Fresh doubts plague prospects for 1999 euro
Germany backs off gold revaluation, Sweden delays union
Wednesday, June 4, 1997
By Alan Freeman
European Bureau
Fresh doubts emerged about the future of the proposed European single currency yesterday, after the German government
staged a humiliating retreat from plans to revalue its gold reserves and Sweden said it wouldn't join the currency at its launch in
1999.
The moves unsettled currency markets in Europe, as investors moved assets from marks to U.S. dollars, and sparked
speculation that the whole scheme could be delayed, or even collapse.
Politically, the euro is designed to encourage further European integration, while economically its aim is to reduce transaction
costs for business and individuals, encourage co-ordination of fiscal and economic policies and reduce interest rates.
Key to the plan is the participation of both France and Germany, without which the currency would be unworkable, since
Britain has already indicated that it will opt out, at least initially, and Italy could be kept out because of its high budget deficits.
The government of German Chancellor Helmut Kohl had planned to revalue its gold reserves and use the windfall profit to help
plug a huge hole in its 1997 budget, estimated at 20 billion marks ($15.9-billion).
Reducing the deficit is essential if Germany is to reach this year's deficit target of 3 per cent of gross domestic product. This is
the level required by the Maastricht Treaty for nations hoping to qualify for the single currency, due to be launched on Jan. 1,
1999.
Faced with the outspoken opposition to the plan by the Bundesbank and politicians of every stripe, Finance Minister Theo
Waigel backed off yesterday, saying he had reached a face-saving compromise with the central bank.
In Sweden, Prime Minister Goran Persson told a news conference that plans for the euro are too uncertain and that as a result,
the country will hold back on its membership in the monetary union.
At the same time, the newly elected French Socialist government has made it clear that it wants no more sacrifices on behalf of
the euro, and although it still backs the project, it is dependent for its parliamentary majority on the Communists, who are
opposed.
And in Italy, Prime Minister Romano Prodi said any delay could prove fatal to the project. "If we postpone it, it will not go
ahead," he said. "Delay means losing faith."
The German move leaves the Kohl government in a political and economic bind. Sources in Bonn were quoted as saying that
the revaluation will go through but only in 1998, too late to help this year's budget.
That leaves Mr. Kohl with several unpleasant options, including increasing taxes and slashing spending in a pre-election year,
something the gold ploy was designed to avoid.
"We're back to square one," said Klaus Deutsch, an economist at Deutsche Bank Research in Frankfurt. "Now we have to
find different measures to fill the gap in the 1997 budget."
The Kohl government has been toying with the idea of a big hike in gasoline taxes or an increase in the 15-per-cent
value-added tax, but any tax rise is fiercely opposed by the government's coalition partners, the right-of-centre Free
Democrats. A mutiny by the Free Democrats would likely bring down the Kohl government.
Spending cuts are also a possibility, but in that case the government would have to contend with the Social Democrats, who
control the Bundesrat, the German parliament's upper house, and would almost certainly block any such move.
"I'm not sure they can find a solution," Mr. Deutsch said of the government's options.
With six months of the fiscal year virtually over, Mr. Kohl's options are increasingly limited unless he decides to allow for a
more liberal interpretation of the Maastricht rules that leave "wiggle room" on the 3-per-cent deficit limit.
But it has been Germany that has insisted all along that countries adhere strictly to the criteria as a way of making sure the euro
would be a strong currency like the mark, thereby keeping the original circle of participants narrow.
But if the rules are loosened to let Germany qualify, Mr. Kohl will be hard-pressed to exclude Spain, Portugal and especially
Italy from the monetary union until they meet all the criteria. If a broader euro means a weaker euro, Mr. Kohl could face a
revolt by German voters, who don't like the idea of the new currency to begin with.
Peter Pietsch, senior economist at Commerzbank AG, a leading German bank, said this week's events have increased the
possibility of a delay, but he still believes the start date will be respected. He worries about a delay.
"If the monetary union is postponed, nobody knows when it will be introduced again. We have to concentrate all our power
and strength on 1999."
Yet Mr. Pietsch says he would be just as worried if the currency were to go ahead based on lax enforcement of the qualifying
rules. "EMU [European monetary union] can only be a success if it is a strong currency."
Market Data 
Markets 
AI
