German Success Is Europe's Worry

AT the eleventh annual meeting of the International Monetary Fund last week, Britain's Chancellor of the Exchequer Harold Macrnillan spoke somberly: "The financial policy of the United Kingdom remains unchanged. However, we shall continue to take such steps as we can to liberalize our arrangements for trade and payments." With these words, Macmillan dampened a cherished hope of economists everywhere that free world currencies would soon become fully convertible, thus permitting anyone earning money in foreign trade to change it into any other currency, spend it where he chooses without restriction. The explanation is that the pound sterling, dominating 25% of all world trade, is not yet strong enough to stand without restrictions. But despite Britain's stand, there is increasing evidence that Europe may soon have to liberalize its currency and trade policy, whether Britain likes it or not.

The prime reason is West Germany. On the index of industrial production (1950 equals 100) German factories are clipping along at an alltime record (206 in May) for a 100% increase in five years. Yet wages and prices have been so carefully controlled that there is little inflation; meanwhile, booming exports have piled up gold and foreign currency reserves of $3.8 billion v. $504 million five years ago.

Thus, with a stable Deutsche mark and sizable reserves, West Germany is pushing hard for an end to currency and trade barriers, has already taken big steps to make the mark fully convertible. Since last May Germans have been able to buy foreign securities in any country with which West Germany has a payment or trade agreement, are also allowed to maintain foreign currency bank accounts for the first time since 1931. Equally important, trade has been liberalized until today less than 6% of West Germany's imports and exports comes under restrictive, bilateral treaties; all the rest is bought and sold on a freely competitive basis. Fortnight ago, West Germany removed restrictions on German travelers, will now permit them to take unlimited currency abroad, provided that the country they visit has a currency convertible with the Deutsche mark.

But while West Germany has stepped to the brink of complete currency convertibility, it has not yet taken the final plunge for fear of upsetting the other European currencies. The Germans worry that if they free the Deutsche mark while other currencies are weak, so much trade would flow their way that it might torpedo the European Payments Union, to the detriment of all European traders outside West Germany. Belgium, Holland and Switzerland all have stable money and trade balances, could probably compete under the terms of free currency exchange. Italy, too, is moving ahead rapidly; the lira has been stabilized at 625 to the dollar, and, while Italy has a sizable trade deficit, the flood of tourist dollars helps right the balance, has pushed foreign currency reserves to a near record $1.2 billion.

But Britain is in no such happy position. It feels it should have between $4 billion and $5 billion in gold and dollar reserves before the pound is strong enough for convertibility. In Britain's economy, beset by inflation, imports have risen more than exports, until gold and dollar reserves have slipped from $3 billion in 1954 to $2.2 billion this year. They may dip lower if the Suez crisis forces Britain to buy oil from the dollar area. To right the balance, West Germany argues that Britain should devalue its pound, thus make British goods more attractive for export customers. But Britain has no intention of devaluing, instead hopes to solve her problem by stemming inflation and lowering spending abroad. The government has raised the bank rate on credit, boosted purchase taxes and made installment buying more difficult. Still, few experts see much chance for improvement before 1957.

France is in even worse shape economically. Though France is enjoying an industrial boom, with production up 31% since 1953 v. 28% for West Germany, prices and wages have soared twice as fast. Thus, with demand outstripping supply, imports have climbed so high that France's trade balance showed a $575 million deficit during the first seven months of 1956 v. $49 million surplus last year. Financiers argue that France should devalue its franc (officially 350 to the dollar, actually 405 and up) to boost exports, and take drastic steps to clean economic house. But France so far has shown little talent for house cleaning. How long will West Germany wait for France and Britain to put their financial houses in order? As German trade and financial security grows stronger, the situation will only get worse. Eventually, unless something is done soon, West Germany may be forced to go it alone, free its currency and trade regardless of its neighbors--that is, unless the Germans want to put deliberate clamps on their hard-won prosperity.

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