IT IS the Bundesbank that provides the drive for a further realignment of the European Monetary System, including a devaluation of the pound and a further downgrading of the Italian lira.
In private and public it has pushed the case, in the face of strong opposition from EMS partners including Britain, France and Spain. On the sidelines, the US apparently backed the German idea, as part of its desire for a co-ordinated cut in German, US and Japanese rates to counter the world recession.
What occurred last weekend - a 7 per cent devaluation of the Italian lira and a quarter- point cut in the key German Lombard rate - was a partial response. But the Bundesbank had achieved its objective: EMS realignments were back on the policy agenda.
The latest crisis afflicting sterling was inflamed yesterday by comments made in an interview by Helmut Schlesinger, the Bundesbank president. His views were reported in indirect speech rather than quotations, and on closer examination have proved to be ambiguous.
But they were immediately interpreted in the markets as suggesting that last weekend's accord did not go far enough, and that it should have included a devaluation of the pound. According to the Handelsblatt report, Mr Schlesinger did not rule out the possibility that even after the realignment and after the lowering of German interest rates one or another currency could come under pressure until the referendum in France.
Handelsblatt also said Mr Schlesinger had conceded that the problems were not solved completely by the measures taken. The situation in the EMS would have been more relaxed if there had been a more extensive realignment. But in his view it was not possible to have a realignment of exchange rates which included other EMS currencies.
Mr Schlesinger gave an assurance that the situation in the EMS would look much quieter than last Friday, when the Bundesbank had to decide whether to stop buying lire or to carry on supporting the lira for another week.
The Bundesbank appears to have several reasons for its views on the EMS. Massive intervention on the foreign exchange markets to defend EMS currency parities threatens seriously to compromise German money supply growth targets, by increasing the quantity of marks circulating in the economy. At the same time, the Bundesbank also has to overcome the impression in Germany that it buckled to international pressure in cutting rates.
The Bundesbank also believes that until eventual monetary union in Europe, the EMS is a fixed, but adjustable, system. The Bundesbank case reflects its belief that it may be impossible for many EC countries to meet the convergence criteria of the Maastricht treaty, including a sharp reduction in budget deficits and national debt levels.
This line has been stated publicly by both Mr Schlesinger and his deputy, Hans Tietmeyer. Since becoming president in 1991, Mr Schlesinger has told journalists that other EC governments have stubbornly resisted even discussing the possibility of realignment.
But underlying the Bundesbank's views is a deep- seated worry that its independence is under fire. When EMU first became a serious Community objective, Karl-Otto Pohl, Mr Schlesinger's predecessor, often warned of its high economic costs to the weaker countries. Bundesbank officials were concerned that their strict anti-inflation policies could be compromised by a European central bank sensitive to the less hawkish attitudes on inflation of some other European countries.
Such fears about what EMU could mean for Germany's successful anti-inflation record were heightened by the experience of German monetary union in 1990. The Bundesbank was forced by the Bonn government to accept an exchange rate of one-to-one between the Deutschmark and the East German mark.
The attitude now in Frankurt is that the inflationary pressures of unification must be contained, whether through high rates, or a strong exchange rate, or both. In the meantime, European governments must be reminded that the road to EMU, however long, will not compromise the Bundesbank's successful record of holding down inflation.
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