Commentary: The Bundesbank must oblige

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The Independent Online
Did the Bundesbank jump or was it pushed? The visit by Chancellor Helmut Kohl and his Finance Minister, Theo Waigel, to the Bundesbank on Friday - just two days before the German central bank executed its U-turn on interest rates - has shocked public opinion. It looks as if the Bundesbank's legendary independence from political pressures has been compromised. The German press - including such leading titles as Suddeutsche Zeitung and Handelsblatt - has roundly criticised the council for its 'surrender'.

However, the Bundesbank's independence has always been limited. Articles 3 and 12 of the Bundesbankgesetz - the bank statutes - lay down that the bank is 'in the execution of its tasks, independent of orders from the federal government'. Its primary aim is 'safeguarding the currency'. That is interpreted as meaning that it is independent in setting its own monetary policy, including interest rates. However, the statutes also say the Bundesbank is 'obliged to support the general economic policy of the federal government'.

If Bonn decides that the framework within which monetary policy is decided should change - for example, by putting the mark into the European Monetary System or into a union with the Ostmark - the Bundesbank must oblige. When Germany has been a member of a fixed exchange rate system - throughout the post-war period until the breakdown of Bretton Woods in 1971; briefly during the European snake; and then continuously since 1979 in the EMS - compromises have had to be struck between domestic and exchange rate objectives.

Nor is it clear that the deal is a bad one for the Bundesbank, even if its objectives are narrowly and domestically defined. The amount of support buying of the Italian lira and sterling was pumping billions of marks into the Frankfurt money markets, where they were looking for a home. With such a sharp increase in the domestic money supply, the Bundesbank had to engage in massive money market operations to mop up the liquidity. Last week, they drained some DM17bn and there was at least another DM24bn of intervention still to affect the money markets. A deal that stopped the intervention in the foreign exchanges made sense.

True, the Bonn government had long been pressing for lower interest rates, both for domestic reasons and to relieve pressure on other members of the EMS. But it was no part of its policy to press for a devaluation of the Italian lira: that was pure Bundesbank. Even after the half- point cut in money rates (and the quarter-point cut in the official Lombard rate), German interest rates remain extremely high. Unfortunately, each jibe about the Bundesbank bowing to the winds is merely likely to make it less flexible in future.