Despite the rows of indicator lights that were beginning to flash red, investors and speculators piled into the German currency. By the beginning of this year the warning lights were burning ever more furiously. The German economy, as the Bundesbank president, Helmut Schlesinger remarked this week, is hardly a paragon of virtue and stability any more.
The head of the Danish central bank, Erik Hoffmeyer, was less circumspect. 'On every important count the Danish economy is more solid than Germany's, notably in its fight against inflation,' he said.
Although still only a murmur, doubts about the mark are beginning to be heard. They are unlikely to grow much louder as long as German key interest rates remain so high. The difficulties could begin, however, when those rates start coming down, as everyone expects them to.
The reason for the increasingly tortured statements on monetary policy by members of the Bundesbank's central council is that they are worried, unsure of just how thin the confidence in the mark may be. In their forecast for 1993, Germany's five leading economic institutes last autumn produced an optimistic 0.5 per cent for GDP growth in western Germany, based largely on the expectation of rapid, sharp rate cuts. Outside Germany, the expectations that this should happen are even greater.
The central bank's ability to do so is, however, limited. 'The fundamentals do not speak for the mark any more,' said Dietrich Beier, chief economist at the Berliner Bank. 'If the Bundesbank were to try to bring rates down too sharply, the mark will be so weak, bringing strong inflation through imports.'
Hung Tran, senior economist with Deutsche Bank, said: 'Our forecast of a moderately weakened mark is conservative - the risk of a weaker mark is a significant one.'
Reading between the lines of recent speeches by Bundesbank board members, one can see a great deal of special pleading for the uncomfortable position in which they find themselves. As Johann Wilhelm Gaddum put it this week: 'The Bundesbank has to keep in mind that every decision on the future course of monetary policy must not cast doubt on its anti-inflationary stand.'
To disappoint the trust placed in the Bundesbank would be fatal, he added.
Everything is now down to timing, but many of the deciding elements are out of the Bundesbank's reach. 'If the wage talks do not soon produce a satisfactorily moderate outcome, and the solidarity pact negotiations on getting public spending under control were to drag on, the markets will be very disappointed,' said Hermann Remsperger, chief economist with BHF Bank. 'The mark could feel a bit battered.'
On both the wages and the public spending fronts, the signs are less encouraging than a month ago. While the recession, and rising unemployment, have knocked the stuffing out of trade union militancy, the current high inflation rate - 4.4 per cent in January - and the spate of 'revenue enhancing' measures announced by the government are working against restraint. If the pace-setting public sector union talks settle for anything up to 3.5 per cent the Bundesbank will be relieved. Anything over and its nervousness will be heightened.
Although the Bundesbank central council apparently gave its approval to the Bonn government's public spending cut proposals when the finance minister, Theo Waigel, presented them in Frankfurt recently, the central bankers know as well as anyone else who has watched Chancellor Helmut Kohl's shaky performance over the past two years that there is many a slip between presentation and doing the business.
Last year in Germany there was much clamour about controlling the deficit, and yet overall public spending still surged ahead by 9 per cent. This time, if all the Waigel proposals are implemented, the rise could be kept to 4 per cent. Despite Chancellor Kohl's repeated statements about the urgency of the moment, the solidarity pact talks have descended into that state of political confusion for which Bonn has recently become renowned.
Mr Waigel talks gloomily of the difficulties ahead in getting tough spending cuts through parliament, where the upper house is controlled by the opposition Social Democrats. The head of BMW, Eberhard von Kuenheim, scathingly pointed out that the revenue enhancing parts of the fiscal consolidation plan looked more impressive than the ones on cuts.
The proposed increases in insurance tax and oil tax and the introduction of a road tax will make heavier going of the Bundesbank's anti-inflationary campaign.
'German inflation will remain relatively high, the current account deficit will persist, and public spending will stay a worry,' Mr Beier said. 'If the recession does not lift, confidence could be shaken.'
The general opinion, nonetheless, is that Chancellor Kohl and Germany will muddle through to an acceptable solution.
In steady, measured steps, the Bundesbank will have dropped leading rates by up to 2 per cent by the end of the year, allowing the mark to settle to around 1.80 to the dollar, which will in turn have been bolstered by a recovering economy and gently rising interest rates.
'The chances are still against a rough ride,' said a Commerzbank economist, Peter Pietsch. 'History is on our side, and it says never speculate against the mark.'