The Euro Isn't Out Of The Woods

For months, Europe has blithely sauntered toward European Monetary Union (EMU), despite worries among economists as to whether Continental economies are ready. Political opposition has been tepid. In Germany, Chancellor Helmut Kohl has turned European unity and the euro common currency into motherhood-and-apple-pie issues. Both his possible Social Democratic Party opponents in September's general elections agree.

But underneath the veneer of unanimity, voters have real doubts about EMU. Polls show that most Germans want to keep the beloved mark. Two-thirds doubt the euro, due to be launched next Jan. 1, will be as stable.

FALLING SHORT. Now, four German professors are mounting a final challenge to the euro that could be deadly if it succeeds. Eight crimson-robed Constitutional Court judges are mulling whether to hear a case brought by the professors that would block monetary union as unconstitutional. If the court hears the case soon, a decision could come just as EU leaders are deciding, early in May, which countries can join EMU. The four professors, including Wilhelm Nolling, a former Bundesbank council member, contend that potential members haven't met EMU's strict criteria: that government debt should be no more than 60% of gross domestic product and its budget deficit no more than 3%. Legal analysts figure that winning won't be easy. "Based on case law, I really doubt this thing can fly," says Jochen A. Frowein, a director of Heidelberg's Max Planck Institute for Comparative Public Law. Indeed, in October, 1993, the Karlsruhe-based court ruled that EMU doesn't conflict with Germany's constitution.

But just by hearing the case, the judges could rattle Europe's stock, bond, and currency markets. A rider in the 1993 ruling said all countries joining EMU must meet its criteria in both letter and spirit--something most countries haven't done. If the court were to stick to that strict interpretation, it could spell trouble for Germany's EMU entry.

The four professors have already succeeded in their main goal of igniting public debate. On Feb. 9, 155 German economics professors weighed in with similar gripes. Organized by Bonn University's Manfred Neumann, they signed an open letter calling for EMU to be postponed until countries--such as Italy and Belgium--could meet the debt rules. "Before our complaint, Germans said: `We don't like the euro, but we have to suffer it,"' says Joachim Starbatty, economics professor at the University of Tubingen and one of the complainants. "Now, the opposition is starting to grow."

SKEPTICS. But EMU has gathered enormous momentum since last fall. Then, investors finally concluded the project would go ahead and have pushed interest rates in countries such as Italy down close to Germany's. Analysts fear that halting EMU now would create the nightmare of a collapsing Italian lira and a soaring German mark that would break European economic growth against a wall of market turmoil. "It might have made sense a year ago to talk about delaying EMU," says PaineWebber Inc. analyst Alison Cotrell. "Now, the cost would be too high."

The legal challenge to EMU isn't going to vanish. If the judges rebuff the case now, Germany's academic euroskeptics plan to try again this fall, arguing the criteria still aren't being met. By then, says Wilhelm Hankel, a former top economics official and one of the complainants, the euro may be under attack by speculators and markets in turmoil. If he's right, the court might see the case more favorably. At least, Germany may finally have had the EMU debate it needs.

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