Put The Emu On The Endangered List

Even Germany may miss targets, which could kill the Euro

Theo Waigel was on the defensive. After years of preaching economic rectitude as the one true path toward forging Europe's planned single currency, Germany's Finance Minister found himself begging forgiveness of his European counterparts when they met in Brussels on Mar. 17. Not only did Waigel have to confess that Germany's economic growth this year will fall short of his projections, he also joined the ranks of leaders from Italy, Spain, and other high-spending countries in seeking a flexible interpretation of the rules when it comes time to decide which nations are fiscally healthy enough to inaugurate the Euro in 1999.

Waigel's admission that Germany probably won't meet the standards it essentially dictated for European Monetary Union could be the first step down a slippery slope. Although Waigel and Chancellor Helmut Kohl still insist that delaying EMU is unthinkable, doubts are growing that the new currency will be launched on schedule. And the misgivings are increasingly coming from within Germany. Herbert Hax, head of the economic panel of five "wise men" who advise Bonn, has publicly recommended that monetary union be delayed if Germany can't make the numbers. And on Mar. 18, Bundesbank council member Klaus-Dieter Kuehbacher said he doubted Germany would meet the Maastricht criteria, adding that the only alternative would be to delay the launch of the Euro.

The new anxiety comes from skidding confidence in Germany's economic recovery. Unemployment has jumped to a record 12% in recent months, and every 100,000-person rise in unemployment adds $4.2 billion to Germany's budget deficit. So despite Waigel's insistence that Germany will deliver a deficit of 2.9% of gross domestic product this year--below the 3% target for EMU hopefuls--few in Germany see that happening.

Indeed, Union Bank of Switzerland economist Holger Fahrinkrug thinks Bonn is substantially underestimating both the number of jobless and its effects. He predicts a 1997 budget deficit of 3.4% of gross domestic product, well above the target. And in mid-March, German newsweekly Der Spiegel reported that Kohl's office was working with estimates that place this year's deficit as high as 4.1% of GDP.

BUYING PEACE. Some observers believe that Waigel and Kohl are laying the groundwork for financial fudging. For Kohl, who has invested more political capital than any other European leader in the single-currency project, that option is more appealing than calling for a delay in EMU, which would be the ultimate political about-face. So he is awkwardly juggling conflicting policies. All at once, he is trying to keep the sputtering recovery alive, soothe market fears that he is polluting the German mark, and placate an electorate increasingly anxious about fiscal tightening.

For example, in mid-March, Kohl bought labor peace with demonstrating miners by retreating on plans to cut subsidies at Germany's loss-making coal mines. Then he scraped together an off-budget stimulus plan to pump $9 billion into the economy. Now, to offset the spending, he is said to be eyeing a $6 billion surplus in the federal pension fund.

That may not be enough to save Kohl from an embarrassing reversal on the EMU timetable. If Germany doesn't improve economically, "it could delay monetary union itself," says Bank of America economist Henrik Lumholdt. He puts the odds of an on-time monetary union at no better than 50-50.

Since monetary union is unpopular among many European voters, especially in Germany, Kohl is probably right to fear that a delay would spell the death of the Euro. "You cannot just postpone [monetary union] for a few months or years," says Ronaldo H. Schmitz, an executive board member of Deutsche Bank. That's because the countries that have made progress in getting their fiscal houses in order to prepare for EMU would probably become demoralized and go right back to budget-busting, politically winning policies.

HIGH MARK. The implication of delay or failure is roiling markets from New York to Hong Kong. The notion that Germany's hard-money men themselves might bend the rules designed to guarantee a strong Euro is terrifying to currency traders. Germany's recent doubtful noises immediately revived the kind of market volatility that had almost been forgotten. Central bankers in Spain and Italy rushed to prop up the peseta and the lira as money poured into German marks. On Mar. 18, the mark hit a three-week high against the dollar, a seven-week high against the peseta, and a four-month high against the lira.

The concerns are spreading far. Federal Reserve Chairman Alan Greenspan fears the Euro will be viewed as a "soft" currency. He's worried that the introduction of the Euro will put upward pressures on the dollar, as investors shy away from the new currency. Similarly, Joseph Yam, head of Hong Kong's de facto central bank, said in mid-March that Asian financial authorities were "concerned" that uncertainties over EMU would affect financial markets and Asian investment flows in Europe.

Kohl may persuade the financial markets that the political imperative for monetary union outweighs the economic pitfalls. But by summer, Euro backers and opponents alike will have a fairly clear picture of how short of debt and deficit targets France and Germany will fall this year. If the numbers aren't good, Waigel and other German policymakers may find the economic argument against monetary union roaring back. To avoid a crisis, they may have to call for delay after all, no matter how humiliating it may be.

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