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Europe: German, French Problems Cast Doubts On 'Euro'-- An Analysis

Prague, 30 May 1997 (RFE/RL) - An unprecedented open conflict between Germany's government and central bank, as well as uncertainty about France's political future after Sunday's first round of general elections, have this week cast new doubts on the European Union's capacity to launch a credible single currency.

Analysts say that if the German and French problems persist or get worse, they could lead to a full-scale crisis over the EU's planned monetary union, due to get underway in 19 months' time. That, in turn, would surely also affect, and possibly even seriously delay, the organization's schedule for beginning membership negotiations early next year with 10 Central and East European candidate countries -- Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia.

Among the Union's current 15 members, Germany and France are the most important supporters of the EMU (European Monetary Union) and its prospective new "euro" currency. Over the past two years, each has promised it would meet the strict criteria for joining EMU laid down in the 1992 Maastricht Treaty that created the Union out of the former European Community. High German officials have repeatedly criticized the failure of other members, particularly Italy, to reduce their budget deficits to the level laid down in Maastricht (three percent of gross national product), the most stringent of all the Treaty's standards for joining EMU.

Now, however, both countries are showing strong signs of not being able to meet that standard themselves before next Spring's selection of first-wave EMU members. Both have double-digit unemployment rates, close to 13 percent in France and over 10 percent in Germany. Their economies have been at best sluggish, at worst recessionary, in the past few years, although there are recent signs of growth in both.

As a result, conservative President Jacques Chirac's Government last year resorted to one-time sell-offs of state assets -- France Telecom was the biggest such privatization. Then, two weeks ago, Chancellor Helmut Kohl's Government abruptly decided to revalue Germany's gold reserves upwards by some $20 billion. Both actions clearly fall into the category of what analysts call "creative accounting." They will serve, the analysts say, to reduce the credibility of the euro in currency markets, thereby turning what was hoped to be an equal of the "hard" U.S. dollar into a "soft" currency.

That view is now openly shared by Germany's central bank, which had earlier strongly criticized France's privatizations. Late yesterday, the entirely independent Bundesbank, Germany's most respected -- almost hallowed -- institution issued a statement similarly criticizing Kohl's planned revaluation of gold assets. The statement said that action, in its words, "could be construed as an attack on Bundesbank independence (and would) be in contradiction with the Maastricht Treaty's view on the independence of (EU members') central banks." It also said bluntly that gold revaluation would undermine the euro's "credibility and stability."

Within hours, Kohl -- backed by his top political allies -- publicly rejected the Bundesbank's protest. A statement issued last night and signed by the Chancellor, his Finance Minister Theo Waigel and other Bonn coalition leaders made clear the Government would go ahead with the gold revaluation. They called the action "sensible and also responsible," and insisted the Bundesbank's independence would not be diminished -- even though the law that created the bank will have to be changed by the German Parliament in order to carry out the revaluation.

In France, euro questions are at the center of five days of campaigning before Sunday's run-off elections, which most analysts and pollsters now believe will be won narrowly by a coalition of Socialist, Communist and other Left parties. If they're right, the result would force President Chirac into as much as five years of what the French call "cohabitation" with a government probably led by Socialist leader Lionel Jospin.

Throughout the month-long campaign, Jospin has been quite critical of Maastricht's strict criteria for joining EMU. He has said that Italy, one of the six founding members of the EU, should not be excluded from the first wave of entrants because of what he called "a percentage point or two." He has argued, in effect, for political rather than central-bank control of EMU. A few days ago, Jospin openly mocked Waigel, and by implication Kohl, for criticizing French creative-accounting measures while devising a $20 billion tactic of their own. And the Communists, Jospin's electoral allies, are running on a strongly anti-euro platform.

Even if Chirac's Right-Center coalition were somehow to pull a slim victory out of the apparent jaws of defeat on Sunday, France would almost surely move toward less enthusiastic support of EMU. That's because, if the conservatives did win, the next French Prime Minister would likely be Philippe Seguin, the outgoing President of the National Assembly, known in the past for his anti-Maastricht stance and skepticism about EMU. Seguin wants France to go all-out to reduce its chronic unemployment, which is hardly compatible with the austerity measures needed to meet the euro-qualifying criteria.

That leaves the euro's prospects today, in the English phrase, somewhere between a rock and a hard place (that is, with no good prospects). It also leaves the EU on the edge of a full-blown crisis. Already apparently unable to achieve consensus on institutional reforms needed for its planned expansion to the East, the Union may now have the integrative glue EMU was intended to provide melt away at the same time.

And where would that leave the 10 Eastern countries seeking rapid entry into the organization? The realistic answer is: further than ever away from realizing their hopes.