About Time for the Bundesbank

February 07, 1993

Entreaties from Washington and Wall Street meant nothing. When Germany's cantankerous Bundesbank decided to lower its interest rates Thursday, it did so for reasons strictly European and domestic. These reasons will not go away because of the marginal reductions. Look for further cuts in which the sluggish American recovery will be a decided beneficiary.

It is fruitless to figure what factor finally impelled the German central bank to act. Probably it was a convergence of two forces generating pressures that could not be denied.

All week long, the Bundesbank watched the financial markets assault the Danish krone and, more important, the French franc. If these two currencies were to fall below the floor set by the European Community exchange rate mechanism, hopes for eventual European monetary union with a single currency would be crushed. And so would Germany's position as de facto economic kingpin and holder of the reserve currency for all of Europe. This nudged even the Bundesbank from its traditional nationalist focus to think continentally.

Meanwhile, the domestic German economy sank deeper into recession as high interest rates imposed to contain the inflation caused by reunification stifled industrial expansion and pushed unemployment to intolerable levels. When labor unions indicated readiness to settle for 3 percent pay raises, the Bundesbank had leeway to act.

Whatever the reason, the world can rejoice that Germany, however grudgingly, is starting to live up to its responsibilities as the economic arbiter of Europe and a major player whose monetary policies vitally affect global welfare. Not least, right here in the United States.

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