World Financial Markets Watching Germany This Week

By , H. Erich Heinemann is chief economist of Ladenburg, Thalmann & Co., investment bankers in New York.

THE two Germany's - east and west - have merged with a big bang.Inflation and unemployment have soared in the east; industrial production has collapsed. From right to left, analysts are watching with trepidation to see how Europe's most powerful economy deals with these disruptions. The key player in the Euro-drama may well be Helmut Schlesinger, who took over as president of the Bundesbank, the German central bank, on Aug. 1. Mr. Schlesinger has a well-earned reputation as an inflation fighter. "We fear him," says Guido Schmidt-Chiari, chairman of Creditanstalt- Bankverein, Austria's largest bank. Michael Geuenich, spokesman for the German Trade Union Federation, warned that if the Bundesbank raises interest rates, the result could be slower economic growth in Germany and a more difficult recovery in the United States, Canada, and Britain. Mr. Geuenich added that higher rates would exacerbate the existing economic slowdown in France. Such views may or may not be correct. Either way, Schlesinger appears willing to run the risk of European recession. He told the British Guardian newspaper that it was "questionable" whether the Bundesbank's official discount rate could remain at 6.5 percent while other money market rates in Frankfurt were 9 percent or higher. That suggests short-term rates in Germany will go up within six to eight weeks. Indeed, there is widespread speculation in financial circles that the Bundesbank will raise its disc ount rate at a meeting Thursday of its policy-setting council. Mostly as a result of reunification, inflation is now running at an annual rate of 4.5 percent. By German standards, that is astronomical. While much of the jump was due to higher taxes on consumer goods to finance reunification, and "is outside the control of the Bundesbank, ... prices are increasing faster than ... we can accept. We have to see that a wage-price spiral does not happen," Schlesinger says. Clearly, he believes that tight money, whatever the cost, is the right course for Germany at this t ime. Under present plans, Schlesinger will head the Bundesbank for only two years. His successor is expected to be Hans Tietmeyer. Mr. Tietmeyer is now No. 2 at the bank and is a former senior official in the government of German Chancellor Helmut Kohl. Nonetheless, Schlesinger seems determined to test the limits of the Bundesbank's independence. Conventional wisdom among bankers is that central banks should be (1) independent of their governments and (2) committed to stable prices. "The more independently the central bank can pursue its goals," Tietmeyer said, "the better the results that can be expected." The notion of the central banker acting in splendid isolation to serve the public good has theoretic appeal, but tight practical limits. Monetary policy influences the division of the economic pie, not the least between debtors and creditors. It is intensely, necessarily political. Owing to deep-seated fears of inflation in Germany, the Bundesbank has more autonomy than any other central bank. But common sense says there are limits to such power. Time will tell whether Schlesinger will overstep the practical limits of his political authority. West Germans have had to pour the equivalent of more than $80 billion a year into the east to prop up the economy there. Despite skyrocketing unemployment, living standards in east Germany are higher today than prior to reunification. But as Tietmeyer warned, "rapid wage increases will serve only those employees who are spared unemployment. Others will suffer because the wage hikes have caused, or will cause, them to lose their jobs." Over time, he said, "prosperity cannot be borrowed. It has to be based on one's own competitive work and production." No one doubts the ability of the Germans to deal with these problems, fundamental as they are. At last count, there were at least 17 different government programs to encourage investment in east Germany. The risk is that the race for German reunification may set off shock waves that could upset the European economy. Helmut Schlesinger will be one of the key actors in this drama.

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