EC Realigns 2 Currencies to Avert Crisis

The European Community engineered its third realignment of currency values in three months early today in an effort to head off a new round of chaos on the Continent’s international currency markets.

But Germany, whose sky-high interest rates are widely blamed not only for destabilizing the EC’s system of fixed exchange rates but also for choking economic growth across the Continent, resisted pressure to reduce its rates.

The actions came at the end of an 11-hour emergency meeting of central bank and finance ministry officials from the EC member nations.

Hans Tietmeyer, vice president of the Bundesbank, Germany’s central bank, was asked as he left the meeting whether Germany had any intention of reducing its rates. “You can be sure that Germany will do what is appropriate,” he said.

In the currency realignment, Spain and Portugal devalued the peseta and the escudo by 6% each against the other seven currencies in the European Monetary System whose values are linked. The system is designed to ensure international investors that currency fluctuations will not eat up profits from their European investments.

Ireland and Denmark, however, did not bow to pressure to devalue their currencies, which also came under attack last week on international currency markets.

Jose Bras, Portugal’s treasury secretary, said he expected no further currency realignments. “This is a very positive movement toward stabilizing the system,” he said.

In Madrid, Finance Minister Carlos Solchaga said Spain requested a further reduction of the peseta’s value to restore confidence in the currency and boost the nation’s slowing economy.

Just two months ago, Italy devalued the lira by 7% in exchange for Germany’s acceptance of a small reduction in its interest rates. When that action failed to end turmoil on the markets, Italy and Britain pulled their currencies out of the exchange-rate system altogether and Spain devalued the peseta by 5%.

But pressures erupted on Europe’s currency markets again last week. Sweden, which is not part of the European Monetary System, effectively devalued its currency Thursday.

Denmark, which is inside the EMS, and Norway, which is not, raised interest rates in an effort to avoid Sweden’s fate. Speculators also put downward pressure on the Spanish, Portuguese and Irish currencies.

Spain went into the weekend meeting seeking another orderly devaluation as an alternative to simply turning its currency loose to market forces, as Italy and Britain had been forced to do. To keep its peseta from falling below allowable levels against the German mark and other strong European currencies, Spain has used billions of dollars worth of its foreign reserves in recent weeks to buy its own currency on international markets.

Germany also sought the devaluation of the peseta and other weak European currencies.

Germany complains that under the system of fixed exchange rates between most EMS currencies, it has been obliged to spend its valuable marks to buy the system’s weaker currencies. EMS rules require that when a weak currency such as the peseta reaches its lower limit against a strong currency such as the mark, the two countries involved--in this case Spain and Germany--must buy pesetas.

Other European countries hold high German interest rates responsible for their currencies’ weakness. High rates in Germany attract investments from all over the globe; by the law of supply and demand, the demand for securities denominated in German marks drives up that currency’s value.

High German rates--short-term German government securities yield about 9%, compared with 3% in the United States--have also been blamed for retarding economic growth not only in Germany but throughout Europe and the rest of the industrial world.

Germany pushed its rates high in a deliberate effort to cool its economy and tame the inflationary pressures that had been unleashed by German unification in 1990. The unification boon was driven by massive German government spending in the newly acquired states of the east and by eastern consumers who suddenly found themselves with large amounts of German marks to spend.

Other European countries whose currencies’ values are linked to that of the German mark found themselves forced to echo the German rate increases. Otherwise, their currencies would have fallen below their minimum acceptable levels against the mark.

Those high rates blunted economic growth across Europe. That in turn diminished Europe’s appetite for imports from all over the world--and particularly from the United States, whose exports to Europe flattened out this year after years of impressive growth.

The pressures generated within Europe by Germany’s high rates first erupted in September.

Germany agreed Sept. 13 to a fractional reduction in its interest rates in return for the 7% devaluation of the Italian lira, one of Europe’s weakest currencies. When pressures kept building, Italy and Britain pulled their currencies out of the exchange-rate mechanism Sept. 17 and Spain devalued its peseta by 5%.

That, coupled with an explicit pledge by Germany and France to defend the value of the French franc, restored a measure of equilibrium for two months before new strains appeared.