Let Germany Lower Interest Rates

October 01, 1992

The best thing that could happen to the lagging world economy would be a sharp, quick drop in German interest rates. More than any other foreseeable action, it would ease monetary tensions within the European Community, halt the plunge of the dollar against the deutsche mark and, in very practical terms, head off increasing signs of a threatened recession in Germany itself.

For Americans, now mired in the longest downturn since the Great Depression, lower German interest rates would permit the Federal Reserve Board to reduce its rates in still another attempt to shake the U.S. economy out of its doldrums. Above all else, the huge gap that now exists between U.S. and German rates inhibits the Fed from further anti-recession moves.

High German interest rates not only are preventing its recession-riddled neighbors from stimulating their economies but have come close to wrecking the European Monetary System and its exchange rate mechanism. Britain has been forced to let the pound sterling float, thus isolating it from the continent it is ambiguous about joining. Sweden, Ireland and Italy have raised interest rates to choking levels to defend their currencies. The Bundesbank had to spend extraordinary sums to prop up the franc, though France's internal economic condition is healthier than Germany's.

Why Germany resists pressure from every side is rooted in psychology as much as in finance. The country has an obsessive fear of inflation, so much so that when the Bundesbank shaved interest rates a fortnight ago it was excoriated by newspapers haunted by the Weimar era hyper-inflation that brought Hitler to power. More substantively, inflation is indeed running at a higher rate (3.6 percent) than well-indoctrinated Germans find acceptable -- this as a result of billions of borrowed D-marks flowing from western Germany to the newly liberated states of old East Germany.

So all the official talk in Frankfurt, Bonn and Berlin is designed to dampen speculation that the Bundesbank will finally relent when it meets tomorrow in Schwerin. Yet even if the German authorities hold the line this time, there is a growing expectation in world exchange markets that by the end of the year its course will change for the better.

There are two reasons for optimism. The currency turmoil has jolted Chancellor Helmut Kohl's hopes for a stronger European Community with a single currency and common foreign policy by century's end. Also, the slowdown in the German economy as production falls, unemployment grows and the strong D-mark in a sea of weaker currencies puts German exports at a severe disadvantage.

Clearly, a compelling case can be made for a lowering of German interest rates. If it doesn't come tomorrow, let it come soon as a sign that Germany is prepared to accept its responsibilities as a leading reserve-currency nation.

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