Frankfurt, West Germany
An important member of the West German central bank, Leonhard Gleske, expects the stability of the dollar to be challenged later this year. Even though the dollar could go lower, Mr. Gleske, who is a member of the directorate of the Bundesbank, equivalent to the Federal Reserve Board of Governors in the United States, believes the US trade deficit will not improve adequately this year, or possibly next year, either.
In a blunt assessment, Gleske says, ``This [the US trade deficit] will continue this year into next year, and because it will stay high, we have to expect the exchange market [to] reflect from time to time those imbalances.''
Gleske, who is considered the bank's expert on international affairs and foreign exchange, maintains that the dollar is currently valued appropriately. But he adds that ``real stabilization requires that we get closer to a better balance.''
The main cause of his pessimism is the large US budget deficit and relatively low savings rate. The low savings rate, he points out, means that the US funds some of its private investment and government spending with foreign capital. Unless Washington either cuts spending or increases savings, he says, ``Monetary policy in the way of interest rates will be asked to do the job.'' But he asserts that this will be too great a burden on monetary policy.
In an hour-long interview, Gleske also said:
Germany is not likely to increase its interest rates at this point, even though rates are rising in the United States. ``To increase interest rates would be quite counterproductive, as seen with the repercussions we would get in the exchange rates,'' he says.
Although the Federal Reserve Board now fears a resurgence of inflation in the US, he does not expect to see higher prices in Germany, provided exchange rates remain relatively stable.
But he warns that ``an increase in raw materials prices could spill over to Germany,'' giving policymakers a problem. Germans are highly sensitive to any sign of increased inflation, preferring to give up employment gains to hold prices down.
Gleske says Federal Reserve Board officials told the Bundesbank two weeks ago that they are concerned about an increase in wage demands this year because of tight labor markets in many parts of the US.
``In some areas it appears you have overemployment,'' Gleske comments.
The German government should advance its tax cuts by a year to help stimulate domestic demand. He concedes this is difficult to do politically, since it involves getting approval from a majority of the German states as well as the federal government. But Gleske believes the tax-cut route is the best way to reinvigorate the German economy, which is expected to grow about 2 percent this year.
When the European ministers meet in Hannover, West Germany, next month, they should establish a committee to ``study the issue and make clear the preconditions necessary and the consequences'' of setting up a central bank for all of Europe in 1992, when the European Community plans to make a major effort to eliminate many of its internal economic barriers. One of the conditions, he maintains, is that it be totally independent of each member country.
In a pessimistic assessment, Gleske does not believe the US trade balance will show large improvement. ``The imbalances will stay high,'' he predicts.
The key reason for his pessimism is the US savings rate. ``Your investment and savings account is very negative, while our investment and savings account is a very positive one. To improve your savings account, you need to cut your budget deficit, or increase your domestic savings,'' he maintains. If this does not happen, the US will continue to borrow heavily from foreigners, depressing the nation's current-account numbers. (The current account includes dividends and interest payments and trade in services, as well as merchandise trade numbers.)
Gleske thinks it would be wrong if the US intentionally tried to ``talk the dollar down'' as a way of trying to solve its trade deficit problem. Martin Feldstein, former chairman of the Council of Economic Advisers under President Reagan and an adviser to Vice-President George Bush, has suggested that the dollar be reduced by a significant amount. Without reducing the US budget deficit or increasing the savings rate, he says, a lower-valued dollar would have little effect on the trade balance.
Gleske's assessment contrasts to those of US Treasury Secretary James Baker III. On a TV interview in Washington Sunday, Mr. Baker said, ``We've got domestic demand growth increasing rather substantially in Europe and Japan. So the external imbalances around the world are coming into better balance. They are being resolved. Some will argue that they are not being resolved fast enough. We think they are being resolved as expeditiously as is possible under the current circumstances.''
Gleske says the Bundesbank remains confident in the US Federal Reserve Board. ``We know Alan Greenspan [chairman of the Fed] and talk to other members all the time.'' The latest Fed philosophy he calls ``pragmatic,'' saying that it seems to be working well.