Thank You, Bundesbank

After months of sticking to tight-money policies despite growing criticism in European capitals and across the Atlantic, Germany’s central bank last week blinked. It cut interest rates in a surprise move that was greeted enthusiastically by its European neighbors and the rest of the world. As Jacques Delors, European Commission president, put it, the rate cuts were a “good political signal.” That may be a slight understatement.

For in shaving two key interest rates, the powerful and almost autonomous Bundesbank instantly served to cool speculative pressures on volatile European currency markets. Bond and stock prices in Europe and the United States rallied on the news. The dollar rose. Minutes after the Bundesbank lowered rates, central banks in the Netherlands, Belgium and Austria cut their rates too.

Germany’s tightfisted monetary policy is a mechanism for containing inflation. The great historical German fear of inflation was triggered anew in the wake of the costly reunification of the two Germanys. Indeed, even with the recent lowering, German interest rates remain five to six percentage points above those in the United States and Japan. This means that German monetary policy will need further adjustment. Higher rates attract massive inflows of capital from outside the country, forcing other nations to keep their interest rates high to compete for funds. The Bundesbank policy also pushed up the value of the mark, to which most Western European currencies are linked in a system of fixed exchange rates.

For the United States, the good news is that German cuts help to relieve any upward pressure on U.S. interest rates as President Clinton prepares his economic plan. U.S. inflation is low and the nation’s productivity in 1992 posted its biggest gain in 20 years. The unemployment rate dipped nationally--and in California. The bad news is that productivity gains have occurred without significant increases in jobs.

Even so, recent economic announcements in Washington and Bonn could only be counted as a net plus for Clinton. It will be hard for him to get the economy moving again if all the news is bad. Last week it wasn’t.