Lafontaine is serious thorn in ECB's side

When the governing council of the European Central Bank (ECB) meets in its lofty Frankfurt headquarters on Tuesday, it will try to remain upbeat about the euro, which will be launched exactly one month later. But many fear that its big day will be ruined by a politician the British tabloid the Sun described this week as "the most dangerous man in Europe" - Germany's Finance Minister, Mr Oskar Lafontaine.

Mr Lafontaine this week persuaded most of his European colleagues to join in his call for more transparency in ECB decisions and for the central bank to take unemployment as well as inflation into account when it sets interest rates. The ECB and its president, Mr Wim Duisenberg, regard such demands as indefensible assaults on the independence of the central bank which was guaranteed in the Maastricht Treaty.

Most German press commentators blame Mr Lafontaine for the new German government's shaky start and the chancellor, Mr Gerhard Schroeder, appears content to allow his Finance Minister to take the blame for all the government's unpopular decisions. A gifted orator with fine political skills and more brain power than most of his colleagues, Mr Lafontaine is none the less a deeply unpopular politician with voters.

He lacks Mr Schroeder's personal charm and, unlike the chancellor, he dislikes and distrusts journalists - most of whom agree that the feeling is mutual. Mr Lafontaine upset many party colleagues with his high-handed behaviour during the coalition negotiations and his determination to place his nominees in key positions.

It came as no surprise when German industry condemned the new Finance Minister's tax plans but few observers predicted Mr Lafontaine's head-on collision with the Bundesbank and the ECB.

Germany's central bankers have come to relish their almost sacerdotal status in a society that reveres stability above almost everything else. But Mr Lafontaine blames their rigid monetary policy for Germany's record unemployment and demands that European interest rates must remain low.

Although the ECB will be responsible for the stability of the euro, economic policy remains the preserve of democratically elected national governments. This division of responsibility has never hindered central bankers such as Mr Duisenberg and Dr Hans Tietmeyer from lecturing politicians on how to run their economies.

Now Mr Lafontaine wants to turn the tables by acknowledging the independence of the ECB but limiting its authority and influence over economic policy.

After an early assault on the central bankers, he now appears to have pulled back and his advisers privately acknowledge that his plan for an exchange rate mechanism involving the euro, the dollar and the yen has little support internationally.

Chief among the Finance Minister's advisers is his wife, Ms Christa Mueller, an economist with whom he wrote a book called Don't Worry About Globalisation, calling for more international political control over the markets.

Like many in Germany, Mr Lafontaine, who has enjoyed holidays in West Cork, is a big fan of Ireland. But his affection may not be reciprocated once he starts to push through another of his pet policies - the harmonisation of corporation tax throughout Europe.

German corporation tax currently stands at 45 per cent, although the new government hopes to reduce it to 35 per cent. It is clear that any Europe-wide minimum tax rate would be well above the current level in Ireland.

Mr Schroeder, whose economic instincts are close to those of the British Prime Minister, Mr Tony Blair, is uncomfortable with many of his Finance Minister's initiatives. But Mr Lafontaine's position as chairman of the Social Democrats makes him a formidable figure within the government.

Mr Schroeder has adopted a wait-and-see policy, allowing the public to identify Mr Lafontaine as the chief architect of the government's economic policies - at least until they successfully produce jobs.

In the meantime, he has appointed an old ally, Mr Bodo Hombach, as his chancellery minister with a brief to transform the chancellery into a think tank for new economic ideas.

Within a month of taking office, Mr Hombach has completed a sweeping reorganisation of the chancellery to ensure that nobody has access to Mr Schroeder without going through him. And he is determined to create a powerful, ideological counterbalance to Mr Lafontaine's enhanced Finance Ministry.

Mr Lafontaine was angry when Mr Schroeder overruled his appointment of another key aide, Dr Heiner Flassbeck, as Germany's sherpa for the next G7 summit. Like his boss, Dr Flassbeck believes that low interest rates are the key to boosting investment, economic growth and job creation and creating a community of prosperous, confident consumers.

Instead, Mr Schroeder appointed Klaus Gretschmann, an Aachen professor and an ally of Mr Hombach, whose views are close to those of Britain's apostles of the Third Way. He insists the ECB must remain independent, opposes Mr Lafontaine's plans to link the euro with the dollar and the yen and is sceptical of EU-wide measures to create jobs.

For the moment, however, Mr Lafontaine has the upper hand and, at least until he falters, remains a formidable brake on the ambitions of Europe's central bankers.