Europe is undergoing an economic crisis at precisely a time that the U.S. economy is beginning to perk up again, despite high interest rates. The dollar is up, gold is down, and the European currencies are woefully weak. The growing sense of malaise assures not only economic stagflation, but widespread political weakness that could affect many governments, including Helmut Schmidt's in West Germany.
Officially, through such groups as the Paris-based Organization for Economic Cooperation and Development, the European governments acknowledge that many of their problems "have their roots in economic developments and policies going back a number of years."
But European politicians facing a steady diet of high unemployment and depressed economic growth rates aren't shy about charging that the Reagan administration, in concert with the Federal Reserve System, is making things worse by doggedly pursing a high-interest-rate policy that spills over into their economies.
At the OECD ministerial meeting June 17, the Europeans wanted to go public with a condemnation of the strong dollar (which reflects high U.S. interest rates) as a cause of European unemployment. In the past year, to take one case, the German mark has depreciated 35 percent against the dollar, boosting import prices, and thus creating strong inflationary pressures in the German economy. But the idea of blaming the dollar in an OECD communique was vetoed by deputy Treasury secretary Tim McNamar.
The Bank for International Settlements in Basel, Switzerland, did not have to be so polite. In its annual report June 15, it blasted American monetarist techniques, as well as deflationary British policies roughly comparable to Reagan's. BIS Board Chairman Jelle Zjilstra said that the greater the reliance placed by countries like the United States on monetary policies generating high interest rates, the greater the depressing effect on other countries that "cannot ignore international interest-rate comparisons."
This controversy will provide a tense backdrop for the economic summit in Ottawa later this month. Not so long ago, to be sure, the Europeans were criticizing the United States for "benign neglect" of a dollar they said was too weak. Thus, there is a strong temptation for Reagan's team to suggest that, high or low, Europe will never be satisfied with the dollar's exchange rate.
But a good case can be made (and it is made in Wall Street as well as Basel) that the dollar -- worth almost 2.5 German marks, 2 Swiss francs and close to 6 French francs -- is now seriously overvalued. The cause, as they see it, is an ideological commitment by both President Reagan and Fed Chairman Paul Volcker to a monetarist approach. This means that control of the money supply is the be-all and end-all of policy, and that the level of interest rates doesn't matter at all.
Eventually, the dollar should fall somewhat, of its own weight, as American exports priced in costly dollars become less competitive. But it takes time for exchange-rate changes to be reflected in international balance sheets -- perhaps 18 months or two years. There is no delay in the impact of the "hard dollar" on oil imports, which have to be paid for in dollars. The currency effect on oil bills is referred to in Europe as oil shock No. 2 1/2," because it has pushed oil prices in local currencies up half as much again as the actual 1979-80 OPEC boost.
But the Reagan administration isn't moved by European complaints. "Interest rates are a convenient scapegoat," assistant secretary of state for economic affairs Robert Hormats said the other evening. "European problems have not been caused by American interest rates. They have rigidities in their economies as a result of government subsidies, overbuilding -- steel is one example -- and a number of them have indexation built into their wage rates."
Adds Treasury undersecretary Beryl Sprinkel in an interview: "We're not going to zigzag as prior administrations did. We've got a basic philosophical thrust. We've looked at the evidence in the United States and abroad, and we think we know what causes high interest rates. We can't find any cases when high money growth didn't cause high interest rates, and we can't find any cases of low growth in money that didn't bring lower interest rates."
Most Europeans at Ottawa, and especially French President Francois Mitterrand, won't be impressed. They've already seen the effect of a Reagan-like policy in Margaret Thatcher's Britain. Mitterrand will challenge supply-side economics by outlining his own return to a Keynesian, expansionist policy to counter unemployment.
Thus, what looms ahead is a stalemate on macroeconomic issues among the summit partners. It doesn't bode well for related problems, including trade negotiations. If, eventually, there is moderation in American interest rates, it won't be a response to international pressure: it will come about if actual or threatened bankruptcies of savings and loan associations and in other interest-sensitive industries begin to worry Reagan and Volcker about the impact of their monetarist tilt.