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To: Alex who wrote (22265)	10/26/1998 8:31:00 PM
From: goldsnow	Respond to of 116753

Lurch to left in Europe - a danger for the euro? 08:48 a.m. Oct 26, 1998 Eastern By Astrid Zweynert LONDON, Oct 26 (Reuters) - A leftward lurch in European politics could undermine the euro if increased spending bloats budget deficits, but analysts were relaxed on Monday about the prospects for a strong euro. Concern that political pressure will undermine the sound monetary policy expected of the European Central Bank was fuelled after a European Union summit last weekend. EU leaders threw their weight behind calls from the left-leaning governments of Germany, France and Italy for a co-ordinated push for growth and jobs creation -- a far cry from the focus on prudent spending that has dominated European politics in the past few years. ''The concern in the markets is that there is a growing risk for increased fiscal spending in the absence of easier monetary policy in core Europe,'' said Jane Foley, currency strategist at Barclays Capital. ''The fear of rising budget deficits would ultimately undermine the euro, so the markets are keen to see how central bankers respond to the challenges from politicians.'' EU leaders said at a weekend summit that even though Europe was a beacon of economic stability in a troubled world, rates should be cut to stimulate the economy. Yet leading central bankers, such as Bundesbank President Hans Tietmeyer and European Central Bank President Wim Duisenberg, have indicated that such politically motivated cries are unlikely to sway them from pursuing their stated aim of sound monetary policy. Loose fiscal policies which might accompany a shift to Keynesian-style policies of boosting demand across Europe fly in the face of the EU's Stability and Growth Pact. The pact, agreed by the EU in December 1996, was a brainchild of Theo Waigel, predecessor of Germany's Finance Minister-designate Oskar Lafontaine. The pact was established in a bid to force euro-bloc countries to limit their spending to no more than three percent of gross domestic product. Countries failing to do so risk being fined by the EU. The market's concern is that if Germany, the harbinger of sound money and inflation control, is prepared to step up spending then other countries might also give up their diet of prudent expenditure. ''It looks like the stability pact will be consigned to the dustbin of history,'' said David Coleman, chief economist at CIBC Woody Gundy World Markets. ''The summit said plenty about creating jobs and boosting growth, which sounds suspiciously like lots of new government spending and not much structural reform. This was always the worry that countries scrap their way into EMU and then fall back into their bad old habits.'' A more lax interpretation of the stability pact is likely to mean steeper yield curves in the euro zone, either because short rates will drop or because bond supply will increase, analysts said. Fighting unemployment is crucial for Germany and France where jobless rates are still in double digits. Germany's Lafontaine leads the way in taking on central banks. On Sunday, Lafontaine fired a broadside at the Bundesbank. He said monetary policy should be used to boost growth and employment, not just to control inflation, and attacked the view that the Bundesbank is always right. Peter Stoneham, senior currency analyst at Thomson Global Markets, said despite Lafontaine's criticism of the Bundesbank he still expected the euro to kick off firm with interest rates at 3.30 percent, the level of Germany's key money market rate. ''It would be the worst possible start for the euro if the Bundesbank gave in to political pressure, so I don't expect them to do it,'' said Stoneham. The linchpin of the euro, the mark's exchange rate against the dollar, was dented on Monday by the weekend's events but not for long. The mark bounced after Bundesbank council member Hans-Juergen Koebnick said a German rate cut this year was ''unlikely'' and ''unreasonable.'' Foley at Barclays said the market's view of the euro would largely depend on how heavily ECB members would emphasise their independent and hawkish credentials. ''The more convinced the market becomes that politics could win the upper hand, the softer the euro will start,'' she said. Copyright 1998 Reuters Limited