Concern over President Reagan's proposed $91.5 billion budget deficit and the dangers it represents for their own economies triggered a decision today by the finance ministers of the European Community to send an envoy to Washington to plead for immediate changes in U.S. economic policies.
Prime Minister Wilfried Martens of Belgium, which holds the presidency of the 10-nation community, will convey the Europeans' complaints about the projected budget deficit, high interest rates, and the Reagan administration's refusal to hold down the exchange rate of the dollar when he visits Washington Wednesday.
"It is quite clear that we will air this serious concern," Belgian Finance Minister Willy de Clercq told reporters today after community finance ministers met in Brussels.
In what some analysts see as one of the most potentially divisive disagreements within the Western alliance, the Europeans have been trying for more than a year to persuade Washington to lower interest rates. With Reagan's announcement of the U.S. budget last week, Europeans were jolted by what they saw as a lost opportunity to harmonize economic recovery.
"Reagan's second budget . . . is a major calamity, not just for the United States but for the West as a whole and even for the world," wrote David Watt, director of the Royal Institute of International Affairs, in The Times of London last week.
Though united on neither a remedy nor a response to Washington's policies, officials said they intend to maintain diplomatic pressure on the Reagan administration building up to an International Monetary Fund meeting in Helsinki in May and culminating this summer with a summit of seven leading industrialized nations in Versailles, France, and a larger NATO summit in Bonn.
West German Finance Minister Hans Matthoeffer said the ministers had agreed that U.S. interest rates, budget deficits and "benign neglect of the dollar" posed a serious threat to European economies.
These three concerns form a complex knot in international economic relations. With a high deficit, a government must borrow more to cover its expenditures. This potentially adds to the money supply and hence inflation, unless interest rates are kept high to discourage spending or consumption. (The U.S. prime rate--the interest banks charge their most creditworthy corporate customers--has ranged between 15 and 21 percent in the past year; this month it has been 16.5 percent.)
High interest rates, in turn, attract money from abroad because of the enhanced return on investment. Thus, the foreign countries are left with a depleted source of funds while grappling with their own needs for increased investment for economic growth.
The attractiveness of dollar investments helps to push up the dollar's value relative to other currencies. This can have dire effects on Europe because, with the exception of oil-producing Britain, oil is priced in dollars. The fewer dollars a unit of foreign currency buys, the less oil that unit of currency buys.
In the wake of then-president Richard M. Nixon's move in August 1971 to end the dollar's convertibility into gold, the value of the dollar has been set mainly by its supply and demand.
There have been suggestions, according to community officials, that European exchange controls be set up against the dollar or that Reagan be asked to change the U.S. policy of nonintervention in foreign exchanges--for instance, by selling more dollars to lower their price in terms of other currencies--or to reduce budget deficits by moderating defense spending or by raising taxes. However, European governments have been unable to agree on economic measures to counter the U.S. policies or on alternative policies to urge the Reagan administration to adopt.
The Europeans have complained that high U.S. interest rates make it difficult for European countries to protect their currencies and to reduce their interest rates to stimulate investment and economic growth. A severe recession has increased European unemployment to record levels--12.7 percent in Britain and an average of 10 percent across Europe.
Even British Prime Minister Margaret Thatcher's government, which had first used high interest rates in a tight-money policy similar to that of U.S. Federal Reserve Board Chairman Paul A. Volcker, joined in the chorus after it began trying to lower interest rates here from a record of 17 percent. The basic bank rate in Britain now stands at 14 percent.
The finance ministers of Britain, France, West Germany and Japan complained about U.S. interest rates to Treasury Secretary Donald T. Regan at a regular, closed-door "Group of Five" meeting at the Palace of Versailles last month, according to an informed source.
After that meeting, several governments, led by West Germany, reduced interest rates, generally half a point, to spur the recovery from recession expected this year. But this was abandoned when they saw that Reagan's budget would result in even bigger deficits and, at best, no further reduction in U.S. interest rates.
Led by the finance ministers and central bankers of West Germany and Britain, the Europeans then became increasingly vocal in their complaints.
In speech last week, Karl Otto Poehl, president of the West German central bank, the Bundesbank, said of the Reagan administration, "I cannot believe that they do not understand that they have responsiblity not only for their own economy, but also for the world economy."
Poehl said both American and European financiers "feared that the enormous increase in arms spending, the simultaneous massive tax cuts, and, as a result, a budget deficit of alarming proportions can lead to a situation in the U.S. in which either interest rates remain extremely high or inflation will accelerate."
Answering a Thatcher government critic in Parliament here last week, Chancellor of the Exchequer Sir Geoffrey Howe said British interest rates could not be reduced until those in the United States came down. He promised that Britain and other European countries would "make plain to the United States our concern about their prospective budget deficit and its implications for interest rates around the world."
Howe's deputy, Nicholas Ridley, was more cautious in Brussels today, warning the others that "what we have to consider is whether it will do any good just to shout at the Americans" when a number of European countries also have big budget deficits. Most of them, however, have recently tried to reduce their deficits by raising taxes and curbing the growth of government spending.
This has reduced living standards in countries from Britain to Denmark, brought down governments, as occurred recently in Ireland, and made it more difficult to form governments in Denmark, Belgium and Holland.