Growing Gap Between Allies

West Germans fear inflation more than U.S. displeasure

Once again the U.S. has tried to persuade West Germany to help spur a worldwide economic recovery by dumping its slow-growth policies in favor of accelerated expansion--and once again the Germans have refused. At a tense three-hour meeting in Bonn, Treasury Secretary Michael Blumenthal was lectured last week by Chancellor Helmut Schmidt about the U.S.'s economic "sins." Among the most grievous cited by Schmidt: the absence of a coherent energy program; the U.S.'s huge foreign trade deficit, which stimulates international inflation; and Washington's unconscionable failure to support the sagging dollar.

Schmidt and his colleagues argue that the Carter Administration is dangerously overestimating West Germany's capacity to act as the locomotive that could pull its trading partners out of the economic doldrums. After Blumenthal's departure, a German Finance Ministry official complained that the U.S.'s arm-twisting tactics showed "a shocking lack of understanding of our economic realities."

To a degree, the Germans are exaggerating their weaknesses. West Germany last month became the first industrial nation to sell as much in goods to the OPEC members as it spends for oil imports. West Germany's trade surplus with the rest of the world reached $17.5 billion last year, and Bonn has a $36 billion reserve of gold and foreign currencies. Most important for the nervous West Germans, who are still traumatized by the ravaging inflation of the '20s, the cost of living rose only 4% last year (compared with 10% in France).

West Germans are quick to point out that on other important fronts their economy has not performed well. Unemployment has been climbing alarmingly. Though half a million Gastarbeiter (guest workers) have been shipped back home to provide more jobs for Germans, the number of unemployed has risen from next to nothing in the mid-'60s to a postwar high of 1.2 million, or 5.4% of the labor force. West German economic growth, which in the '60s rivaled that of the Japanese, has slowed to a stumble. At last May's London summit, Schmidt assured fellow leaders that his country would achieve a 5% expansion in 1977. The true figure, however, was only 2.4%, and there is no guarantee that Bonn will achieve its 3.5% target for 1978.

What has gone wrong? A major hand-.cap is the strength of the German mark, which gained 25% in value against the dollar during the past two years. That makes German goods dearer on the world market and cuts into corporate profits. The steel industry has been hurt by Japanese competitors, and the textile industry finds itself priced out of many traditional overseas markets. One consequence: capital investment is drying up.

During the early stages of the. 1973 oil crisis and the resulting worldwide recession, Schmidt, who became admiringly known as der Macher (the Doer), expertly employed a combination of jawboning and mild government pump priming to sustain Germany's growth and stability. But as the economy turned stagnant, even Schmidt has seemed to be stumped. West Germany, which is one of the most modernized of nations, does not need an expanded public works program that could create more jobs. Meanwhile, Schmidt's ambitious drive to build 17 additional nuclear plants, which would have created 200,000 jobs, foundered on objections of environmentalists and the violent protests of left-wing demonstrators.

In hopes of giving the economy a little jolt, Schmidt last November cut income taxes by $10 a month for single people and $20 a month for couples. Instead of rushing out to spend their new wealth, the thrifty Germans put it in the bank. Next, Schmidt reduced the interest rate for savings, but that had little effect; Germans sock away 15% of their net earnings, while Americans save only 5%.

As Schmidt was cautiously trying to revive the economy, the old inflationary threat came alive. In their first strike since 1896, German dock workers stomped off the job last month, demanding raises far above the government's 4.5% guideposts. After a five-day walkout, the workers won a 7% increase retroactive to January. Then other unions, whose contracts are expiring, began staging brief stoppages in plants from Hamburg to Munich.

Inflation could have unforeseeable political and social effects. A short bout of economic stagflation in the early '60s resulted in the fall of the government of Ludwig Erhard and created the uncertain political climate that led to the onset of student radicalism, which, in turn, contributed to urban terrorism. Given his nation's tragic past experience with economic crises, Schmidt believes the long-term liabilities of inflation would far outweigh any short-term benefit that Bonn and its trading partners might derive from a burst of steam from the German locomotive.

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After a rally in January as a result of U.S. support efforts, the dollar plunged last week to record lows against the world's two strongest currencies; it was worth only 2.06 German marks and 1.88 Swiss francs. The dollar also fell in relation to the British pound, the Italian lira, the Japanese yen, and even the recently troubled French franc.

In large part this week's slide was caused by Blumenthal's performance in Europe. At a meeting of finance ministers in Paris, he gave the impression that Washington was less concerned than its trading partners about the slide of the dollar and would not intervene to boost the dollar's value. Actually that is nothing new, but when word of Blumenthal's attitude leaked, the dollar began to fall again. The slide continued as Blumenthal's talks in Bonn failed to patch up the rift between the West's two most important economic powers.

Unfortunately, last week's bad news overshadowed a positive dollar development that otherwise might have added several cents to its worth. In Paris, Saudi Arabian Finance Minister Mohamed Abdel-Kheil told Blumenthal that his country would indeed continue to accept dollars as payment for oil and had no intention of switching to a mix of other currencies.

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