Siding with his European counterparts, the top U.S. central banker said Friday that the success of Europe's single currency, the euro, depends on the credibility of the new central bank that will watch over it.
Pointing to the German mark, Federal Reserve Chairman Alan Greenspan said its strength was based on the reputation of Germany's central bank, the Bundesbank.
"If the European Central Bank fails to inherit the reputation" of the Bundesbank, then the euro could be "undercut," Greenspan said via a video link from Washington to a banking conference in Frankfurt.
But he also said, "I have considerable confidence that the advent of the euro will be a successful one."
Turning to foreign-exchange rates, Greenspan called it an "illusion" to think target zones for the world's major currencies could succeed.
"One might argue it's a desirable goal, but not credible or feasible," Greenspan said.
The idea is favored by Oskar Lafontaine, the finance minister in Germany's new center-left government, who views it as a way to avoid harmful swings in financial markets.
Greenspan said the money that central banks would need to defend the foreign-exchange target, coupled with other technical problems, make such a program "extraordinarily difficult to manage."
He also said interest rates would be a difficult way to manage target zones. If Europe were in a recession, for example, and its currency was at the lower end of the band, it wouldn't want to raise interest rates to defend the currency. Higher interest rates tend to boost demand for a country's currency.
The Bundesbank, which maintains it must remain free of political interference, has ignored recent calls by Lafontaine for lower interest rates among the countries participating in the euro to promote economic growth.
On Thursday, the Bundesbank left its key interest rates unchanged, just two days after the Federal Reserve trimmed its rates for a third time in recent weeks,
Interest rates across much of Europe are already easing as central banks bring their rates in line with the low levels in Germany and France, Bundesbank president Hans Tietmeyer told the conference.
Tietmeyer added that a convergence of interest rates in coming weeks is essential as the euro will start as a banking-only currency on Jan. 1.