Two months ago, in Mexico City, the engaing German finance minister, Hans Matthoefer, was challenged by a reporter for standing pat on economic stimulus programs with an inflation rate of only 3 percent. "Why should we (push growth)?" Mathoefer responded. "This low rate of price increase, I think, is one of the reasons for the stable economic growth that we have."
But the situation has changed dramatically in the past several weeks and West Germany will go to the economic summit in Bonn July 16 and 17 under tremendous pressure to announce an expansionary program.
Here in Germany's banking center, it's a foregone conclusion. The only question is the shape (and timing) of the proposal that Chancellor Helmut Schmidt will put on the table.
For one thing, the incredibly low German inflation rate that Matthoefer was pround of in May has dipped even lower. For June, prices rose at an annunal rate of only 2.5 percent. Even if linflation edges up slighly for the rest of the year, 1978's average ought to be 3 percent or less.
(American who have to change cheap dollars into expensive deutsche marks don't benefit from the internally low price structure. Thus, in dollar terms, a cup of coffee cost $2.50, and adding juice and a roll for a typical continental breakfast makes it $7.50.)
But worse for Schmidt's negotiating position at Bonn is that the German economy has been stagnant for the first five months of the year and, even if things pick up later in 1978 in response to last year's stimulus program of about $12.5 billion, the 3.5 percent growth goal for the year is now out the window. This is admitted officially by the conservative German central bank, which has been standing firm in urging Schmidt not to cave in to foreign dmands at the summit.
Without further expansion - which he favors - Reinhold Stoessel, senior manager and chief economist of the Dresdner Bank here, says: "At best, we might be able to achieve 3 percent growth this year." Many of the authoritative German research institutions think it might be only 2.5 percent.
IT IS THE latter figure that has the politicians of all parties worried. And politics alone assures that Schmidt will have to come up with something at Bonn, because a 2.5 percent growth rate would imply rising unemployment.
After the Liberal Free Democratic Party (FDP) lost in recent local elections in Hamburg, it began to advocate a tax cut beginning in 1979 to stimulate the economy. To keep the ruling coalition (including his own Social Democratic party) together, Schmidt is being forced to move toward the FDP Democratic Party) together. Schmidt is being forced to move toward the FDP position. Moreover, the opposition parties - the Christian Democratic Union and position. Moreover, the opposition parties - the Christian Democratic Union and Christian Social Union - long have favored strong expansionary moves.
The lower chamber in the Bonn Parliament is now completely controlled by the opposition, which is trying to make the most it can out of the split within the Schmidt coalition. "Schmidt has to be an accomplished juggler," says an insider. "He has to deal with three difficulties.
"First, he has the opposition in the second house. Second, he has some differences between the Free Democratic Party and the Social Democrats. And third, he has some difficulty in his own SPD between the majority and the left wings. And that's to say nothing of the international pressures."
OUT OF ALL of this has come the notion of a $6 billion tax cut. It was mentioned in passing by Matthoefer, and repeated in Washington by Economics Minister Otto Graff Lambsdorf. Then it was quickly denied by Bonn officials, who would have preferred to keep their playing cards for the Bonn trading game somewhat closer to the vest.
But my impression after a round of talks is that a sizable German tax cut for 1979 is a good bet for the summit, with a total package involving structural reforms of the German tax system of a least $7.5 billion to $10 billion.
Depending on what he can get out of the summit wheeling and dealing in exchange, Schmidt might recommend the lesser piece for 1979, and the bulk for 1980.
Ironically, Schmidt's political weakness at home makes a summit success for him all the more essential. He needs somehow to translate his external prestige into internal political gains. Prime Minister James Callaghan of Great Britain said last month in accepting an award in New York that "we are condemned to cooperate." Perhaps the German politcal situation is why Lambsdorf, speaking of the summit, raised the ante to "we are condemned to success."