It was ironic that the Bundesbank, renowned for its sceptical opinion of the Maastricht accord on European monetary union, should have been forced into the role of white knight for the beleaguered French pro-Maastricht forces.
Yesterday's extraordinary meeting of the bank's central council was brief, because the decision to cut rates had been made for it. But it was particularly brutal.
Not since the spring of 1990, when the Bundesbank was forced to accept the Bonn government's diktat on currency union with East Germany, has there been such dismay and outrage expressed on the 11th floor of the central bank's Frankfurt headquarters.
There was much heated talk of resignation from some hardliners on the 17-man council, so sharp was the sense of humiliation. Less than two months after raising its discount rate to 8.75 per cent in a domestic signal of inflation-fighting intransigence, the Bundesbank yesterday did the opposite - even though none of the problems that so worried it before has improved. Only last week, Otmar Issing, the senior council member, said that there was 'no case at all' for relaxing the anti- inflationary measures.
The sensational nature of the bank's U-turn was already clear on Sunday when European finance ministers announced that the Bundesbank would cut its rates the following morning. For an institution that prides itself on its autonomy from political interference, this was an ominous development.
Helmut Schlesinger, the Bundesbank president, admitted in effect that foreign pressure was behind yesterday's moves. 'The domestic economic situation, seen in isolation, would not have allowed this easing of the monetary reins,' he said.
But Germany's economy is not in isolation, however much the Bundesbank tries to behave as if it were. Over the week before the meeting, the central bank spent an unprecedented DM24bn ( pounds 9bn) to help keep the Italian lira from falling through its floor in the exchange rate mechanism. Not only was support at such a level 'unsustainable', according to Mr Tietmeyer, but it was also undermining the point of the Bundesbank's high interest rate policy by boosting the growth of the mark money supply.
'We had to get ourselves out of this trap,' Mr Schlesinger said. The Bundesbank called for a devaluation of the lira. But to achieve it, the bank had to cede to international pressure for a relaxation in German interest rates. The desperation of other European governments for a chance to boost their own recession-struck economies had been suddenly and dramatically accentuated by another factor.
The closeness in the polls as France entered the final week before its referendum led governments to exert maximum pressure for a quick pro-European co-operation signal by the Bundesbank. As the German Finance Minister, Theo Waigel, said yesterday: 'The Bundesbank rate cut will improve the chances of a favourable vote in the French referendum'.
The hardliners yesterday focused their rearguard action on three points. Inflation in western Germany appears stuck above an unacceptably high 3.5 per cent. (In Germany as a whole the figure is 5.5 per cent). Growth in M3 money supply, currently over 8 per cent, shows little sign of dropping towards the bank's maximum guideline of 5.5 per cent. Finally, there is still little evidence that the German government is prepared to make the drastic public spending cuts in the west that the Bundesbank argues are essential if the exploding costs of unification are to be controlled.
In normal circumstances these arguments would have prevailed, even over the reservations of those moderates on the central council who are increasingly concerned that the Bundesbank's interest rate policy is now dangerously tight for the rapidly weakening German economy.
Instead, the central bank yesterday sought to pull off the seemingly impossible: to satisfy international pressure; to minimise its loss of face; to convince the world that it remained as tough as ever; and to send an encouraging domestic signal that the key to further interest rate cuts lies in the hands of the Bonn government, the unions and industrialists.
The outcome was the 'limited signal', as Mr Tietmeyer described it, of the Lombard cut, the minimum the bank could get away with. While politicians in Germany and the rest of Europe hailed the move as the long- awaited signal that would get economies moving again, Mr Schlesinger stressed that such a 'small adjustment would only gradually take effect'.
At the same time, in a significant technical move, the Bundesbank lowered its repo- rate to 9.2 per cent on a three- month fixed tender. This was seen as an attempt to stop money market rates from bumping up into the lowered Lombard rate, and as an important sign of encouragement to the markets that further interest rate reductions could come as soon as low wage settlements and public spending cuts permit.
'The ball is now in the court of government and the unions. But the Bundesbank is also saying, with the tiny Lombard cut, that it means to stay tough until it sees real progress,' said Gert Schmidt, economist at Deutsche Industriebank.Reuse content