BY CARL-ERIK ISACCSSON
STOCKHOLM - The Bundesbank, the German central bank, unexpectedly raised a key short-term interest rate from 3.0 percent to 3.3 percent October 9. The central banks of Belgium, France, the Netherlands, and Luxembourg followed suit.

These countries comprise the core group for the projected European economic and monetary union (EMU). Their coordinated rate hike suggested that Bundesbank's decision was not only dictated by the recent fall in the value of the German mark relative to the dollar and pound, but also a preparation for the introduction of the "euro" single currency, scheduled for Jan. 1, 1999. In order to avoid setting off the kind of currency turmoil that hit Europe in 1992 - 93, this core of governments have to act to a degree as if the single currency already is in effect, with fixed exchange rates and close to no differences in interest rates.

The higher interest rates will tend to further restrict economic growth, at a time when unemployment rates continue to hit new highs. The jobless rate in France stands at 12.5 percent, and unemployment in Germany reached yet another post- war record of 11.7 percent in September. Most of the increase in Germany came in the eastern part of the country, where the official jobless figure is now 19.2 percent, underlining the widening economic division between the two parts of the country.

"Why would a central bank start a new cycle of higher interest rates in a country suffering from unemployment at levels not seen since the 1930s?" asked an editorial in the October 10 Financial Times of London. "A part of the answer is that the Bundesbank believes unemployment is almost entirely a structural phenomenon," the editors declare, suggesting there's nothing to be done to improve the situation.

Meanwhile, French prime minister Lionel Jospin pledged October 10 to introduce a law that would reduce the workweek to 35 hours from 39 by the end of the century. Jospin's move followed a fresh outbreak of strikes during the week by workers on the French railroad system and the Paris Metro.

Differences in the economic conjuncture among countries within the European Union (EU) will also build up tensions between the member states. The Bundesbank is trying to converge interest rates at a level below those in effect in Ireland, Portugal, and Spain, which average 5 - 7 percent. These regimes want to keep their interest rates higher either to defend their currency exchange rates or because they have come further in the business cycle than in Germany and France, where the upturn is weak.

The British rulers are still fiercely debating whether and when London will join the single currency project. While unemployment as an average among the EU member countries has increased to more than 10 percent, the jobless rate has fallen in Britain to 5 percent, only half its rate in 1992. An editorial in the September 26 Financial Times commented that this is "good news for Britain but what does it say about the rest of the world? A 5 percent unemployment rate was, after all, only the average at the end of the 1970s and much above the 3 percent considered excessive at the start of that decade."

The attempt to push through austerity measures in the name of meeting the criteria for the monetary union has contributed to the collapse of the coalition government in Italy. After a week of wrangling over the 1998 budget, Prime Minister Romano Prodi resigned October 9 as he failed to get the support of the Communist Refoundation Party (RC) for austerity measures totaling $3 billion in cuts in pensions and other social spending. This was Italy's 55th government since World War II, and it had unexpectedly survived for 17 months with a stable showing that had placed Italy among the 11 countries expected to join the single currency from the start.

On October 14 Prodi was reinstated after reaching an agreement with the RC to introduce legislation to reduce the workweek from 40 hours to 35 hours by 2001. Nevertheless, the stamp of political instability and Bonn's opposition to including Italy in EMU makes it more likely now that Rome will be kept outside the Union from the start.

Tensions over EU enlargement, budget
At a meeting of the finance ministers of the European Union in Mondorf in southern Luxembourg on September 13, German finance minister Theodor Waigel opened a battle over the EU budget. Waigel, who in interviews in German press has complained that Bonn pays more than 60 percent of the net costs of the EU, declared, "It is an absurdity that the German people will not accept. A new mechanism for the sharing of the budget burdens in the Union must be worked out before there will be an enlargement of it with new members."

The representatives of the Netherlands, Austria, and Sweden - governments that also pay far more than what they get back in agricultural and other subsidies - immediately backed Waigel in his demand for a revision of the budget mechanisms. The finance ministers from Spain, Greece, and Portugal, whose governments get more back, especially in agricultural and regional subsidies, weren't favorable. Charles McCreevy, the Irish finance minister, was openly negative to the proposal. Dublin is one of the bigger net receivers of agricultural subsidies within the Union.

Waigel argues that Germany is slipping down the rankings of the rich countries -it is now fifth in terms of per capita gross domestic product behind Luxembourg, Denmark, Austria and Belgium - thanks to the addition of the low income region of east Germany. A column in the September 17 Financial Times argued that "Germany could do much better if they agreed to support further CAP [Common Agricultural Policy] reform. Farm spending still accounts for almost half the EU budget. But the Bavarian farm lobby has tied the Bonn Government's hands."

Another motive for Bonn not pushing the demand for reforming CAP is that it could fracture the fragile consensus the countries within the European Union has on enlargement of it to new members. In the long term, enlargement to central and eastern Europe will shift the center of gravity away from Greece, Italy, Spain, and Portugal, toward Poland, Czech Republic, and Hungary, the countries that the German rulers see as their backyard.

The rift between Paris and Bonn again came to the fore when Jospin and Kohl met for the 70th bilateral summit in Weimar, Germany, September 17. Instead of taking initiatives to develop further the European Union, the agenda focused on issues of less importance like strengthening of cultural and educational exchanges and for mutual recognition of vocational and educational qualifications.

The French and German delegates at the meeting agreed to proceed with the change in Airbus status into a joint-stock company by January 1999. The declaration stated that the French and German governments are "in complete agreement" that a restructuring of Airbus is "urgently imperative" to create an agile European competitor to Boeing Co. of the United States. Boeing acquired McDonnell Douglas in August to form the world's biggest aerospace company. Paris had earlier been unwilling to incorporate state-owned aircraft factories into a jointly owned Airbus company, however, and details implementing the agreement remain to be worked out.

At the meeting of the EU foreign ministers in Brussels, other questions of dispute over the enlargement of the EU came up. The Belgian government, supported by Paris and Rome, demanded a streamlining of institutions and decision making before enlargement goes ahead. They said a further strengthening of EU institutions was "an indispensable condition" for concluding negotiations with the applicants.

Debate over delay of EMU in Germany
Meanwhile, the debate over a possible delay in starting the common currency has heated up in Germany. In early September Bundesbank president Hans Tietmeyer suggested that a postponement of the euro would pose no great problem. While avoiding any direct comment on the possibility of the delay, he told the newspaper Die Woche, "I simply cannot agree with those who argue that a delay to the euro would cause the heavens to cave in or the economy to come off the rails."

These remarks came up one day after Lamberto Dino, the Italian foreign minister, called for a year's delay in the EMU if many countries fail to meet the entry conditions next spring. These moves were immediately countered by the government in Bonn. "There is absolutely no reason for a discussion about a delay," stated government spokesman Peter Hausmann.

Foreign minister Klaus Kinkel also issued a statement rejecting Tietmeyer's views. Others have since then joined the debate. Germany's Economics Minister Gunter Rexrodt said, "In my view, a delay implies the great danger of a definitive collapse [of the EMU] and renationalization within the EU. Things must not get that far. The introduction of a common currency bears greatest importance for Europe."

In an article in the September 18 Financial Times, Wolfgang Schauble, the leader of the Christian Democratic Union (CDU) and Christian Social Union (CSU) coalition in the German parliament, wrote, "In view of the past successes of European stability policy and the efforts of individual EU member states to attain stability, there is no reason to postpone EMU. Doing so would not only ease the pressure to reach convergence but would also call into question the successes so far. The entire project would run the risk of collapsing."

But Edmund Stoiber, a CSU politician and government chief in Bavaria, said in a September 15 interview in the Swedish daily Svenska Dagbladet, "If someone says that the timetable is more important than the criteria, I answer that it is contrary to what is written into the Maastricht Treaty. We will respect both the criteria and the timetable, but if it is not possible the criteria have priority over the timetable."

Some Social Democratic Party (SPD) politicians have joined the chorus for postponement. Earlier Gerhard Schroder, one of the Social Democratic candidates for chancellor in the upcoming German elections, said that EMU should be delayed if the criteria are not fulfilled. He was joined in early September by prominent Social Democratic opposition politician and mayor of Hamburg, Henning Voscherau, who in his election campaign stated, "If the criteria are not met the euro will not be a stability currency but an inflationary currency, and that we can not have." Voscherau played a key role in national politics as coordinator of his party's opposition to government tax reform blocked by the SPD- dominated Bundesrat, the upper house of parliament. In 1992 both houses of parliament reserved the right to evaluate terms under which Germany would join the single currency.

The Social Democrats were stunningly defeated in the Hamburg elections in early October, loosing several percent while both CDU and the far right gained. Voscherau resigned his posts within the SPD and a debate over the election strategy of the Social Democrats broke into the open. Oscar Lafontaine, now the SPD chairman and also a likely chancellor candidate in the 1998 elections, joined Rudolf Sharping, the head of the Social Democrats parliamentary faction, in criticizing Voscherau's election campaign as too centered on "law and order" and "euroscepticism." Instead, they said, the Social Democrats should focus their election campaign on the classic themes of social benefits and fighting unemployment.

Carl-Erik Isacsson is a member of the metalworkers union in Sodertalje, Sweden.  
 
 
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