W. Germany's trade deficit tumbles the mighty mark
Bonn — When I deposited $100 in my account last July, I got 174 deutsche marks for it. When I deposited $100 in my account this week, I got 214 marks. What's good for me as an American is bad for West Germany -- or so all the West German economists are saying these days.
The drop of the mighty mark has surprised everyone. "If you talked to foreign exchange dealers before the rise, no one would have predicted it," notes one financial analyst. "If they were strong on the dollar they would have predicted 1.95, not 2.00 [marks to the dollar]. Even three or four weeks ago, they would maybe, possibly, have said 2.10. But not this." By "this" he meant the early-February three-year low for the mark of 2.165 to the dollar.
After this low the Bundesbank reluctantly pushed daily money interest up to 10 percent Feb. 6, up a large 1 percent in the past few weeks. The central bank took this action -- while still avoiding a rise in the discount rates -- after spending $1 billion the preceding week in market intervention to halt the mark's slide. The bank action brought the mark back up 2 1/2 pfennigs (hundredths of a mark).
In retrospect analysts blame the mark's weakness primarily on last year's record 28 billion mark ($13.1 billion) current-accounts deficit in West Germany. This deficit arose largely from cost increases in oil and other imported raw materials. Despite official optimism there is widespread doubt next year's balance will be much better.
Depending on accounting preferences, the 1980 current accounts deficit was covered either by government borrowing abroad or by foreign exchange losses in roughly the same order of magnitude. The fourth element in the equation was long-term capital outflows, again in the same magnitude.
West Germany's 23.6 billion mark foreign-exchange loss last year brought total foreign-exchange holdings down to 69.4 billion marks by Nov. 30, 1980, as against 93 billion marks at the end of 1979 and 100 billion marks at the end of 1978. After a quarter century of consistent trade surpluses, however, West Germany's foreign reserves remain the largest in the world, if the gold is valued at its market price rather than its official price.
Additional factors in the drop of the mark against the dollar include widespread hope that the economic policies of the new Reagan administration will promote recovery in the US -- and a feeling that the dollar would be the strongest currency after all if the Soviet Union should invade Poland.
In the current market psychology the main factor that should strengthen the mark in the long run -- an inflation rate that is the lowest in the industrialized West -- has not had much impact. Indeed, the just-released figures showing a January-to-January cost-of-living rise of 5.8 percent (up from a 5.5 percent December-to-December rise) may have added to short-term downward pressure on the mark.
Opinions differ on how to cope with the weak mark. West Germany's private economic research institutes favor letting the mark float to its free-market level. They argue that herd psychology is now undervaluing the mark in relation to its real worth, and that a free float would quickly restore the mark to a more representative value.
The Bundesbank finds such a course too risky, however. It is intervening heavily to support the mark. And its latest nudge to money rates -- at a time when the recessed domestic economy might be better served by lower interest rates -- shows its concern.
Within the joint float of the European Monetary system the mark is also pushing the lower limits of permitted fluctuations. This, too, is unexpected, since the strong mark was expected to support other currencies at the beginning of the EMS two years ago.
Ironically, back in 1977/78, when my $100 fell from 221 to 206 marks in one month, West German economists were as unhappy as I was with the ever-strengthening mark and the ever-weakening dollar. West German exports would become less competitive, they argued -- and they asked why the US government wasn't shoring up the dollar. Now the West Germans -- accustomed to the lowered import prices of the strengthened mark -- no longer want a weakened currency.