Too Short, Too Dear & Too Few

Walter Hesselbach, president of a bank controlled by West German trade unions, said it rather circuitously: "We cannot get around acknowledging the fact that a capital market no longer exists in Germany." Baron Gotthard von Falkenhausen, president of the Federal Association of German Private Banking, put the problem more bluntly: "We do not have a capital market any more."

What such statements added up to was the fact that West Germany, for so many postwar years considered to be the economic miracle of Europe, is now suffering a critical money shortage. Items:

> Siemens, the huge electrical firm that stands second only to Volkswagenwerk as Germany's biggest corporation, recently had to postpone new projects because it could raise only $12.5 million of a needed $50 million.

> Farbenfabriken Bayer, Germany's biggest chemical company, had to agree to pay almost 10% interest for ten years in order to borrow $12.5 million.

> Builder Artur Pfaff had to call off West Berlin's most ambitious postwar private construction project--a $12 million complex of from four-to 18-story glass-faced buildings containing apartments, offices and shops--because he could not get money in terms that even approached financial reasonability. Pfaff even went so far as to advertise in the Financial Times of London: "Wanted: DM 100 million to DM 200 million by reputable building firm . . . First-class security and on a trust basis through a major bank." All to no avail.

The collapse of West Germany's money market is in part due to economic success. The war-torn country was, of course, rebuilt with the help of foreign--mostly U.S.--capital, and by 1964 it had, through investment from abroad, built up a large balance-of-payments surplus. This had an inflationary potential, which Chancellor Ludwig Erhard moved to block by imposing a 25% capital-gains tax on bonds held by foreigners. At the same time, and also as an anti-inflation action, the Bundesbank's President Karl Blessing initiated a tight-money policy; the discount rate has since been hiked several times, most recently from 4% to 5% in May.

All this has had the effect of scaring away foreign investment and drying up the domestic money supply. Adding to the crisis is the fact that about three-quarters of the available capital market is consumed by government spending--meaning Erhard's Bonn regime, the eleven states, and municipalities. This situation led the Deutsche Bank's Hermann J. Abs, one of Germany's most respected economists, to observe: "The cake of funds has become smaller, and the public sector is demanding a bigger piece of the smaller cake." The result, according to Abs, is that "the international competitiveness and stability of our economy is threatened by too short, too expensive and too few long-term financing possibilities."

Erhard has been pushing for a government-stability program that might give the Bundesbank cause to ease some credit restrictions. But at week's end he had to interrupt his Bavarian vacation and return to Bonn, where he reiterated his plea that the states restrict spending, hinted that even tighter money is the only way to preserve the delicate balance between inflation and recession. "Where freedom was abused," he told the Bundesrat, "there remains no choice but to restrict freedom."

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