US and Germany In Conflict Over Interest Rates

DESPITE polite communiques, relations between the world's dominant economic powers are strained as they meet here this week. The friction is largely between the United States and Germany, which blame each other for being motivated only by domestic considerations.

Citing concerns about recession here and abroad, US Secretary of the Treasury Nicholas Brady has pushed internationally for lower interest rates as a means of spurring growth.

The Treasury is concerned that Germany - the world's fourth-largest economy and leading exporter in 1990 - is looking only at its own domestic economy, now under strain as reunification exacts higher and higher economic and political costs.

Inflation conscious, Germany's Bundesbank (central bank) has resisted a marked reduction in rates; it asserts that the Bush administration feels pressured to revive the US economy for the 1992 presidential elections.

The Bush administration's ongoing plea to the central bankers and finance ministers from the so-called Group of Seven (G-7) countries - the US, Britain, Canada, France, Germany, Italy, and Japan - has been to adopt a "world economic view" that keeps interest rates down and spurs economic growth.

Bush is also nudging the US Federal Reserve, according to Norbert Walter, chief economist for Germany's largest commercial bank, Deutsche Bank. He says the US Treasury is urging the Federal Reserve to further reduce interest rates.

Mr. Walter, who met in Washington with Michael Boskin, chairman of the White House Council of Economic Advisers, also attended a G-7 conference of leading US economists. Walter says Bush must first address his own internal policy disorder.

US government figures released Friday confirm the US recession: The gross national product (GNP) declined by 2.8 percent in the first quarter of this year and declined by 1.6 percent during the fourth quarter of 1990. Walter asserts that Washington's purported concern about worldwide recession is partly a mask for its anxiety over the US domestic economy.

While he concedes that worldwide economic growth is "not impressive" at 0.5 percent to 1 percent a year, Walter points to Europe's upswing, "which started in 1987 and will continue through the mid-1990s." The US, says Walter, is in fact "looking inward, and the political element is quite obvious - the administration wants to get the economy moving faster in view of next year's election."

Sen. William Roth (R) of Delaware, who recently returned from Germany and Japan, says "moving out of recession is not a domestic political issue but an international issue. There is a good reason for the world to see our economy on an upward spiral."

But he notes that Germany is "increasingly looking toward its internal problems.... [Germany's] historical concern has been inflation. Whatever is done economically must eliminate inflation. They've been consistent down through the years on this."

That policy is more important than ever to German leaders, who are experiencing the problems of reunification. German Chancellor Helmut Kohl incurred west German resentment in February by reneging on his campaign promise and hiking taxes to finance the absorption of the east. Despite Chancellor Kohl's pledge to reverse the east's misfortune by 1995, Germans there are frustrated.

"These people have a right to be impatient," contends Werner Weidenfeld, a German government adviser on US-European Community relations and director of the University of Mainz. "They waited for 40 years and now they're told to wait another five years more."

During the first three months of 1991, a staggering 6,000 suicides were recorded in the former East German state of Brandenburg, population roughly 2.5 million. Juergen Thomas, spokesman for Potsdam's mayor, attributes the loss to an east German identity crisis that relates to joblessness, housing shortages, and a wholesale change in social and political life.

Volker Ruehe, secretary general of Kohl's Christian Democratic Union, cautions that merging east and west Germany will prove "more difficult than rebuilding West Germany from zero after World War II." Running down the social and economic costs, he says that "in some parts of east Germany, unem-ployment will reach 80 percent; the average will be 50 percent."

He warns that "people are underestimating the time it will take east Germany" to meet western standards.

Ludolf von Wartenberg, director general of the Federation of German Industries says "a massive" portion of eastern Germany's 8,000 enterprises will be shut down to achieve economic recovery. Well over half of the 16 million former East Germans worked in what Mr. von Wartenberg calls the "overindustrialized sector."

West German investment is sorely needed to revamp industry in the east, where production is declining rapidly.

The Bundesbank's decision to keep interest rates high not only angers the US Treasury. Walter Seipp, retiring next month from the helm of one of Germany's largest banks, Commerzbank, attacks Bundesbank policy for making economic growth too expensive. He says higher rates put a damper on investment and put the German economy in jeopardy of stagnation.