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European Union: German Problems Cast New Doubts on EMU

Prague, 12 February 1997 (RFE/RL) - Growing German economic problems --and questions about Chancellor Helmut Kohl's political future-- have cast new doubts on the European Union's timetable for the introduction of a single currency. Any delay in introducing the "Euro" would, in turn, almost certainly put off the completion of negotiations -- perhaps even their start, due early next year-- with the 10 Central and Eastern European nations seeking the earliest possible entry into the Union. (The 10 are: Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia.)

The 15-nation EU is due to inaugurate the European Monetary Union (EMU) by the start of 1999. That date was prescribed in the Maastricht Treaty that changed the European Community into a Union almost three-and-a-half years ago. The same treaty laid down austere economic criteria for joining the EMU, notably low national deficits and inflation rates.

Until recently, Germany had been considered by most analysts as among the EU members most likely to be eligible for EMU membership from its very outset --along with Luxembourg, Belgium, the Netherlands and perhaps Ireland. In fact, German central bankers and government officials have often spoken disparagingly of other member states' --most often, Italy's-- chances of joining. Now, however, there seems to be just almost as much uncertainty about Germany's chances on meeting Maastricht's tight standards as there is --if not of Italy's-- certainly of economically troubled France's chances of joining the EMU from the start. And if both Germany and France --the EU's long-time bilateral integration "motor"-- don't participate in EMU from the outset, then the birth of a single currency would be still-born, and the Union would find itself in deep crisis.

Most responsible for the sudden change in Germany's chances for participating in the single currency was last week's announcement of an unexpected surge in the country's unemployment rate. The rate went up almost one-and-a-half percentage points in a month (January), a huge jump that added to the relief rolls a half-million more jobless for whom Germany must now pay substantial unemployment benefits.

Maastricht standards call for nations joining the EMU to have a maximum budget deficit of three percent of their gross national products. Last month, before the surge in joblessness was announced, the German Government estimated a 2.9 percent deficit for this year, just a hair away from Maastricht's ceiling. But analysts point out that 500,000 more unemployed would take the deficit well over the ceiling, leaving Germany ineligible for EMU.

Not surprisingly. when the jump in unemployment rate was announced, the value of the German mark dropped on currency markets. It dropped even further yesterday, when a report from Britain's BBC Radio said that German officials were now estimating a 1997 budget deficit of 3.5 percent. That report was dismissed later by Bonn's Finance Ministry, which insisted that the old 2.9 percent estimate was still correct. Even so, the mark lost almost two pfennigs against the dollar yesterday.

German officials say that more than two-thirds of the half-million newly unemployed were due to what economists call "seasonal factors" --particularly, they note, unusually cold weather that cut into construction work. They also say that once the jump is adjusted "seasonally," it comes to no more than 150,000. But even granting that, there seems little prospect of Germany getting out of double-figure unemployment this year --just as France has lived with 10 percent and more jobless for almost a decade.

The reasons in both cases have to do with increasing competition from cheaper labor available in Asia and Central Europe, and needed --but still u-n-enacted-- structural reforms in government social-benefit schemes as well as in industrial output. Neither Germany nor France is likely to meet those challenges within the next 12 months. That is hardly a good omen for EMU's successful birth.

Adding to the doubts about Germany's economy, the largest in Europe, are questions now being asked about the political future of Chancellor Helmut Kohl, who has already been 14 years in office --longer than any of his predecessors. In a interview with French television Sunday ("7 sur 7" on private channel TF1), Kohl said he would not make up his mind about leading his Christian Democrats into next year's general elections until after the conclusion of the EU's Amsterdam summit meeting in mid-June. The Amsterdam summit, he and others hope, will successfully conclude the EU's 15-month-old Inter-Governmental Conference (IGC), mandated by the Maastricht Treaty to review and reform the Union's institutions.

All EU members agree that internal basic reforms are necessary before the Union can fulfill its promise to expand to the East. But accord in principle has noy meant accord in practice at the IGC, where so far nothing of importance has been agreed upon. Some EU officials say that's the way such important conferences usually go, and predict agreement at the summit in four months' time. Others say there's little chance of agreement on essentials, because these days more divides than unites the 15.

In any case, Kohl's public pegging of his future to the success of the IGC has added another uncertain factor to the EU's immediate future. More than any other EU leader, it's Kohl who has pushed for further integration, a strong EMU on schedule and a rapid opening to candidates from East. Analysts say that, were he to step down and the German economy continue to falter, the European Union --and its Eastern candidate states-- would loose their most solid support.