ECONOMY	FEBRUARY 23, 1998 VOL. 151 NO. 8
	EMU: More Objections Leading economists argue for a delay in introducing the new single currency to Europe By JORDAN BONFANTE /BONN uch is his dedication to European Economic and Monetary Union and its monetary offspring, the euro, that German Chancellor Helmut Kohl seizes every opportunity to sell it. Even at an Epiphany celebration last month, Kohl couldn't resist lecturing 80 European youngsters, aged 6 to 15, on the subject at the conclusion of their annual charity drive. "In some months we will take an important decision concerning the common currency," he enthused. "The next generation of children like you will be collecting donations not in deutsche marks, not in any other currency, but in euros!" Last week he was back on the soapbox, but this time to counter an urgent threat to his beloved euro--a joint "manifesto" from a group of 155 German and Austrian economists warning that Europe was perilously ill prepared for the pressures and dislocations the euro is sure to bring and demanding an "orderly postponement" of EMU. Politicians, both in the government and opposition, swiftly closed ranks and tried to swat away the offending document before it could inflict any damage. Kohl insisted that the euro was on schedule and assuredly "in Germany's interest." Social Democratic Party opposition leader Oskar Lafontaine similarly chimed in to defend the euro timetable. One influential maverick, Saxony Prime Minister Kurt Biedenkopf, sided with the economists and proposed a specific delay of three years. But Foreign Minister Klaus Kinkel fumed that with any postponement, "the mark would soar, our exports would collapse...and jobs would be jeopardized." The manifesto had re-ignited debate over EMU just when much of Europe's political and financial establishment seemed confident of--or resigned to--an obstacle-free homestretch. In Germany the EMU alert came against a background of record-high unemployment and political uncertainties in advance of next September's national election. It also buttressed another last-ditch initiative to derail the euro, a 300-page petition by three jurists and a former central banker--dubbed the "gang of four"--to the Constitutional Court to issue an injunction against German participation. Most experts expect the suit to fail because the court's jurisdiction is limited to ensuring political decisions comply with the Maastricht Treaty. But if at the end of the month it even accepts the case, that alone would reinvigorate the cause of Euro-skeptics.. One of the manifesto's main authors, Bonn University monetary economist Manfred Neumann, explains that its timing--debated by phone for a month and finally agreed by three ringleaders meeting in Frankfurt's train station last December--was designed to influence a series of fast-approaching political events. The Lower Saxony election, March 1, will help determine whether sometime Euro-skeptic Gerhard Schroder or Euro-enthusiast Lafontaine becomes the spd candidate to run against Kohl in September. Next comes a series of E.U. reviews of each applicant country's fiscal performance--notably whether its budget deficit was below 3% of gross domestic product. Finally, in early May, European leaders are to anoint the qualifying countries for the first wave of EMU. "I tell politicians, read Marx," says Neumann. "Marx said the first floor is economic and the second floor is political. If the first floor is weak, the second collapses." He points to two main objections to current plans for EMU. For one thing, Europe needs a far greater degree of flexibility in its labor market before it can withstand the "severe labor dislocations" likely to be engendered by the sudden competitiveness the euro will usher in. For another, even though there's been progress in stabilizing national budgets, politicians have led the public to believe that a budget deficit of 3% of GDP is a workable target. In fact, 1% would be preferable since it would allow governments room to increase spending or cut taxes the next time a recession occurs without sliding back into profligacy. Deutsche Bank economist Norbert Walter, a prominent euro-booster, criticized the 155 as not only mistaken but reckless. "The professors are playing with fire at a gas station," he says. "This manifesto will add to unease in the population. Along with rising unemployment, it could be an explosive combination." Other economists, however, sympathised with the manifesto's warnings. "We do have a lot of structural problems in Europe that are not yet solved," says Jorg Kramer at LGT Asset Management in Frankfurt. Failing delay, the economists hope the manifesto will at least force the strictest possible compliance with stability criteria, and restrict the number of first-wave countries--implying the exclusion of Italy. That would come as a rude shock in Rome, where both politicians and public are convinced that Italy's in. But last month senior Dutch leaders, including Finance Minister Gerrit Zalm, who are adamant about a strong euro and face elections in May, voiced doubts about Italy's fiscal rectitude, particularly the size of its overall debt--more than double the Maastricht limit. In Rome, Kohl whimsically tried to reassure Prime Minister Romano Prodi. "My mother always told me, finish what's on your plate--and don't look in the plate of others." Many Italians interpreted that as saying, "Don't worry about the Dutch, the Italian case will be judged on its merits." In truth, Italy's entry or exclusion ultimately will be a largely political decision. If there was one thing the German manifesto highlighted, it was the wide gulf between politicians and economists over the euro. Skeptical as many economists might be, the reality is that every German political party, except the far-left 30-seat Party of Democratic Socialism, endorses EMU. Polls may show that a slight majority of the public resists it--50% versus 47% according to the latest survey by the emnid organization. "But it is not at the top of the public's agenda, and there is no organized political oppostion," concludes Kramer. "Therefore even with new developments, we're forecasting with 95% certainty that Euroland is coming on schedule." Even manifesto co-author Neumann concedes that if all stays on track until the required Bundestag vote on the euro selections in May, a big majority will vote in favor. The bedrock reason: an unwritten principle dating back to the father of contemporary Germany, Konrad Adenauer, that Germany must never be the country that says no to Europe. In the face of a political credo as deep-seated as that, economist Cassandras will find their warnings are issued in vain.
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