European bankers stir a mix of optimism, anxiety
There's odd mixture of euphoria and gloom circling the West European financial community. The cheeriness arises from the decline in the price of petroleum. A year ago , when the world's top commercial bankers met in New Orleans, they were deeply concerned about the ability of oil-importing countries to pay for their suddenly much larger oil bills. They listened with some anxiety to new proposals for financing the huge international payments deficits of some rich and poor nations.
When mostly the same bankers gathered here on the shore of Lake Geneva last week for their annual International Monetary Conference, there was considerable confidence in the ability of their own banks and such institutions as the International Monetary Fund and the World Bank to recycle the surplus petrodollars of some OPEC nations.
The overall feeling was that the second oil shock, at least in regard to the industrial nations, "looks once again to be manageable," said Sir Jeremy Morse, chairman of Lloyds Bank Ltd., London.
The gloom among some of Europe's well-to-do and powerful arises from European political events. They are nervous about election trends in Western Europe and Soviet pressures on Poland.
For instance, the vote in France for the Socialist President, Francois Mitterrand, prompted a flight of capital. One banker told of the long backup in automobiles at the border with Belgium as French customs officials lifted the floor carpets of automobiles looking for francs being taken abroad illegally to avoid new currency controls.
In West Germany the new political weakness of Chancellor Helmut Schmidt is regarded as worrisome. Italy's latest government crisis adds to the unease. Some fear that Margaret Thatcher will not survive the next election some 2 1/2 years hence and the result will be a leftwing Labour government.
Also disturbing to this moneyed class is the disapproval of cruise missiles shown in the recent Netherlands elections. This group fears a growth in neutralism in WEstern Europe, perhaps allowing the Soviet Union to "Finlandize" The region.
Such fears as these, along the high interest rates in the United States, have prompted a weaking of European currencies and strengthening of the US dollar as the frightened seek investment havens in the security of America.
Such fears, however, tend to be faddish. They will fade, as one banker put it, when it is realized that Mitterrand "does not have horns," that Western Europe will not wilt like a delicate blossom.
Moreover at some point US interest rates will decline as today's stringent monetary policy slows the economy and the demand for money.
European central bankers do not like the extraordinarily high US interest rates. It puts pressure on them to maintain tight credit conditions themselves when they are worried about rising unemployment. Otherwise, the value of their own currencies falls as money flows into the US in search of a higher return. A falling exchange rate boosts the cost of imports (including oil, which is usually priced in dollar terms) and boosts inflation.
For years West Germany, France, and some other European nations benefited from what some termed "a virtuous cycle." Rising currency values meant that imports were cheaper, keeping inflation under better control. Now they are suffering from the opposite, "a vicious cycle," as their exchange rates drop.
European central bankers, having for a long time told the United States it should conduct tougher domestic economic policies, now find it impolitic to complain about the tough US monetary stand.
For instance, Fritz Leutwiler, president of the Swiss National Bank, told a press conference he was not against the strength of the US dollar, but did deplore the weakness of the Swiss franc, "Which doesn't help us keep up the fight against inflation."
Karl Otto Pohl, president of the Deutsche Bundesbank, agreed that a strong and stable dollar is "in the interest of the whole world." But he added that he "would appreciate a different policy mix that would put less of a burden on monetary policy." In other words, he would rather see a tougher fiscal policy (bigger budget cuts or less tax cuts).
The comment certainly would not have offended Paul A. Volcker, chairman of the Federal Reserve Board, who was listening. He has been arguing in Washington for the same thing.
Mr. Volcker did say that he saw "room for tax reduction in the framework of a responsible program."
He also told reporters: "The challenge of American policy is to be sure the evolution of policy over time justifies the strength of the dollar." He added, "The overwhelming fact is that all currencies have been weak in greater or less degree because we all have had inflationary problems."
Britain saw the pound slip dramatically last week. This is especially difficult for the Thatcher government because of the weakness of the British economy. If it raises interest rates, it could further lessen business acitivity and increase unemployment. Gordon Richardson, governor of the Bank of England, would only say that he intended "to keep things in proportion." The pound, he noted, has been strong against the German mark and the French franc.
One observer here maintained that paul Volcker is the most important economic official in the world today because of the primacy of monetary policy in economics and of the US in world economic affairs. Probalby none of the foreign central bankers would have disagreed.