• U.S.

Transatlantic Money Squabble

6 minute read
Christopher Byron

U.S. interest rates have Europe in a dither

Ronald Reagan will hear plenty of complaints about sky-high U.S. interest rates during his two days of economic summitry next week in Ottawa, where the heads of the world’s seven leading non-Communist industrial powers will gather to confer on economic policy. Instead of declining, as Administration officials have been predicting, interest rates have continued to wobble uncertainly around 20%. Last week the cost of money again ratcheted upward slightly, pushing the benchmark prime interest rate that big commercial banks charge to 20.5%, or just a percentage point below the alltime peak reached last December.

A tight money policy and the resulting high U.S. interest rates are a key element in the Administration’s fight against inflation. Though the nation’s trading partners and allies have welcomed Washington’s determination to slow the rise in prices, they have begun to complain about the tactic being employed. Foreign leaders do not like high American rates because they force other nations to push up their own interest rates accordingly, thereby slowing economic growth. Officials are particularly concerned about resulting rises in unemployment levels. Unlike the U.S., which has seldom had an unemployment level of less than 3%, many European nations have traditionally had jobless rates of about 1% or 2%. Thus the rise to current levels of 5% or more is not only economically jolting but socially disturbing as well.

Interest rates are already in solid double digits throughout most of Europe. In the past six months the key interest rate in West Germany has hovered around 14.5%, while in France it has jumped from 14% to 19.5% The Europeans find themselves in a no-win squeeze. A decision to boost domestic rates to stay competitive against the dollar simply invites economic slowdown and even recession; a decision to do nothing just brings on inflation.

The two choices are hardly appealing.

West Germany’s 5.5% inflation rate and its unemployment of 4.8% are enviable by U.S. standards, but the outlook is not encouraging. West Germany’s economy is now in recession and not likely to return to positive growth until the second half of 1982 at the earliest. In France, where the dollar has climbed to its highest point since the end of World War II, unemployment is now 7.2%, while inflation is 12.7%. In Britain, inflation is near 12%, more than 2.5 million workers, or 11.1% of the labor force, are unemployed, and the economy is in its worst slump since the 1930s. Such conditions were at least partly responsible for last week’s rioting by unemployed youths in several British cities.

The Europeans complain that high U.S. interest rates are preventing other countries from engineering their own economic recoveries. French Foreign Minister Claude Cheysson speaks of U.S. tactics that are “wounding” Europe’s economies. West German officials complain that the rising value of the dollar, which has soared by a startling 40% in the past twelve months, to 2.44 deutsche marks to the dollar, has all alone pushed up the nation’s oil import bill by 37%, since world oil prices are quoted in the U.S. currency. At a minimum, foreign officials are now hoping to press the U.S. in Ottawa for better exchange and interest rates coordination to pre vent future money-market gyrations.

Europe’s complaints are in stark contrast to two years ago, when foreign officials were attacking Washington for keeping interest rates too low and letting the value of the dollar fall. At that time they were protesting that the cheap dollar made American exports too inexpensive and took away their business.

Attempts to make the U.S. the scapegoat for Europe’s economic troubles are not accepted by all. West German Chancellor Helmut Schmidt has repeatedly condemned U.S. monetarism for forcing up West German interest rates and stifling growth. But a special report issued last week by that country’s prestigious panel of independent economic advisers blames West Germany’s economic woes on the government itself. The group argued in effect that high West German interest rates are necessary not to offset rates in the U.S. but to counteract a widening West German trade deficit and heavy government spending.

In addition to complaining about high interest rates, both Bonn and Paris have also been charging lately that the U.S. is not doing enough to cut Government expenditures. In fact, the Reagan Administration is doing far more to cut Government spending than either the French or the West German government is doing to pare its own budget. Even as he lashed out last week at “intolerable” U.S. interest-rate levels, Prime Minister Pierre Mauroy unfurled a new French economic program that features, among other things, a plan to create 210,000 civil service jobs.

Meanwhile, West Germany’s Schmidt is finding it next to impossible to reduce his country’s public spending. The politiically centrist Free Democrat Party, which is a partner in the Bonn coalition, is calling for sharp social service spending cuts in next year’s national budget, but the left wing of Schmidt’s Social Democratic Party is resisting virtually all cuts.

Sizing up the confused criticisms from abroad, Reagan Administration officials in Ottawa next week will aggressively champion their strategy for fighting inflation. Says Beryl Sprinkel, the Administration’s bluntly outspoken Under Secretary of the Treasury for Monetary Affairs: “The high interest rates in Europe and the strength of the dollar reflect the belief in the international money market that we’re getting our inflation under control, and they’re not. The Europeans do not seem to like our policies when the dollar is weak, and they do not seem to like them when the dollar is strong.”

If American interest rates now begin to ease off, as some economic forecasters predict, the overseas complaints will have been much ado about little. But if the cost of money stays high in the U.S., Western European leaders are simply going to have to live with a strong dollar and high rates. —By Christopher Byron. Reported by Jordan Bonfante/Paris and Roland Flamini/Bonn, with other bureaus

More Must-Reads from TIME

Contact us at letters@time.com