If it does have to cede power to any significant extent, the very future of the institution is at stake. If it does not, then it is very hard to see Europe having a true common currency.

So, at exactly the moment when the Bundesbank seems at the height of its power, it is also fighting for its life. The history of the past 80 years shows how there is a German central banking tradition which transcends economic and military catastrophe. The history of the past 40 years shows how determined German central bankers have been to avoid the mistakes of the previous 40, and how they have succeeded in doing so. The present strength of the mark is the Bundesbank's triumph.

What is beyond dispute is that the tale must take another twist. Either Europe races towards a common currency, with an EC central banking system; or the mark becomes de facto the common currency, with the Bundesbank the only central bank that matters. If this is a disturbing prospect for the Bundesbank, it is an even more disturbing one for Europe.

'The Bundesbank: the bank that rules Europe', David Marsh, Heinemann, pounds 18.99.

(Photograph omitted)