German Bundesbank to Hold Line

THIS is a critical time for a leadership change to occur at Europe's most powerful central bank, the German Bundesbank: *-Western European governments are cutting a path to a single European currency and a single central European bank.

*-The economy in east Germany has further to drop before it begins recovery.

*-The Bundesbank itself is in need of restructuring.

But despite these major challenges, most economists and politicians in Germany predict that the resignation of Bundesbank President Karl Otto Pohl - an institution himself after 11 years as president - will have little effect on Bundesbank policy.

One reason for this is that Mr. Pohl's successor, to be announced in the next two weeks, will probably come from the Bundesbank's eight-member directorate. In the directorate, agreement already exists on such key issues as interest rates, European monetary union, and Bundesbank reorganization.

"There is absolutely no dissent in the Bundesbank about the correct interest rate or monetary policy. Nothing at all will change," says Pieter Pietsch, economist for Commerzbank in Frankfurt. This is not good news for Washington, which has been pressuring Germany to lower interest rates and help spur global economic recovery.

The leading candidate for Pohl's replacement is Hans Tietmeyer, member of the directorate and former state secretary in the Finance Ministry in Bonn. The runner-up is Helmut Schlesinger, Bundesbank vice president, but due to retire in September 1992. The Finance Ministry has normally recommended a candidate, who is then appointed on approval of the Cabinet.

'It is a critical time'

"Yes, it is a criticial time for the Bundesbank, but both men would be qualified successors for Pohl," says Gerhard Kutscher, who follows the central bank affairs for Handelsblatt, Germany's leading business newspaper.

Mr. Tietmeyer, who heads the international policymaking section of the Bundesbank, is considered an especially qualified candidate because of his background in international finance. In economist Pietsch's opinion, issues such as European monetary union, the dismal financial picture in Eastern Europe, and the international debt crisis are "the great challenges for the '90s."

Despite several clashes with the government, including calling German monetary union a "disaster," Pohl cited personal reasons last week when he announced his intention to resign in October. His term was not due to end until 1995. One reason he may have felt comfortable about an early resignation is that the Bundesbank has already established a basic policy for a single European currency and central bank. It looks as if these changes won't occur until 1996 or 1997.

At an informal meeting of European Community (EC) finance ministers on May 11, the Bundesbank's positions seemed to find general acceptance. It is against the creation of a central bank if there is no single currency to be managed. It says no single currency should be introduced until EC members meet the proper financial and budgetary criteria and their economies are in harmony with each other.

Since some EC members, such as Greece, Portugal, and Italy, are far behind the rest in terms of reaching these goals, the Bundesbank has suggested a two-speed approach to a single currency, in which the stronger countries move to a single currency first and the weaker ones join later.

On the domestic front, little policy change is expected. "Interest rates will stay high, no matter who is at the top," says Mr. Kutscher. Such a policy is intended to keep inflation low and the mark stable, especially since the mark underpins European currencies. Inflation, the Bundesbank's main enemy, is especially worrisome, since major unions have just won wage hikes of 7 percent without a corresponding increase in productivity.

Compromise appears set

As far as restructuring the Bundesbank goes, the directorate unanimously favors easing decisionmaking by streamlining the number of state central bank directors who sit on the bank's policymaking council. But some states want to add five seats to the council, to account for the five new states making up east Germany. A compromise looks likely.

If Tietmeyer is appointed as the new president, one concern is that he will be too closely allied to Chancellor Helmut Kohl. The Bundesbank's mandate is to operate independently from the government, but Tietmeyer belongs to the chancellor's party and was his personal adviser on German monetary union.