Economist Defends Slow German Growth
ULRICH RAMM sounds defensive about German economic policy. The chief economist for Frankfurt-based Commerzbank says: "The way we have to go, with high interest rates, is a right one and necessary for a stable future."
Germany has had quite a few arrows shot in its direction recently. Politicians in Britain and France have questioned those high rates, worried that they might weaken their own economies.
And just before the spring policy meeting of the International Monetary Fund (IMF) late last month, United States Treasury Undersecretary David Mulford suggested the Germans should reduce their budget deficit so that the Bundesbank, the German central bank, could reduce interest rates.
That prompted a quick response. A German official said sharply that each nation should put its "own house in order." In other words, the US, with a $350 billion-plus federal budget deficit this fiscal year, can hardly talk.
"There are things which are really idiotic," commented Edward Bernstein, a Brookings Institution economist who was long research director at the IMF. The Group of Seven industrial democracies should be consulting with each other quietly about the economic scene, says Dr. Bernstein. A public dispute isn't productive. They should be asking "what can each of the large economies do to revive the world economy," he says.
Besides, US leverage on Germany has shrunk with the end of the cold war. German leaders can give domestic economic interests utmost priority.
According to the IMF, real world output this year will rise only a modest 1.4 percent. The growth in the industrial nations will be l.8 percent, with the US up 1.6 percent, Japan 2.2 percent, and Germany 2 percent.
Mr. Ramm agrees on the German figure. He adds that real growth will be only 1.5 percent in what was West Germany and between 10 and 15 percent in the states that made up East Germany. Economic activity in the east German states is now reviving after a deep slump. Though these states have 25 percent of the total population of Germany and 33 percent of the land area, they account for only 7.5 percent of total German output. So even a sharp upturn in those eastern lnder only boosts the overall German g rowth rate by 0.5 percent.
Despite such slow growth, Ramm insists that the Bundesbank can't relent on high interest rates. One reason is that the German money supply has been expanding at an 8.5 percent annual rate for the past six months. That's well above the central bank's targets and would be inflationary if maintained at that rate, Ramm noted in a recent interview in Boston.
Inflation was 4.7 percent for the 12 months ending in April, uncomfortably high by German standards and a rate higher than in the US or France.
It is this high inflation rate and a budget deficit swelled by reunification expenditures that have made the German federal government willing to take a strike by public-sector unions this past week. Wage increases in Germany have been running around 4.5 percent to 6.5 percent in the last two years, well above the nation's 2 percent annual gain in productivity.
"That has made Germany less competitive," says Ramm. But he says he's not too concerned because other countries also have made policy mistakes.
The government budget deficit has become more controversial within Germany with the economics minister, Jurgen Mollemann, questioning the assumptions behind the prediction of a declining deficit by the finance minister, Theo Waigel.
Also related to reunification costs, Germany's international payments have swung from a surplus of 77 billion marks in 1990 to a deficit of 34 billion marks (US$21 billion). Some 10 billion marks of that went to the US to help pay for the Gulf war.
The dramatic swing in Germany's current account has given its neighbors a boost in their exports, notes Ramm.
There's much grumbling in west Germany about the costs of subsidies to the east German states. "We are trying not to get a Mezzogiorno in Germany," says Ramm, referring to south Italy with its persistent poverty. He figures that wealthy Germany, through massive financial help, can boost its eastern states out of their economic backwardness in not too long a time.