Europe's Deadline May Be Too Brutal

This is going to be one hot fall for Europe's political leaders. All over the Continent, governments are preparing huge spending cuts to try and meet the tough criteria for European monetary union. In Germany, Chancellor Helmut Kohl is looking to slice the equivalent of 2% of gross domestic product out of the 1997 budget. France aims to do what no French government in memory has done--reduce spending in real terms. In Spain, the new right-wing government would like to chop its budget deficit from 4.4% of GDP to 3% in one year. Other countries that might not meet the stiff deficit and debt criteria for a single currency still want to get close enough so they won't be entirely left out when the charter members of a Eurocurrency are chosen.

The fiscal moves are making markets edgy. Why? Because the drive for monetary union by Europe's political class may be incompatible with solving Europe's twin crises of slow growth and unemployment. A growing number of European businesspeople, including most recently the CEO of Italy's Fiat, believe Europe would be better off postponing the deadline for forging a single currency and instead concentrating on boosting growth and lowering unemployment. They feel that if Europe's politicians continue to push deflation on their economies, they run a high risk of killing off recovery, sparking social upheaval, and creating a monetary union so badly founded that it will collapse within its early years. Politicians counter that without the goal of monetary union to invoke, governments won't have the discipline to cut spending, force changes in labor rigidities, and make Europe more competitive in the world economy.

It's too soon to abandon the budget-cutting that Europe needs. But it's not too early for European leaders to make contingency plans for putting off what might become a premature rush to monetary union. If weak German growth keeps Bonn from meeting its single-currency goals or if France simply can't be ready next year without resorting to accounting gimmicks, European leaders ought not to force the issue. Neither a weak monetary union nor a recession does anyone any good.

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