West Germans are pleased with US anti-inflation plan
West Germany and the rest of Europe like what they see in President Carter's new antiinflation program -- and the dollar is buoyant and steady. This remains the good news after more than two weeks of evaluation of the March 14 Carter-Volcker financial package.Skip to next paragraph
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Europe's vote of confidence is apparent not only in official words of welcome , but also in the market. The dollar has risen this year from a trough of 1.70 deutsche marks (DM) to its currnt 1.93, a sizable appreciation, with more than half of the increase coming after the Carter announcement.
The dollar has strengthened so much, in fact, that the Bundesbank has been making one of its heftiest interventions (to buy dollars and keep their price down) since the 1973 float.
Financial analysts point out that, philosophically, West Germans cannot help cheering Mr. Carter on. With a phobia about inflation that goes back to the bills-in-wheel-barrows days of the Weimar Republic, Germans have long insisted that the main prerequisite for a stable world economic system is control of domestic inflation in the U.S.
More explicity, most sophisticated Germans regard the chief instrument of control as monetary policy. The new high American interest rates -- even if they do run some risk of an interest-rate war -- are seen by Germans as the necessary first step to taming American inflation.
A counterinclination in some West German economic circles would be to regret the American forcing of West Germany's hand in setting high interest rates and Bonn's consequent loss of flexibility in a period when any impending domestic recession might require the stimulation of easier credit. (The current German discount rate is 7 percent; another significant interest rate, known as the Lombard rate, is 8.5 percent.)
Thus, the high-powered West German agencies for economic prognosis, especially the Kiel Institute, have voiced some general concern over a domestic slowdown below the 2 percent real growth generally projected for this year. The majority of West German economists still seem to be more worried about inflation than about a slump, however.
One new feature of the shifting financial situation seems to be greater West German acceptance of a reserve role for the mark. New West German regulations that were put through almost simultaneously invited foreing capital inflows, including official funds. Prominent among the relaxations was the lowering of the maturity limit of fixed-interest securities that foreigners may hold from four to two years. Some economists argue that only at a one-year maturity do securities fall into the category of foreign reserves, but the direction is plain.
Despite earlier West German resistance to foreign holding of DMs as reserves, the mark had already replaced sterling in the 1970s as the second currency reserve after the dollar. DMs now constitute some 11.5 percent of reserve currency holdings by governments other than West Germany's.
A further sign of financial change is the current unprecedented West German raising of an OPEC loan, in an amount that is still secret but could run as high as 5 billion marks ($2.58 billion). And Finance Minister Hans Matthofer stated March 24 that West Germany might also take American credits to cover part of its budget deficit.