Inflation? Don't Even Say That Word Around Helmut SchlesingerBlanca Riemer and John Templeman and Igor Reichlin
As he paces the beige carpet in his spacious office in the Bundesbank's concrete-and-glass headquarters two miles from downtown Frankfurt, Helmut Schlesinger looks remarkably relaxed--for a man who's about to take the hottest seat in global finance. But beneath the surface, he's anything but calm. Deeply disturbed over the prospect of reunification setting off a destructive "wage-price spiral" across Germany, the nation's incoming central bank president wastes no time describing his foremost concern. "Our main task," he tells BUSINESS WEEK, "is to keep the value of the currency stable. That means avoiding inflation."
That's a tough order. With reunification more than doubling the government's borrowing needs, to $110 billion this year, Schlesinger's work seems to be cut out for him even before he takes over from Karl Otto Pohl on Aug. 1. The economy is continuing to expand, but inflation is heading toward its highest level in nine years (charts). Worse yet, Germany's current-account surplus is vanishing, and the proud German mark has sagged 17% against the dollar since winter, raising the specter of more inflationary pressures.
RATE HIKE? Amid such disheartening news, it's no wonder that many economists expect Schlesinger, the former Bundesbank chief economist and a dyed-in-the-wool monetarist hawk, to push Germany's high interest rates as much as a full point higher when the Central Bank Council meets on Aug. 15.
Doing so might anger the U. S. and European allies. But even though Schlesinger himself hints he might not be ready to move that soon, he is still likely to keep money tight well into 1992. "He's tougher than Pohl," warns Richard Freeman, chief economist at Britain's Imperial Chemical Industries PLC (ICI). "He has a reputation for defending German national interests."
Schlesinger's tough-guy reputation is well-earned. The longtime chief architect of the Bundesbank's hard-line monetary policies, Schlesinger is known around the office as a hard bargainer who prefers his own advice to that of associates. His reputation is much the same outside the Bundesbank. For months, Treasury Secretary Nicholas F. Brady has been complaining about the risks to the fragile global recovery posed by high German interest rates. Indeed, with those rates and the mark dominating the European Monetary System, ICI's Freeman believes Continental Europe may be doomed to "bloody weak" growth next year, perhaps only 2 1/4%.
With those concerns in mind, some observers think Schlesinger may become a little more flexible now that he is assuming a global role. At the June 23 meeting of the Group of Seven industrialized countries in London, insiders say, Pohl and Schlesinger reached a tacit understanding with U. S. and other allies to put a lid on German rates until fall if their counterparts would help brake the mark's rapid decline.
OPEN QUESTION. Not long after, the G-7 dumped dollars around the world, sending the greenback from a 19-month high of 1.84 marks to a level Schlesinger regards as "better for us," about 1.75. "A deal was made," says Michael R. Rosenberg, manager of fixed-income research at Merrill Lynch & Co.
Whether Schlesinger can keep the lid on rates past September or October is an open question. July's $10 billion tax hike to help pay for reunification probably will boost consumer prices by 4% for the month and will push the full year's inflation rate to 4.5%, estimates Commerzbank Chief Economist Jurgen Pfister. With big German unions already winning wage hikes of 6% to 7% lately, Schlesinger worries that workers will be asking for at least that much in 1992.
If these inflation jitters unnerve currency traders and send the mark reeling again, Schlesinger may have no choice but to boost the discount rate by a full point, to 7.5%, says Pfister. Others believe Schlesinger might instead revive a temporary surcharge on large secured loans to banks that was last used a decade ago. Such a plan would result in a "special Lombard" rate of 10.5%, 1.5 percentage points above its current level.
Still, some think Schlesinger would be wiser to leave rates alone. Every day, Schlesinger's office computer spews out statistics suggesting that Germany's nine-year upswing is finally faltering. And eastern Germany's economy is expected to shrink 20% this year.
Despite such indicators, Schlesinger is likely to stick to his hard line until he is convinced that price pressures are easing. "The 1970s showed there is no gain from inflation," he cautions. "There is a danger, however, that some people are forgetting this lesson." Here's one central banker who won't let them.