Nobody has ever accused Hans Tietmeyer of being shy. Lately, the president of the German Bundesbank has been even blunter than usual in blaming the Clinton Administration and Congress for the dollar's 13% decline against the German mark since January. For Tietmeyer, the U.S.'s low savings ratio and high budget deficits are fueling the mark's rise and threatening Europe's economic recovery.
There's no doubt that the U.S. needs to get its economic house in order. But Tietmeyer's blast was ill-timed. He should instead have been making common cause with Washington to pressure the Japanese to open their markets and correct their trade imbalance with the world. That's because Japan's trade policy is driving up the mark even as it batters the greenback.
DOWNWARD SPIRAL. Make no mistake, the crossfire between the dollar and the yen is wounding Germany and the rest of Europe. As trade tensions push the dollar to historic lows against the yen, money traders are diving for cover into the world's only other reserve currency--the mark. "If you feel you have to get out of the dollar, where's the alternative?" says Rolf-E. Breuer, a managing director at Deutsche Bank in Frankfurt. "The strength of the mark is the reflection of the dollar-yen struggle."
The rising mark immediately hits the bottom line of German manufacturers like Daimler Benz Aerospace, which has to price its planes and helicopters in dollars while paying its workers in marks. But that's just the beginning of the downward spiral. As global money managers pile into marks, they pull out of weaker European currencies, from the Spanish peseta to the Italian lira to the British pound. That's a double whammy for German exporters, who must then struggle to compete against ever-cheaper products from such European powerhouses as carmakers Fiat and Volvo and British chemical giant Imperial Chemical Industries PLC.
The irony is that the yen-dollar crisis is having a far greater impact on Europe than on the U.S. This currency turmoil will eventually come back to haunt most of Europe in the form of higher inflation. In this chaotic atmosphere, Europe's hopes for monetary union slip further and further into the future. Meanwhile, there is no sign in the U.S. that the falling buck is about to spark a runup in inflation, and American exporters are picking up market share globally.
Policymakers in the Old World know the Japanese will not voluntarily open their markets enough to bring down the yen and thus halt the mark's rise. "Japan has been in surplus a long time, and there's no likelihood it will reduce the surplus by its own measures," says a senior German official. Some Europeans are already on board with the idea of tougher measures. "It's time to speak up and take action," says Klaus-Peter Muller, a managing director at Commerzbank. "The Japanese are persistent and tough. We need to be the same."
Here's what the Europeans should do. They should lend their voice to the American push for market-opening measures in Japan. Europe's weight in this dispute could be critical in bending Tokyo's bureaucrats to open their economy and resolve currency misalignments. Then the Europeans must be prepared to back up U.S. actions with their own retaliatory tariffs against Japanese autos, auto parts, and electronic components. They should even remind Japan how adept the Europeans can be in slowing imports to a trickle. After all, it was the French who more than a decade ago forced many Japanese products to pass through an inefficient customs post in out-of-the-way Poitiers.
FIGHTING. European leaders have been leery about jumping into what has been a fight between the U.S. and Japan. But this dispute is lurching toward a full-blown trade war that will spare few of the developed economies. Yet European negotiators have so far quietly let the U.S. do the fighting, knowing Europe will benefit from any new barriers to Japanese products in the U.S. as well as any openings in Japan. Already German carmakers such as Mercedes-Benz and BMW foresee sales gains in the U.S. should sanctions block Infiniti and Lexus imports.
The risk is that such noninvolvement lets the Japanese play the Europeans off the Americans. And Tietmeyer's comments about poor U.S. domestic policy encourage the Japanese to claim that Americans have only themselves to blame for the dollar's anemia. Europe's leaders have to change their rhetoric, if only out of self-interest.