BRUSSELS — Just when it looked as if the major industrial countries were getting their economic act together, the U.S. and German central banks have startled the rest of the world--including each other--by marching off in opposite directions.
And the ailing U.S. economy may suffer more from Germany's action than it gains from its own government's.
Germany's Bundesbank moved first Jan. 31 by engineering an increase of half a percentage point in its two benchmark interest rates. Less than two weeks earlier, top German officials had given face-to-face assurances to their counterparts in the other industrial powers that no such measure was in the offing.
The Bundesbank said higher interest rates were necessary to ward off rising prices in a country where reunification has bred a burst of potentially inflationary business investment. The mighty German economy may be able to overcome the latest ratcheting upward in interest rates and keep growing despite it.
But the other European countries--particularly Britain, France and Italy--that have hitched themselves to the German economic engine may find themselves not running along beside it but being dragged behind in the dust.
The shock waves could easily ripple across the Atlantic. Weak economies in Europe make weak markets for U.S. exports. Without further growth in exports, which have been one of the few bright spots in the U.S. economy, the recession will be that much harder to grow out of.
"It shows just how interconnected the industrial economies have become," said Alan Stoga, an economist with Kissinger & Associates in New York.
On Feb. 1, one day after the Bundesbank boosted interest rates in Germany, the Federal Reserve did exactly the opposite in the United States. In pushing down the discount rate--at which banks may borrow reserves from the Fed--from 6.5% to 6%, the central bank was seeking to stimulate economic activity and help cure the U.S. recession.
Taken together, the two actions have had one predictable consequence: They've sent the battered dollar plunging to new lows against the German mark in international currency markets.
Despite persistent and heavy dollar buying last week by 13 central banks in Europe, plus the Federal Reserve and the Bank of Canada, the dollar barely lifted its head off the mat. By Friday afternoon, as the intervention continued, it was trading at 1.4550 marks, up from the all-time low of 1.4467 marks it had hit on Thursday. (On Jan. 30, the day before the Bundesbank pushed its rates up, the dollar could buy about 1.49 marks.)
