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FEATURE - EMU born against red
European backdrop
06:38 p.m Nov 11, 1998 Eastern
By Robert Mahoney
BONN, Nov 12 (Reuters) - They are not in
circulation yet but western Europe's new single
currency notes could bear a red stamp that their
creators never intended.
Left-led governments are now in power in 11 of the
European Union's 15 capitals.
This has brought a change of mood in how to tackle
Europe's sluggish growth and stubborn
unemployment.
Calls for coordinated cuts in interest rates, greater
flexibility regarding the implementation of the bloc's
Stability and Growth Pact, and neo-Keynesian public
works projects to stimulate economies surfaced for
the first time without German and British objections
at an EU summit in Austria last month.
For 16 years former German chancellor Helmut Kohl
used his considerable political weight to squash such
leftist thinking. But Kohl, the last political survivor of
the generation that conceived economic and
monetary union, was toppled by the Social
Democrats (SPD) in September.
He had not even left the Bonn chancellery before the
new SPD Finance Minister Oskar Lafontaine began
assailing the holy of monetary holies, the German
central bank.
Lafontaine said the independent Bundesbank should
cut the cost of borrowing to create jobs, and behave
more like the U.S. Federal Reserve which sets
growth and employment above currency stability.
This is blasphemy for the orthodox who,
remembering Germany's hyperinflation of the 1920s,
regard currency stability as the cornerstone of the
modern German economic miracle.
Right-of-centre politicans and economists have
staunchly defended the Bundesbank from what they
call an assault on its independence, knowing that
Lafontaine's ultimate target is the European Central
Bank (ECB) which will manage the euro once the
deutschemark disappears.
LAFONTAINE -- RIGHT OR WRONG?
Market economists have dismissed Lafontaine as a
socialist dinosaur whose ideas will soon prove
unworkable or condemned him as an opportunist
trying to make the ECB and its Dutch head Wim
Duisenberg the scapegoat should his own policies to
cut German unemployment fail.
But for some, particularly in left-governed France
and Italy, Lafontaine has brought some fresh air into
the stuffy central bank corridors of Europe.
''I find what Mr Lafontaine is saying is really good,''
said Jean-Paul Fitoussi, head of the Observatoire
Francais des Conjonctures Economiques in Paris.
''The ECB should set itself the goal, like in the
United States, of growth and jobs.''
Fitoussi said the 11 initial members of the euro zone
would form a fairly closed market like the U.S.
where currency shifts would have less impact on
internal inflation than now.
Rather than being like the Bundesbank on which it is
modelled, the ECB should expect to be questioned
by democratically elected governments, he said.
''Governments have decided to show that they no
longer fear the foreign exchange market and that they
can put pressure on the ECB, after all, it is putting
pressure on all governments together to get them to
cut their deficits. A balance of power means mutual
pressure,'' Fitoussi said.
Patrick McCarthy, a European politics expert at
Johns Hopkins University in the Italian city of
Bologna, agrees that few countries take the
Bundesbank view of a stable currency as a public
good in itself.
But he doubts that there is a common approach
among the new left-of-centre governments that range
from Italy led by former communist Massimo
d'Alema to Britain under a post-Thatcherite Tony
Blair.
''The problems of social Europe are not going to be
very simply addressed by this gang of social
democrats,'' said McCarthy, pointing to the huge
structural differences in labour markets between the
Mediterranean and northern Europe.
ROOM FOR MANOEUVRE CURBED
The new governments' room for manoeuvre is curbed
by the EMU's founding Maastricht Treaty and
subsequent ''Stability Pact'' that impose strict budget
deficits limits to avoid weakening the euro.
But some analysts believe politicians may have
leverage that could lead to tension with the
Frankfurt-based ECB.
''Maastricht does have leeway for governments to
have a say on exchange rate policy, which always
looked set up to be a potential serious contradiction
between the role of the ECB and the politicians. They
could try to exploit that,'' said Kirsty Hughes, of
London's Institute of Public Policy Research.
She believes that the coming to power in Germany of
Lafontaine and Chancellor Gerhard Schroeder has
strengthened France's socialist government under
Prime Minister Lionel Jospin. He had been keen to
balance the independent ECB in Frankfurt with a
form of ''economic government'' to promote
job-creating policies.
''Jospin has been really resurgent since the German
election, talking back up all his employment policies
that Germany and Britain had previously put down,''
Hughes said.
This will not last long, according to EMU analysts
such as Daniel Gros of the Brussels Centre for
European Studies.
He believes the most conspicuous thing about
France's reaction to Lafontaine's onslaught has been
its silence.
''The French know their room for manoeuvre is
limited and that there is no point in having large
deficits,'' he said.
Italy too is commited to launching the euro on time
and will do nothing to jeopardise that, even under its
new government, he said.
Gros and other analysts noted that most of German
industry and trade unions, together with mainstream
parties like the SPD and Christian Democrats, were
also behind the euro because it favoured an export
economy like Germany.
They accused Laftonaine of attacking the
Bundesbank and ECB to raise his political profile.
''The temperature will rise for a while. Politicians
when they come to power think they can do a lot,''
said Gros. ''But they don't realise how much
Germany is bound up in the system.''
Former Belgian prime minister Wilfried Martens said
Lafontaine would make no headway against the
ECB. He rejected the view that the euro would lead
to a war between an ECB reining in monetary policy
and politicians relaxing fiscal policy.
''There will be no permanent battle. What are seeing
today are just skirmishes, but reason will prevail,''
said Martens, a Christian Democrat and member of
the European parliament.
Some analysts, however, are not sure the ECB can
shake off this new political scrutiny so easily. They
acknowledge the bank's independence but say its
decision not to publish records of its proceedings
may play into the hands of politicians eager to label it
unaccountable.
''I think the way the ECB is communicating and
going about being transparent does not look good,''
said Hughes.
''We are not about to see European politicians
backing off,'' she said, adding: ''This may make the
start of the euro more politically charged than we
expected.''
Copyright 1998 Reuters Limited. |
