Beating up on the Germans is fashionable these days. High interest rates maintained by the Bundesbank, Germany`s counterpart to the Federal Reserve, are choking off chances for an economic recovery in Europe and the United States, goes the now-familiar refrain from Washington, London and other centers of political power.
Wall Street tells us the U.S. stock market is in a funk in part because of high German interest rates. A quarter-point cut in one short-term German rate two weeks ago set off the biggest one-day rally in U.S. stocks this year. When investors here and around the world decided a quarter of a percent wasn`t enough, stock prices quickly reversed course.
Rudiger von Rosen, chief executive of the Frankfurt Stock Exchange, says putting the blame on Germany is unfair and counterproductive. In a wide-ranging interview, Von Rosen stated the German case effectively. His message: We`re all in this together, and Germany and the U.S. have more in common than recent headlines suggest.
For one thing, Von Rosen agreed with the German bashers that lower German interest rates are a good idea. You don`t have to look far to see why he takes that view. On Friday, the DAX index of stocks recorded on the Frankfurt Stock Exchange completed a weeklong slide.
Bloomberg Business News reported from Frankfurt: ”The DAX index of German stocks sank 17.58 points, or 1.15 percent, to 1513.36 Friday amid a flood of reduced earnings estimates for automobile-makers and persistent gloom over the outlook for German interest rates and inflation, traders said.”
Sound familiar? The same paragraph, substituting the Dow Jones industrial average or the Standard & Poor`s 500 index, could have been written Friday on Wall Street. The Dow Jones industrial average Friday dropped 37.55 to 3250.32, and the S&P 500 was off 4.12 to 414.35.
No one complained in 1990, observed Von Rosen, when the former West Germany took up the task of reunification with the former East Germany-a task that promised a virtual gold rush of opportunities to U.S. and European exporters. No one complained, either, in the 1970s and 1980s, when West Germany was a net exporter of capital to the rest of the world, a flow that reversed course this year.
”For me, it is very hard to understand that the British government is blaming us for their recession,” he said. ”Germany was quite clearly the locomotive for other European economies.”
Like many analysts, Von Rosen believes European Community officials erred in not adjusting their currency exchange rate agreements to take into account the collapse of the Berlin Wall on Nov. 11, 1989, and the terrific burden that reunification imposed on the former West Germany. The cost of reunification is the main factor behind high German interest rates, he said. He is critical of Britain for failing to permit a devaluation of the pound and, instead, trying unsuccessfully to hike British interest rates.
Despite their wide disparity in interest rates-with German short-term rates triple comparable U.S. rates-Germany and the United States have one thing in common that is stumping public officials in both countries, Von Rosen said. Government deficits are sapping both nations` ability to respond to economic challenges, he said.
In a speech Friday to students at Northwestern University, he said: ”A rapid and decisive reduction in Germany`s budget deficit is the most important task of fiscal policy in Germany at present. So long as this is not done, the Deutsche Bundesbank will be overtaxed in pursuing its task with the means of monetary policy to ensure price stability.”
With a few minor changes, these remarks could have been delivered by Federal Reserve Board Chairman Alan Greenspan and may be delivered soon by Ross Perot.
In the interview, Von Rosen said inflation is not a problem in Germany, despite an uptick to 3.5 percent this summer from 2.5 percent. Money supply figures provide a poor gauge of German inflation, he added, because millions of German marks are leaving the country in the hands of undocumented workers from Poland and elsewhere in Eastern Europe. Ironically, these ”black market” workers help keep inflation under control by undermining demands by Germans for higher wages, he said.
Von Rosen believes the hike in German interest rates in July, which sent shockwaves through world financial markets, probably was unwarranted. And ”it might be a fact that the room for lower interest rates is growing greater.”
If the government curtailed its subsidies to the country`s steel and agriculture sectors, ”then it would be much easier for them” to cut interest rates, he said. Similar cries for entitlement and subsidy reductions in the United States are barely heard in this election season.
Biotech options
Volatility in stock prices is one of the theoretical underpinnings of options trading. From that standpoint, the Chicago Board Options Exchange picked a good day Friday to disclose plans to begin trading its new 20-stock Biotech Index Oct. 9. The index is the first of a series of industry-group options that the exchange hopes to roll out in the months ahead.
On a pro-forma basis, the index is down about 31 percent this year but was up 104 percent in 1991. This kind of volatility adds to the appeal of an options index, where speculators and hedgers can take on or lay off risk.
Volatility is one word to describe what happened to the biotech stocks Friday. The sector, along with health care, was hit hard. For example, Amgen, one of the best-known names in the new index, dropped $3.25, to $63.87; Biogen fell $1.75, to $31.50.
