U.S. and Germany on Divergent Monetary Paths : Economics: The Federal Reserve lowers interest rates; Bonn’s central bank raises them. The result is a battering of the dollar and a possible blow to the American economy.

Just when it looked as if the major industrial countries were getting their economic act together, the U.S. and German central banks have startled the rest of the world--including each other--by marching off in opposite directions.

And the ailing U.S. economy may suffer more from Germany’s action than it gains from its own government’s.

Germany’s Bundesbank moved first Jan. 31 by engineering an increase of half a percentage point in its two benchmark interest rates. Less than two weeks earlier, top German officials had given face-to-face assurances to their counterparts in the other industrial powers that no such measure was in the offing.

The Bundesbank said higher interest rates were necessary to ward off rising prices in a country where reunification has bred a burst of potentially inflationary business investment. The mighty German economy may be able to overcome the latest ratcheting upward in interest rates and keep growing despite it.

But the other European countries--particularly Britain, France and Italy--that have hitched themselves to the German economic engine may find themselves not running along beside it but being dragged behind in the dust.

The shock waves could easily ripple across the Atlantic. Weak economies in Europe make weak markets for U.S. exports. Without further growth in exports, which have been one of the few bright spots in the U.S. economy, the recession will be that much harder to grow out of.

“It shows just how interconnected the industrial economies have become,” said Alan Stoga, an economist with Kissinger & Associates in New York.

On Feb. 1, one day after the Bundesbank boosted interest rates in Germany, the Federal Reserve did exactly the opposite in the United States. In pushing down the discount rate--at which banks may borrow reserves from the Fed--from 6.5% to 6%, the central bank was seeking to stimulate economic activity and help cure the U.S. recession.

Taken together, the two actions have had one predictable consequence: They’ve sent the battered dollar plunging to new lows against the German mark in international currency markets.

Despite persistent and heavy dollar buying last week by 13 central banks in Europe, plus the Federal Reserve and the Bank of Canada, the dollar barely lifted its head off the mat. By Friday afternoon, as the intervention continued, it was trading at 1.4550 marks, up from the all-time low of 1.4467 marks it had hit on Thursday. (On Jan. 30, the day before the Bundesbank pushed its rates up, the dollar could buy about 1.49 marks.)

Even before last week, analysts for the Morgan Stanley investment banking house in London said Germany’s “real” interest rates (adjusted for expected inflation) made German securities among the best buys in the world.

The moves by the Bundesbank and the Fed only exaggerated that effect. And the mark will only become stronger as demand grows for mark-denominated investments.

For American expatriates and tourists in Germany, the dollar’s slide--it has lost more than half its value since 1985--has priced many German goods out of reach.

For the U.S. economy, by contrast, the dollar’s decline could carry some good news. A cheap dollar makes American goods cheaper in competition with foreign products. But the dollar has fallen so far that many analysts feel that there is little price advantage left to be gained.

Paradoxically, the potent mark’s impact on much of the rest of Europe may be more significant to the U.S. economy than its impact on the dollar. Ten countries of the European Community, in the interest of preventing the sorts of currency fluctuations that inhibit business activity, have linked the values of their currencies.

In effect, no currency’s value is to rise or fall by more than 2.25% against any other. If it does, central banks are to intervene in currency markets.

So if the mark grows stronger in the wake of Germany’s latest increase in interest rates, it may mean that other European countries will have to raise their interest rates to keep up. The Netherlands has already done so.

And most other European economies are not so buoyant as Germany’s. John Williamson, an economist with the Institute of International Economics in Washington, said France and Italy, where economic growth is slowing, could hit the skids if rates moved higher.

Britain is a special case. The British economy is reeling from a recession generated by a government-fixed interest rate that reached 15% before the government trimmed it to 14% late last year.

And thanks to the latest rate hike in Germany, “the day when we can cut our rates is further away,” said Christopher Johnson, chief economist for Lloyds Bank in London. “That’s bad news, because the recession here is hurting.”

This matters to the United States because an economically weakened Europe is a Europe that cannot buy so many U.S. exports.

“Any slowdown in the economies of Germany and the rest of Europe would undercut efforts to increase exports from the United States,” said Jeffrey Schott, a colleague of Williamson at the Institute of International Economics. American car manufacturers, for example, say they find the European market is softening.

None of this prevented the Bundesbank, living up to its reputation as the world’s most vigilant inflation fighter, from raising its benchmark interest rates by half a percentage point. German banks must now pay 6.5% for ordinary loans from the Bundesbank; distressed banks whose credit is not as good would have to pay 9%.

“I am of course aware that this will be criticized abroad,” conceded Bundesbank President Karl Otto Poehl. It was necessary, he said, to fight inflation at home and cool the German economy, which is operating at full throttle as it seeks to rebuild the ramshackle economy of what used to be East Germany.

Criticized it was.

Less than two weeks earlier, at a meeting in New York of the finance ministers and central bankers of the seven leading industrial nations (the G-7), German officials had said not to expect them to raise rates soon.

“This has knocked the notion that the G-7 can coordinate policies into a cocked hat,” said Stoga of Kissinger & Associates.

Not all the criticism came from abroad. Norbert Walter, chief economist of Deutsche Bank, Germany’s largest, said he did not share the Bundesbank’s concern that the German economy was approaching the boiling point. He noted that some sectors, notably automobiles, steel and chemicals, were slowing.

And with the sudden annexation last year of East Germany, Walter said, nobody can be sure what course the German economy will follow. “Fine-tuning doesn’t make sense in this situation,” he said.

To Stoga, Germany’s economic policies today echo those of the United States under President Ronald Reagan in the early 1980s.

Germany’s 1991 budget deficit is expected to reach about 5% of the country’s gross national product, about the peak in the United States under Reagan. Generating Germany’s deficit is not a defense buildup and tax cut, as in the United States, but an enormous governmental effort to help finance business activity in what was East Germany.

Just like the U.S. Federal Reserve of the early 1980s, the Bundesbank is worried that the excess government spending will overheat the economy and drive inflation (running at an un-Germanic rate of 3% a year) to unacceptable levels. So the Bundesbank is resorting to the only cure available to central banks: higher interest rates.

“Germany has in many ways bought into Reaganomics,” Stoga said. “I hope it works better for them than it did for us.”