Europe's Money Moves

IN theory, central banks don't have to make a profit. In practice, governments usually count on these institutions' turning over handsome gains to offset a portion of the deficits created by the politicians.

For example, last winter's budget shows the United States Federal Reserve System turning over $18.5 billion in earnings to the Treasury in fiscal 1992, the year that ended Sept. 30. Those earnings arise mostly from seigniorage (the creation of money), but they can also come from intervention in the foreign-exchange markets or from other operations.

Last month, however, major Western European central banks lost a bundle when they tried unsuccessfully to save the British pound, Swedish krona, Italian lira, and the Spanish peseta from devaluation. The German Bundesbank alone employed $30 billion in deutche marks in an effort to prop up the pound and lira by buying these currencies. Now it has these devalued currencies on its books - at a loss.

Altogether, European central banks used the equivalent of around $100 billion during the currency crisis and lost on paper perhaps $4 billion to $6 billion. Such losses translate into gains for the commercial bankers, businessmen, and speculators who sold these currencies to the central banks. Governments will grab back some of those profits when they are reported for income-tax purposes. Nonetheless, European governments are likely to see their central-bank bonuses trimmed this year. So was the interven tion worth it?

One plus is that the fixed exchange rates between the member nations of the European Rate Mechanism have for several years encouraged trade and investment within the European Community. Business people face enough risks crossing borders without also having to deal with rapidly changing exchange rates.

But if differing national economic policies put currencies out of whack with each other, central banks face a horrendous, if not impossible, task trying to maintain fixed exchange rates.

The European Community's goal has been a single currency and central bank by the turn of the next century. But ambitions got ahead of economic reality. The economies of European nations remain too different for fixed exchange rates to last long. And national pride and politics prevented the small, more-frequent devaluations that might have prevented last month's big foreign-exchange blowup. Such adjustments should become part of the EC's system.

Europe will strive again for the political and economic tidiness of monetary union. But it may take longer than originally planned.