West German mark gaining popularity as a haven
Frankfurt, West Germany
Karl Otto Pohl, president of West Germany's central bank, sounded a bit proud. "The role of the deutsche mark as a reserve currency is very fast increasing," he said.
Already some 13 percent of the international monetary reserves of the noncommunist nations consists of the currency of this country, the Western world's third most powerful economy after the United States and Japan. This percentage amounts to some 65 billion deutsche mark (DM), he noted. At the current foreign-exchange rate, that's about $37 billion.
Nations still set aside for an economic "rainy day" many more US dollars and gold than German marks. But the growing addition of DM to their reserves reflects the desire of some governments and central bankers to diversify their currency holdings out of the dollar, which has been losing value fast because of rapid inflation. This trend also indicates the excellent reputation of the mark , with its relatively low inflation rate and conservative management.
For years, Mr. Pohl's predecessors at the Bundesbank opposed the use of the mark as a reserve currency. They feared that a Soviet threat to West Berlin or some other event would prompt a flight out of DM. That might make it more difficult to control German domestic monetary policy. It could also prompt a large swing in foreign-exchange rates, complicating the life of West German exporters.
Some members of the Bundesbank's policymaking "Central Bank Council" are still anxious about the mark's taking on the function of a reserve currency. They prefer to speak of it as an "investment currency." This implies that other nations are welcome to buy DM securities with maturities of three or more years. However, these council members would rather that other nations did not put short-term DM securities into their reserves -- money that could be quickly switched into other currencies at the first sing of any trouble.
Mr. Pohl, however, is not troubled by this new reserve function of the mark, and even notes, apparently with some satisfaction, that more marks are held abroad in private holdings.
"As long as we maintain a persuasive anti-inflation policy and the deutsche mark is considered a hard currency, there is no problem," he said in an interview here.
The one-time economic journalist went on: "We have to live with that role as a reserve currency. Our exports are nearly as high as those of the United States, and much bigger than those of Japan.
"Moreover, it is very understandable that the OPEC surplus countries want to diversify their reserve currencies. We have to offer them something to invest in. Otherwise, the temptation is to leave their oil in the ground."
Mr. Pohl was referring to such nations as Saudi Arabia, Kuwait, and Abu Dhabi , whose oil revenues exceed their current spending for imported goods and services. Thus they must find some way to invest their surplus funds.
The change of attitude in West Germany toward the use of its currency as an international monetary reserve is not simply pride in the mark's strength and stability. "Circumstances have changed," Mr. Pohl noted.
For most of the past 30 years West Germany has enjoyed surpluses in its current account. To oversimplify, it sold more goods and services to other nations than it bought. Indeed, often the US and other trading partners complained about the strong German international payments position.
Starting last year, however, Germany's current account slipped into a deficit -- about 10 billion DM ($5.9 billion). This year, Mr. Pohl predicts, the deficit could hit 25 billion DM.
What happened was that the cost of West Germany's oil imports went from about 32 billion DM in 1978 to an estimated 65 billion DM this year. Moreover, the cost of some other commodities rose sharply.
West German oil imports, which were equivalent to 2.5 percent of gross national product in 1978, are now equal to 4.5 percent of the nation's total output of goods and services.
After the quadrupling of oil prices in 1973-74, the sharp appreciation in the value of the DM meant that the cost of its oil, which was fixed in dollars, did not rise so much in terms of marks. Whereas the cost of oil has increased some 12 times in US dollars from the start of 1973 to May 1980, it has increased only sixfold in deutsche mark.
Since the latest OPEC increase in oil prices, however, the mark has not appreciated much in value against the dollar. So the German balance of payments has had to take the full brunt of the oil price increase.
Another factor in the growing deficit has been Germany's relatively rapid econnomic growth. After removing the effects of inflation, its gross national product grew 4.5 percent last year and even faster in the first quarter of this year. Since then it has slowed decidedly.
Mr. Pohl expects to see an improvement in his country's balance of payments as the Bundesbank's current restrictive monetary policy slows down the domestic economy and Germans thus buy imports at a slower pace. Further, he hopes German exports to OPEC countries increase rapidly. (They were up 37 percent in April and May.) And he counts on conservation and other measures to reduce Germany's imports of oil and oil products.
Restoration of a balance current account, however, could take three or four years. "You can't expect that to happen in a few months," Mr. Pohl cautioned.
In the meantime, Germany must finance its payments deficit. It can do this out of reserves. Germany has the largest currency reserves in the world and the second-largest gold reserves after the US. Or it can "import capital," using competitive interest rates to attract money here.
Germany also imports capital when the mark is used as a reserve currency. The foreign country buys German government securities either on the open market or by direct negotiation. this year, Germany has sold some 4 billion DM of government securities directly to Saudi Arabia.
"The OPEC countries are very much interested in getting AAA securities [ top-quality investments]," said Mr. Pohl. "And we are not unhappy about this investment."
He added, "We have no problems in financing the deficit." Many other, poorer deficit countries undoubtedly wish they could say the same.