Europe’s Currencies Weather German Failure to Lower Rates

BRUSSELS —  Europe’s chaotic currency markets, which threatened late last year to disrupt the entire global economy, seem to have subsided into a state of uneasy calm, at least for now.

The latest and strongest signal came Thursday, when the currency markets kept their cool even though the Bundesbank, Germany’s central bank, passed up a chance to reduce German interest rates.

Germany’s sky-high rates are widely blamed for bolstering the German mark against other European currencies.

George Magnus, an analyst with S. G. Warburg Securities in London, said the turmoil has ended for now.

“But I’m not convinced that the problems are over for good,” he said.

In the long term, he said, the system of fixed exchange rates among European currencies can work only if Europe’s individual economies have similar rates of inflation and economic growth. But Europe’s national economies still differ widely from one another, he said.

On Thursday, however, the French franc, the Irish pound and the Danish krone did not lose value, even though the Bundesbank did nothing to relieve pressure on them.

Earlier this month, all three of those currencies hit their minimum allowable value against the mark.

John Hall, an international economist with Swiss Bank Corp. in London, said the Irish pound remains vulnerable.

The Irish government earlier this month briefly pushed overnight interest rates to 100% to protect the currency, but Hall said that high rates, if maintained, would cripple the economy.

The French franc, by contrast, may have weathered the storm. The Bundesbank and the Bank of France have declared their determination to maintain the franc’s value, a policy they have backed by buying billions of francs on international currency markets when selling pressure threatened to force the franc through its minimum allowable value against the mark.

French Prime Minister Pierre Beregovoy said Thursday that the franc will weather the storm, at least through parliamentary elections scheduled for March.

Europe’s system of fixed exchange rates is designed to increase continental investment by assuring international investors that their profits will not be eaten up by declining currency values.

So strong were the pressures on the system last September that the British and Italian governments pulled their currencies out and let them float down in value.

Spain and Portugal stayed in the system, but Spain devalued its currency by 11% and Portugal devalued its by 6%.

Although the Bundesbank on Thursday left short-term German interest rates intact for now at nearly 9% (compared with about 3% in the United States), most analysts expect it to bring rates down soon.

Magnus predicted a reduction at the Bundesbank’s Feb. 18 meeting.

Swiss Bank Corp. expects the bank to reduce rates in small steps throughout the year.

France and other German neighbors that have sought to maintain the value of their currencies have been forced to mimic Germany’s high rates, lest investments flow out of their countries in search of higher rates of return.

The Bundesbank has kept rates high to offset the inflationary pressures triggered by German reunification.

Magnus warned that, if German rates do not fall quickly, France’s economy, already beset by 10% unemployment, will be strangled unless it lowers rates unilaterally, a move that would almost surely lead to a devaluation of the franc.

“France hasn’t seen the end of this yet,” he said.