No sign of let-up in Bonn assault on
central banks
01:54 p.m Oct 29, 1998 Eastern
By Douglas Busvine
BONN, Oct 29 (Reuters) - The war of words
between Germany's new government and the
Bundesbank and the European Central Bank just
won't die down -- if anything it is intensifying.
Social Democrat Finance Minister Oskar Lafontaine
has kept up his verbal barrage against central bankers
since last month's election triumph, urging them to ease
monetary policy to boost demand-led growth and
create new jobs.
Both the Bundesbank and the ECB, which will take
charge of monetary policy after the launch of the euro
currency in January, have rebuffed the political
salvoes.
So now Lafontaine's lieutenants have entered the fray
to add new firepower to his offensive.
Heiner Flassbeck, the intellectual father of Lafontaine's
neo-Keynesian brand of economics, said on Thursday
that, with government finances already under strain,
monetary policy should do more to stave off a looming
economic slowdown.
Germany is on the verge of deflation, he said, and ''if
there is a deflationary risk, the Bundesbank must cut
interest rates.''
Flassbeck, who has made his name at the German
Institute for Economic Research by swimming against
the tide of monetarist orthodoxy under Germany's old
conservative government, is set to take charge of
international affairs as finance state secretary.
His future fellow state secretary Claus Noe,
meanwhile, accused Bundesbank President Hans
Tietmeyer of trying to ''depoliticise'' money and
seeking to evade accountability for monetary policy.
''That is an absolutely pre-democratic, absolutist
policy,'' he wrote in an article for Die Zeit weekly.
''It's motto is: don't interfere in the business of the
experts, because it doesn't concern you.''
Independent economists say that the new
government's bold calls for a monetary policy rethink
arise from the limited scope it has to give the economy
a boost by loosening fiscal policy.
European countries are still grappling with budget
deficits on the eve of monetary union, while the United
States, which has brought federal finances back into
surplus, has more room to administer an expansive mix
of fiscal and monetary policies.
''In Western Europe monetary policy is more
significant than in the U.S. because we simply do not
have the instrument of fiscal policy,'' Norbert Walter,
chief economist at Deutsche Bank Research, said.
But Michael Groemling, an economist at the Institute
for the German Economy (IW) in Cologne, warned
that monetary policy would achieve little if it did not go
hand-in-hand with measures to fight structural barriers
to growth and employment.
''Monetary policy is not a cure-all,'' he told Reuters.
Groemling was speaking after the IW published a new
forecast that German economic growth would fall to
two percent next year, down from an expected 2.75
percent this year.
That is below the joint forecast of 2.3 percent growth
next year published by Germany's six leading
economic institutes -- which include the IW -- just last
week.
Other analysts see a more sinister agenda behind
Lafontaine's hard line.
The thinking goes something like this: If interest rates
stay put and the economy then slides into recession,
politicians will be able to blame the central banks for
not helping out.
On the other hand, if central banks do bow to political
pressure, politicians will gain power. That would
dovetail well with the ambitions of the left-wing
governments in Germany and France to build up a
political counterweight to the ECB.
''I don't know exactly what Lafontaine's thinking is,
but you certainly can't rule out such motives,'' one
analyst, who spoke on condition of anonymity, said.
Whatever the long-term thinking, the outspoken line
taken by Chancellor Gerhard Schroeder's government
marks a dramatic break with half a century during
which politicians have honoured the independence of
the Bundesbank.
Former Finance Minister Theo Waigel has scented a
conspiracy by what he called the ''Socialist
International'' to undermine the independence of
central banks.
That sentiment was echoed on Thursday by Erwin
Teufel, the conservative premier of
Baden-Wuerttemberg state.
''It's a devastating signal for international financial
markets and Germany's economy when the new
government casts overboard one of the central pillars
of German stability,'' Teufel said.
Copyright 1998 Reuters Limited. All rights reserved.
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