German Bankers Field Challenges From European Critics
THE European Monetary System (EMS) does not need to be changed; it just needs to be allowed to work as it is supposed to.
This is the assessment of bankers and officials here in Germany's financial capital. They sound bruised from the war of words with Britain over the Bundesbank's role in the value of the pound and the subsequent withdrawal of Britain from the EMS. But they clearly appreciate British Prime Minister Major's renewed emphasis on European unity - and seem hopeful that German policies are better understood in Britain than some British politicians have felt able to acknowledge publicly.
"That the system is under strains should not give rise to questions about what should be done to change the system," says an official of the Bundesbank, Germany's central bank. "The clear analysis of the events of the last few weeks is that for too long a period, some countries were not in convergence [on monetary and economic policies] and some realignment was needed."
Last month's lira devaluation was the first EMS realignment since January 1987, and more may be needed. Rainer Veit, first vice president of Deutsche Bank Research, says, "We still believe that the best solution for the EMS would be a realignment, with these elements: a moderate devaluation of the [Spanish] peseta and the [Irish] punt, to avoid interventions, and the fixing of a new parity for the [Italian] lira. Something like this could stabilize the EMS. In such a realignment, the Bundesbank would be able to reduce short-term interest rates."
Another possibility for a German rate cut would be an attack on the French franc, he says; with the Bundesbank having said publicly that the franc is well priced against the mark, it would "lose face" if the franc had to be devalued, or if the French had to pull out of the system.
Without these developments, Veit expects that the Bundesbank will not reduce its rates "demonstratively."
"For more than five years, we have been so proud of our well-functioning EMS that we postponed a realignment," he says. "The stabilization of the EMS, and getting those others who have dropped out of the system back into it should be a prime policy objective."
High German interest rates have strengthened the deutsche mark to the point where other European currencies have been unable to maintain the exchange rates to which they are committed under the EMS. This forced a devaluation of the lira last month and in turn pushed the pound through its EMS "floor" so that the British were forced to suspend participation in the system indefinitely. Subsequent controversy over whether the pound collapsed because of disparaging comments Bundesbank President Helmut Schless inger made in a newspaper interview dominated headlines for days; the affair culminated with the German ambassador being called on the carpet at the British Foreign Office.
European Community finance ministers rejected the British plea for "reforms" of the EMS at their meeting last week. The special EC summit next week in Birmingham, England, to which finance ministers and central bankers are not invited, Veit says is a "face saving" device to allow Mr. Major to appear to stand up for British interests, and still get the Maastricht Treaty through the British House of Commons.
Many European countries are in the awkward position of having a de facto central bank - the Bundesbank - committed primarily to the stability of a currency other than their own.
The Bundesbank's Sept. 14 interest-rate cut, part of a "package" with the lira devaluation, however, was seen in some quarters as a sign that the Bundesbank was beginning to see Europe as a whole - and its officials took some heat from Germans who thought they were surrendering independence. A diplomatic observer says that at the Bundesbank "there seems to be an increased appreciation for the fact that decisions taken in Germany are having effects through the EC."
Ulrich Ramm, chief economist at Commerzbank, notes approvingly that the Bundesbank is the stated model for the proposed European central bank. "But that is not enough," he says. "What is not stated is the measures a European central bank should follow, the instruments it should use. A new currency for Europe should be as stable as the deutsche mark. But our neighbors seem not to be as interested in stable currency as we are."
There is another side to this: a view that the Germans have higher-than-needed interest rates because they are financing reunification with debt rather than increased taxes or cuts in services. EC Finance Commissioner Henning Christophersen has just called on Bonn to "clarify" its financing plans to help strengthen European monetary cooperation.