THE DOLLAR UNDER PRESSURE : Declining Dollar Could Be Bad News in the Long Run

With all the hullabaloo about the rising mark and falling dollar, it’s often overlooked that the interest rate policies that led to this crisis stem from a serious mistake by the West German government in the 1990 reunification with what was then Communist East Germany.

Chancellor Helmut Kohl’s Bonn government welcomed its eastern comrades with the monetary equivalent of steroid injections, setting off a massive consumer boom in the newly united Germany.

But steroids have unfortunate aftereffects. There is recession in Germany today as a consequence of that 1990 mistake. Beyond Germany, the promised completion of European economic union in this decade is threatened.

With respect to the United States, the consequences are moderately beneficial right now--a low dollar helps American exports. But long-term, some of what is going on in Germany today could lead to the eclipse of the U.S. dollar as the world’s leading currency--and a sharp curtailment of U.S. control of its own economic destiny.

Make no mistake, power games are being played behind the thrust and babble of currency trading, fascinating to watch if you know what to look for.

Power and politics were involved in 1990 when West Germany gave the 17 million East Germans a very generous exchange rate for their Communist money. Economics at the time dictated that one strong deutsche mark be given for every five of East Germany’s ostmarks. But Kohl’s government saw a chance to buy votes, and so made the exchange one for one.

The result, for a while, was a boom: Easterners satisfied their pent-up consumer demand with West German goods, giving western workers lots of overtime and high pay.

But less than two years later the reckoning came. Inefficient East German factories could not compete with West German industry and closed down. Industrial production has fallen 50% in the east, and almost half the old East German work force is unemployed or underemployed.

The eastern states have become a giant reclamation project for the German government, which is pumping 159 billion marks a year--$113 billion at current rates--into cleaning up an environmental disaster and rebuilding transport and communications infrastructure.

It’s an interesting investment. If Germany can reclaim the east, it expands the German home market by 27%, to 80 million people--Europe’s largest by far.

But Germany is making its neighbors pay for the expansion. The Bundesbank is keeping interest rates high--nearly 10%--both to suppress the inflation left over from the consumption boom of 1990-91 and to attract foreign investors to finance the $113-billion-a-year eastern reclamation project.

And Germany’s European Community partners are directly affected. Under the European monetary system, France, Britain, Italy, Holland, Belgium and other nations must keep their currency values within 6% of the deutsche mark. So as the mark rises, they must hike interest rates to keep their currencies rising too.

The result is widespread recession among Europe’s economies and resentment of German interest rate policies--including grumbling from German exporters, who are hurt by the strong mark.

The resentment could turn to action on Sept. 20 when French voters go to the polls to approve or reject the Maastricht treaty, which would unite Europe’s economies and create a single European currency, the ecu, by the year 2000. Opinion polls in France show the treaty in trouble.

So there is pressure on Bundesbank Chairman Helmut Schlesinger--a particularly independent and unflappable civil servant--to lower interest rates. And there is much criticism of Germany for acting in its own interest rather than that of the European and world communities.

But we Americans should be aware that the United States acts similarly when it calls for a weak dollar to boost U.S. exports. What we regard as intelligent policy, other nations often see as a big power helping itself at their expense. Almost all countries hold dollars in their official reserves. A weaker dollar makes them poorer.

And in the last decade, many foreign investors have helped finance our deficits by loading up on U.S. Treasury bonds. The United States is now paying those foreigners $60 billion a year in interest--but paying them in depreciating currency as it allows the dollar to weaken.

So far there is no problem. But someday, if the dollar continues to be unstable, another currency might come along that would be more attractive to the global community--the ecu, for example.

The dollar might then become a secondary currency, subjecting U.S. economic policy to dictates from other economic powers--as Britain and its once powerful pound sterling have become today.

Admittedly, that is a long-term caution.

For a good idea of what will happen in the near future, watch the French. If they vote down the Maastricht treaty Sept. 20, the mark will drop sharply--a point to keep in mind for all those buying the rising mark today.

The dollar may strengthen sooner than expected.

But if the French vote yes on Maastricht, despite current hard times, the status of Germany as economic polestar for Europe will be enhanced. Then the prediction of an economist for a major German bank--”by 1995 the exchange rate will be one deutsche mark to one dollar,” a further 30% decline for the dollar--might well be fulfilled.

That wouldn’t be just another boon for exports; that would be ominous.