There have been a number of developments in Germany recently. On wages, 3 per cent has been set as the benchmark increase in the west, comfortably below the expected annual inflation rate for 1993. And this week's accord in eastern Germany by chemical workers undercutting the contract on automatic wage equalisation with western levels suggests that what the Bundesbank calls 'reasonableness' is beginning to prevail there, too.
Although January's negative growth in the M3 money supply was a highly distorted figure, the fact that it was so much lower than market expectations reinforces the view, as the Bundesbank vice-president Hans Tietmeyer put it, that it is 'showing signs of the desired slowdown'.
Progress on the inflation front is proving much slower, with preliminary western German figures for February only inching down to 4.3 per cent after 4.4 per cent in January. But there is little doubt that it is on the way down, especially given the harshness of the German recession.
This leaves the remaining key condition - curbing western public spending. The behind- the-scenes arm-wrestling between German monetary and fiscal policy over the past 18 months has been one of the main reasons why interest rates have stayed obstinately high.
The Bundesbank saw in the government's apparent insouciance towards the problems of controlling the ballooning costs of unification a serious threat to its stability policies, and international confidence in Germany generally. The recent weeks of chaotic argument in Bonn over the solidarity pact, and especially the spending-cut side of the equation, have provided little comfort for the central bankers. It is little coincidence that Mr Tietmeyer made his stern call for action shortly before Chancellor Kohl returns from a lengthy Asian trip.
Ideally, the Bundesbank would prefer to hold out until the government delivers. But time may not be on its side. ERM pressures similar to those that pushed the central bankers at the beginning of February into a slight easing of rates before they wanted to could well reappear in the run-up to the French general election towards the end of next month.
With so much at stake in Europe, including the Danish referendum, if the franc were left to get into real trouble, it is difficult to see how a further rate cut can be avoided before long. The Bundesbank just does not want the Bonn politicians to take anything for granted.Reuse content