Bundesbank Rate Cuts Show Broader Outlook
German rate adjustments and looser credit ease pressure on European currencies
THE German Bundesbank's decision to cut interest rates for the first time in nearly five years, following a "realignment" of currencies within the European Exchange Rate Mechanism (ERM), should help quiet complaints that Germany is exporting recession.
The decision "shows that the Bundesbank is aware of the rest of the world, and that's useful," says J. Paul Horne, international economist at Smith, Barney, Harris Upham & Co. in Paris. He hopes the move will help sway French voters in favor of the Maastricht Treaty on European union in a referendum Sunday.
The decision also reflects an implicit acknowledgment of recessionary tendencies within Germany itself, as well as a sense that loan rates have been so high that credit has become a "luxury."
World financial markets have been in turmoil in anticipation of the French vote. With the general sluggishness in the global economy, investors looking for someplace to put their money have been drawn to Germany, with its high short-term interest rates.
This has strengthened the deutsche mark and strained other currencies within and outside the ERM, particularly the Italian lira and the British pound.
The European Community's finance committee decided Sunday to devalue the lira by 3.5 percent, and to raise the value of the other ERM currencies by 3.5 percent. Mr. Horne says, "Sterling is next on the hit list," referring to the British pound.
Share prices and the value of the dollar soared in response to the Bundesbank announcement Sunday - but then fell back when the actual figures were revealed: from 8.75 percent to 8.25 percent for the discount rate, and from 9.75 percent to 9.5 percent for the Lombard rate (what the Bundesbank charges other banks for overnight loans).
Horne calls the cuts in the Lombard rate "symbolic," and says of the cut in the discount rate: "They just gave back two-thirds of what they took away July 16," when they last raised the rates. He considers the "fixed repo" rate, at 9.25 percent, more important. The Bundesbank's target seems to be to see money-market rates fall half a point, from 9.75 to 9.25 percent.
The Bank of Sweden cut its marginal interest rate back to 20 percent yesterday from the 75 percent rate introduced last week to defend the Swedish crown against the deutsche mark. The Belgians, the Dutch, and the Swiss also announced interest-rate cuts. A recent EC projection is for growth of only 1.25 percent this year, and no recovery in 1993; unemployment in Europe is more than 10 percent for the first time in five years.
"It's really true" that Germany is exporting recession, said Wolfgang Scheremet of the German Institute for Economic Research in Berlin, which has been on the pessimistic end of the spectrum of observers.
Peter Pietsch, an economist with Commerzbank in Frankfurt, counters that although German interest rates may be a factor in the general European slowdown, "It's just nonsense to say that it's because of the Bundesbank." The difficulties in Britain and elsewhere are largely "homemade problems," he said.
Opinion is similarly divided on the state of Germany's own economy, but Horne explains it as a series of "mini-recessions." The economy shrinks from quarter to quarter but still achieves positive growth for the year. In 1991, a very strong first quarter was followed by stagnation in the remaining three quarters; the resulting annual growth rate was more than 3 percent. Again this year, a strong first quarter has been followed by a second quarter in which the economy shrank somewhat. Analysts are predicti ng an overall growth rate of between 1 percent and 2 percent for the year.
Since western Germany experienced 4.5 percent growth in 1990, this "cooling off" has had quite a psychological effect in Europe, Horne says.
"Much of this can be laid at the door of Helmut Schlesinger," the Bundesbank president, says Horne, who adds that he considers himself "a partisan of Schlesinger."
The German economy is less interest-rate-sensitive than others, notably the United States, because of lower overall levels of debt carried both by firms and individuals. But the Bundesbank has been concerned that high interest rates have been necessary to check whatever inflation might be caused by the east German reconstruction boom. This boom has meant a surge in German demand for imports, growth that has slowed only recently.
It is clearly in Germans' long-term interest for their neighbors to have easier money and a better exchange rate vis-a-vis the mark. Nearly half of German gross domestic product goes to exports, with particular emphasis on capital goods such as machine tools; this compares with about 10 percent in the US. Germany does best when its trading partners do well and can afford to invest in new production capacity.