the Euro

["Ian Murray" <seamus2001@xxxxxxxx>]

EDITORIAL
Tuesday, November 6, 2001
Economies threaten credibility of euro

By JONATHAN FENBY
Special to The Japan Times

LONDON -- Ever since the common currency began to take shape in the
mid-1990s, there has been a latent conflict between politicians in the
euro zone and the guardians of the monetary stability pact in
Frankfurt and Brussels. This autumn the politicians insist publicly
that they stand four-square with the bankers and the officials at the
European Commission; but the divergence is clear to see, and is only
going to increase as the economic strains grow. Something may give
this month.

As long as their economies were booming, governments could live with
the deficit-cutting rules and high interest rates fixed by the
European Central Bank to achieve its primary aim of fighting
inflation. But now that the good times have evaporated, the strain is
mounting in a way that could threaten the credibility of the euro just
two months before its notes and coins go into service.

With leaked growth forecasts by the Organization of Economic
Cooperation and Development showing leading economies heading for
their worst year for two decades, European battle lines have become
steadily more apparent. In the corner of euro orthodoxy are ECB
President Wim Duisenberg and the head of the EU Commission, Romano
Prodi. Duisenberg says the bank has "very little room to maneuver" on
its 3.75 percent interest rates, and Prodi insists on holding to
Maastricht Treaty budget targets.

On the other side of the ring, major governments are moving toward
economic-stimulus packages that, combined with slumping tax revenues,
put those budget targets at risk and could thus threaten the
foundations on which the common currency rests.

The OECD forecasts can only encourage them, as they showed German
growth falling from 2.2 percent last year to 0.7 this year and French
growth dropping from 2.6 percent to 1.9 percent. Since the figures for
this year include the more buoyant months early in 2001, the current
situation is even worse.

The French were the first to move. A "growth consolidation plan"
announced by Finance Minister Laurent Fabius aims to boost consumption
with tax credits for 8 million less well-off households and to
encourage investment by easing depreciation rules. Analysts see the
measures, which will be partly funded by the sale of the state's stake
in a motorway in southern France, as a step in the right direction but
expect only a limited effect. The tax credits will only average the
equivalent of $140.

The government's announcement that the price of third-generation
wireless licenses for French telecommunications companies would be
slashed by almost 90 percent means a one-off shortfall of $12 billion
in state revenue when Fabius is committed to tax cuts and the cost of
introducing the 35-hour week to the public sector. Further budgetary
pressure is coming from a job-creation program launched by the
Socialist-led government as unemployment rises again.

Germany, as the biggest economy in the euro zone, holds the key to
Europe's revival. The slumping growth forecasts have invalidated the
basis on which Finance Minister Hans Eichel drew up this year's
budget. With the minister now predicting growth in 2002 of 1 percent
to 1.5 percent, compared with a 2.25 percent forecast earlier in the
year, the outlook is grim. As in France, unemployment is rising, with
Siemens and Commerzbank each announcing big layoffs. A program of
corporate tax cuts will reduce revenue for the coming years.

German Chancellor Gerhard Schroder has talked of a stimulus plan
before the year ends, though his finance minister, who briefly stepped
out of line on the deficit front during the summer, still insists that
the target of a balanced budget will be met on time in 2006.

Following the example set by France, the government in Berlin may seek
to boost consumption by personal tax cuts and to pursue the
privatization route to raise revenue -- for instance by the sale of
state shares in Deutsche Post. But this has two drawbacks: the one-off
benefit would not contribute to longer-term budgetary stability while
current market conditions are hardly the best context for big sales of
state assets.

The pressure is all the sharper because both the German and French
governments face elections next year, with French Prime Minister
Lionel Jospin expected to challenge President Jacques Chirac. That
makes pursuit of growth and the fight against unemployment even more
crucial for the politicians.

Schroder and Fabius have made clear they want an interest-rate
reduction while the finance minister of Belgium -- which currently
holds the EU presidency -- says the monetary side of policy presented
more room for maneuvering than the budgetary side.

Italy, the third biggest euro-zone economy, would also like to see a
cut as growth forecasts for 2002 are halved. On the budgetary front,
some analysts already predict an increase of almost 50 percent in the
deficit next year; so the degree of rigor to be expected from the
relatively new rightist prime minister, Silvio Berlusconi, remains
uncertain.

The Commission in Brussels may yet find itself marching to a different
beat from the major continental governments as it insists on sticking
to the stability criteria underlying the common currency while
acknowledging that 2002 may not look very different from 2001.

The underlying problem for Europe is that the current downturn has
come at an early stage in their drive to balance their budgets
following the heavy overspending of the years before the euro. There
is no prospect of the kind of stimulus program unveiled by U.S.
President George W. Bush.

Using bodies like the European Investment Bank to pump in cash may
keep spending off the state ledger. But, short of a sudden economic
revival, the Maastricht criteria, which forced budgetary discipline,
are now becoming a straitjacket for governments far more concerned
about future growth than about the inflationary perils of the past.

Jonathan Fenby, former editor of the South China Morning Post, is
associate editor of the London newspaper Sunday Business.

The Japan Times: Nov. 6, 2001