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Section: Daily Dispatches

Schroeder Government Is Reported to Want
Even More Freedom to Spend Gold Reserves

By John Fraher
Bloomberg News Service
Sunday, April 11, 2004

http://quote.bloomberg.com/apps/news?
pid=10000100&sid=auoMvqn0HXQQ&refer=germany

FRANKFURT, Germany -- Hans Welteke, son of Bundesbank
President Ernst Welteke, said his father clashed with German
Finance Minister Hans Eichel over the use of the central bank's
gold reserves before taking a leave of absence this week,
according to a letter published by the Tagesspiegel newspaper.

"There were differences of opinion regarding the use of the
Bundesbank's gold reserves, especially with Finance Minister
Hans Eichel," Welteke said in the letter to the Berlin daily.

Ernst Welteke, 61, agreed on Wednesday to take a paid leave
of absence amid an investigation by Frankfurt prosecutors into
a hotel bill paid by Dresdner Bank AG for him and his family
in 2002. The Bundesbank is resisting efforts by the
government to install Deputy Finance Minister Caio
Koch-Weser as its new president, which it considers an
attack on its independence, a person familiar with the matter
said on Thursday.

Schroeder favors Koch-Weser because the deputy finance
minister is prepared to make more use of the country's gold
reserves than Welteke, weekly Focus magazine reported
on Saturday, citing unidentified Bundesbank officials.

Finance Ministry spokesman Oliver Heyder-Rentsch said
the government's "insistence" that Welteke step down "has
nothing to do with his position on gold sales." Bundesbank
spokesman Wolfgang Moerke declined to comment.

Schroeder, whose popularity with voters has slumped, is
seeking funds to increase spending on research, education,
and development while at the same time adhering to
European Union spending rules. He wants to increase
spending to 3 percent of gross domestic product by 2010
from 2.5 percent at present.

Welteke in January recommended setting up a research
foundation to distribute 5 billion euros ($6 billion) from
gold sales over five years. Schroeder says the
Bundesbank's plan isn't sufficient to meet his spending
needs, Focus reported.

Some members of Schroeder's Social Democratic Party
were opposed to Welteke's plan. Karl Diller, another
deputy finance minister, said March 10 some lawmakers
wanted to use the proceeds to cut debt, and unanimously
opposed Welteke's plan to fund research with the
proceeds. Welteke's proposal needs the support of
parliament as well as an amendment to the law.

Germany has breached the EU's deficit limits, which
require governments to keep their budget deficits below 3
percent of gross domestic product, since 2001 and may
do so for a third year in 2004. The Bundesbank's gold
reserves amount to about 3,400 metric tons, making it
the world's second-largest holder of bullion after the U.S.

It wouldn't be the first time that the Bundesbank has fought
with the government over its gold reserves. Juergen Stark,
named interim president of the central bank on Wednesday,
was deputy finance minister in 1997 when the government
tried to revalue the bank's gold and currency reserves to
massage down the budget deficit so Germany could
qualify for the rules on members of the euro that it designed
itself.

Slighting the bank, Helmut Kohl's government announced
plans to create a paper profit equivalent to 10 billion euros
by revaluing the reserves in May 1997, only to back down
under Bundesbank pressure three months later.

Hans Welteke also said in his letter that Eichel is pushing
for the Bundesbank president's resignation as part of an
effort to hold on to his own job.

"It is being whispered in Berlin that the current finance
minister 'wouldn't survive' a cabinet reshuffle," said Welteke
in his letter to Tagesspiegel. "However, the chancellor can't
afford to 'fire' two political financial figures at the same time.
If one of them is 'dispatched' early, then the finance
minister's job is safe for the time being."

The SPD's popularity has dropped to 29 percent, compared
with 48 percent for the Christian Democratic Union, the main
opposition party, according to the most recent poll
commissioned by ZDF television.

Der Spiegel said yesterday that Schroeder wants to replace
Eichel with Ingrid Matthaeus-Maier, a management board
member at German state-owned bank KfW Group. The
magazine cited meetings between Schroeder, his chief of
staff Frank-Walter Steinmeier, and advisers.

The first half of Welteke's letter, published yesterday,
defended the family's 7661-euro four-night stay at Berlin's
Adlon hotel at the start of 2002. The stay was paid for by
Dresdner Bank, which invited the Bundesbank president to
attend a function celebrating the introduction of euro notes
and coins.

"I must confess that at the time I didn't really care who
paid for the trip," he wrote. Ernst Welteke, his wife, their
3-year-old son, Hans Welteke, and his girlfriend all stayed
at the Adlon, Spiegel reported last week.

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