The Bundesbank--Why Care?

Virtually every European outside of Germany is screaming at the Germans to lower their interest rates. But the Bundesbank--Germany’s tight-fisted central bank--is unmoved. Bye-bye to any economic recovery in Europe by 1994? Probably.

Here’s why. In a global economy such arcane factors as the Bundesbank’s monetary policy have a huge impact on other countries. Had the Bundesbank reduced rates at its last meeting Aug. 26, as was widely expected, the European Community might have escaped the recession sooner. That’s because Germany’s high rates effectively force other EC countries to keep their interest rates jacked up higher than they want precisely at the moment they need to cut them to stimulate their economies.

Make no mistake: For the fiercely independent Bundesbank, Germany’s national economic interests come first and foremost. Never mind what grief it causes other EC members, the United States and Japan. The central bank’s unwillingness to lower rates earlier in August nearly caused the breakup of Europe’s monetary system, the centerpiece for an European economic union.

The German economy is the the largest in Europe and thus is a defining element on the Continent. The Bundesbank’s justification for high rates is its historical abhorrence of inflation. The specter of inflation has surfaced with the huge costs of financing the reunification with poverty-stricken East Germany. Germany fears that lower domestic interest rates would stoke inflationary pressures.

Now EC members face the decision of whether to cut loose from the influence of German interest rates and lower their own rates. Their currencies, under the new European trading structure, can fluctuate as much as 30% against one another. Few EC members have taken advantage of this to bring down their rates.

The Bundesbank’s self-absorbed anti-inflation policy reaches across the Atlantic. U.S. exports to the EC, already down from a year ago, will suffer even more from a prolonged European recession. Europe is a huge market for American goods and the United States has enjoyed an overall trade surplus with the EC. This is why we should care--and worry--about the Bundesbank.