Germans Drop Interest Rate, Social Spending

AFTER a pause of nearly two months, the Bundesbank lowered its leading interest rates by half a percentage point yesterday, resuming its course of gradual interest rate reductions.

The move was well timed, coming just a week before the Tokyo summit of the Group of Seven industrialized nations. At last year's G-7 meeting, Germany was urged to do its part to revive the world economy by lowering its comparatively high interest rates. President Clinton repeated this call Wednesday.

The Central Bank dropped the discount rate to 6.75 percent, and the Lombard to 8.25 percent.

The discount rate is the Bundesbank's cheapest rate for loans to commercial banks; the Lombard is the rate at which banks can borrow emergency funds from the Central Bank.

Continued weakness in the German economy has put pressure on the Bundesbank to deliver interest rate relief, and so has a new willingness in Bonn to cut federal spending.

On Tuesday, leaders of Germany's ruling coalition laid out a plan to cut 25 billion deutsche marks ($14.6 billion) from 1994's federal and state budgets, mostly by attacking Germany's social spending.

The announcement of a 3 percent cut in social spending infuriated Germany's opposition Social Democratic Party (SPD). It accused the government of solving its financial problems on the backs of Germany's growing ranks of jobless and disadvantaged.

But some groups also considered the savings inadequate. The country faces mounting unification costs just when a record postwar recession is causing revenues to drop.

"The savings course would have been much more convincing if the government had recognized [the need for] a modernization of the social state, and not just taken time-limited emergency measures," the conservative daily Frankfurter Allgemeine Zeitung criticized.

Instead of reforming its generous social programs, the newspaper pointed out, Bonn is actually building up the social state by going forward with a new nursing home and long-term health care plan.

The government, however, is under political pressure not to appear too Draconian, as next year is an intense election year with no fewer than 19 polls scheduled.

It also will not be able to get its savings plan through the Bundesrat, the upper chamber of parliament, without the support of the SPD, which controls that chamber.

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