Blueprint By Bonn

It was a wrenching political about-face. On Oct. 25, French President Jacques Chirac flew to Bonn to reassure an impatient German Chancellor Helmut Kohl that the French were truly committed to European monetary union. The very next day Chirac went on television to announce a radical shift in government policy: Cutting France's huge budget deficit, not creating jobs, was now his top priority. Just two weeks later, French Prime Minister Alain Juppe backed up his President with a package of tough welfare reforms and other spending cuts. The newfound resolve helped halt a severe slide in the French franc and the Paris equity markets. It also boosted support for monetary union all over Europe.

That Germany would call many of the shots on EMU has never been a secret. But in recent weeks, Bonn and Frankfurt have stepped up their strong-arm tactics. On top of needling the French, scolding the Italians, and slapping down private economists at home who strayed from the party line, Germany has made already strict requirements for membership in monetary union the starting point for a distinctly German vision of European economics and politics.

Bonn's mounting demands are bringing into clearer focus the price that Germans will exact for sacrificing the Deutschemark for a new Eurocurrency. If EMU is to go forward as planned in 1999, Germany insists that the resulting union be made in its own image, with a rock-solid currency and conservative monetary policy. In such a bloc, the profits of Germany's industrial giants would no longer get hit with foreign-exchange shocks when one of its major trading partners mismanaged its economy. Stability on the Continent would also nurture a new, more liquid global reserve currency and make companies throughout Europe less vulnerable to the vagaries of the U.S. and Japanese economies.

"BROADER OBJECTIVE." And monetary union may be only the beginning. Germany ultimately favors political union for Europe, too, organized in a loose federation. By setting the terms for EMU, Germany is seeing to it that the economic policies ef a European federation would have a distinctly German stamp. "This is part of a broader objective of a strong move toward political union," confides a central banker closely involved in the single-currency process.

But Germany has more immediate reasons to push hard for EMU. Europe's existing money system has caused German business untold grief, as an appreciating mark and competitive devaluations around Europe erode its export profits. Indeed, the strong mark is largely responsible for Germany's slowing growth--now estimated at only 1.5% for 1995. A stillborn EMU presents another monetary nightmare. If progress seems to falter, investors are likely to drive the mark into the stratosphere. That would lay to waste all the efforts of German industries to boost their competitiveness. A failed EMU and skyrocketing mark could even mean that "the Germans will lose control of their own monetary policy," says Andre Levy-Lang, chairman of the management board of France's Compagnie Financiere de Paribas.

So the Germans are playing hardball as never before. Even as he prepared to meet with his colleagues at the end of September to reaffirm the 1999 deadline for beginning EMU, German Finance Minister Theo Waigel let Italy know that Rome's high deficits and debt would deny it a place among the founding members of the single-currency club. And France's capitulation in policy followed a long series of communiques between Bonn and Paris in which German officials expressed anxiety over Chirac's job-creation schemes.

The Germans are trying to ensure that their tight-money rules stay in force far beyond 1999. On Nov. 7, Waigel proposed a "stability pact" to govern fiscal policy after EMU starts up. It would require member countries to aim for budget deficits even lower than the criteria for entrance set by the Maastricht agreement. To join EMU, a nation's budget deficit cannot exceed 3% of its gross domestic product, and debt can't be more than 60% of GDP. Under Waigel's proposal, the post-union budget- deficit target would be just 1% of GDP. Countries that loosened their fiscal grip would face sanctions or steep fines.

For Bonn, such tighter demands are designed to reassure outsiders and Germans alike that EMU won't dilute Germany's vaunted monetary and fiscal discipline. The Bundesbank has been shocked to see investors in the mark fleeing to the safety of the Swiss franc to escape an expected weakening of the German currency. And Salomon Brothers European economist Kermit Schoenholtz points out that monetary-union uncertainties have helped push yield spreads between U.S. and German bonds futures to a 20-year high, as investors demand a premium for buying long-term German debt.

Much of the Germans' momentum also comes from fear that without maintaining a hard line, they won't be able to sell monetary union to their own people. Although Germany's parliament ratified the Maastricht Treaty, some 60% of Germans polled regularly turn thumbs down on losing the mark. Says Dresdner Bank chief economist Klaus Friedrich: "The Bundestag voted overwhelmingly in favor of monetary union, and its constituents are overwhelmingly against it."

Indeed, when Germany's floundering opposition, the Social Democratic Party, began publicly questioning the logic of EMU, they found a popular cause--and opened a debate that Kohl had hoped to keep silent. With Germany's next federal election scheduled for late 1998, just months before the planned starting date for EMU, persuading voters that it won't leave them with wheelbarrows full of worthless paper is a political necessity.

HARD REALITIES. Officials are so worried about sentiment at home that they are trying to squelch any sign of opposition. For example, Bundesbank President Hans Tietmeyer launched an extraordinary public attack on Dresdner's Friedrich when a comment the economist made was misreported to suggest that the criteria for EMU membership should be softened. And when inefficient German savings banks complained that they couldn't afford to develop the software and accounting systems to handle a quick transition to a Eurocurrency, the Frankfurt-based European Monetary Institute soothed them by proposing to stretch out the switch from national currencies for up to 3 1/2 years.

Of course, Germany's ability to shape the Continent's future will be limited by hard economic realities. Europe's slowing recovery could make it virtually impossible even for Germany to meet the Maastricht criteria in 1999. That already has officials floating the idea that a delay might be necessary. But German leaders have learned that by dictating tough rules, they can keep EMU momentum going without spooking the financial markets. Even if the dream of monetary union is put off for a few more years, Bonn and Frankfurt are guaranteeing that it will ultimately translate into a German kind of reality.


-- Finance Minister Waigel raises the hurdle for joining EMU: If members don't keep lowering their deficits after signing on, they face heavy fines.

-- German officials embarrass the spendthrift Italians, announcing at a major meeting that Italy won't make the fiscal cut for EMU.

-- Heavy pressure on Paris leads to a complete about-face in French policy, from cutting unemployment to cutting the deficit.

-- To calm German voters' fears of losing their hard currency, Tietmeyer publicly denounces suggestions that Germany will soften its EMUcriteria.


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