After The Currency Crisis, Global Growth?

The unraveling of the European Community's monetary system on Sept. 16 is bad news for German Chancellor Helmut Kohl and French President Francois Mitterrand, who crafted the Maastricht agreement to turn the ec into a tightly knit economic and political union. But the outcome of the late-summer currency turmoil is likely to be healthy for Europe and the entire world. While nations have grappled with recession and deflation, the stern anti-inflation monetary policy that Germany's Bundesbank thrust on European and other allies has proved tragically inappropriate. Now, the Germans must cut rates convincingly.

That will allow the rest of Europe to cut rates decisively and get growth going, and leave room for further rate reductions in the U.S. and Japan. With Japan already promising to spend $87 billion to revive its own tottering economy, the industrial world may achieve a healthy expansion by 1993.

Sure, Europe's laggards need to get their acts together. If Italy wants to benefit from Europe's unity, it must privatize and slash its staggering budget deficit. And the Germans are going to have to find a way to finance the rehabilitation of eastern Germany without bankrupting the rest of Europe.

Until Sept. 16, Europe believed that it couldn't achieve rapid monetary and political union without hewing to the Bundesbank's no-inflation, strong-currency stand. When the $100 billion-a-year cost of rehabilitating eastern Germany induced the Bundesbank to raise interest rates to record highs to keep domestic prices in line, Bonn's allies followed the Germans even as their own economies ran out of gas. Obviously something had to give. Two decades ago, the Bretton Woods system of fixed exchange rates broke apart when the U.S., Britain, and other industrial countries decided they no longer could sacrifice growth and jobs to an unyielding plan for currency stability. The ec's currency mess shows once again that there are limitations on adhering to rigid monetary goals until the Europeans get their economies in line. But until they do, monetary union will be a pipe dream.

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