Big Deficit in Germany Raises Odds for 'Euro'

The star pupil in the class on "contemporary European fiscal management" - Germany - has just been publicly rebuked by the teacher for not getting his homework done.

Paradoxically, that may make it easier for others in the class to pass the course. And thus it could mean that Europeans are more likely to have a common currency, the Euro, jingling in their pockets or folded in their purses in a few years.

The rebuke came from the European Union. It blasted Germany for letting its budget deficit balloon last year to 3.6 percent of gross domestic product (GDP), the nation's output of goods and services. That is up from 2.5 percent the year before. For 1996, EU economists in Brussels are projecting that Germany will have an even more unacceptable budget gap of 3.9 percent.

At this rate, Germany is unlikely to meet the 3 percent deficit allowable under the "convergence criteria" set forth by the Maastricht Treaty on European currency union. Germany is also over, by a little less than two percentage points, the 60 percent limit on public debt as a proportion of GDP.

An embarrassment

It is an embarrassment for Chancellor Helmut Kohl, who, remembering his own school days, has remarked, "When the No. 1 in the class got bad grades, that made the others happy."

Currency policy is an arcane, technical subject, and an unlikely path into the history books. But for the chancellor, a common currency is fundamental to the political integration he sees as vital for Europe. It is "a matter of war and peace," he has said, to some snickering from those who thought he was being overdramatic.

Thus, the prospect of delay in the launch of the new currency, now set for 1999, is especially galling for him. Yet, strangely enough, over the last few weeks a consensus seems to have developed within the business and financial communities that the Euro will be launched on time. For one thing, Germany and France have expended a great deal of political capital to make it happen. And financial markets see it as making economic sense.

On-time launch is likely to take some flexible interpretation of the convergence criteria. But with Germany - which has been the key backer of strict criteria to ensure currency stability - in fiscal straits, such flexibility may be politically possible as it wouldn't be otherwise. And the Kohl government, trying to pass a significant austerity program, is not alone in its efforts to get public spending under control. Across the EU, governments are striving for budget cuts equal to 2 percent of GDP through 1997.

Bullish on the Euro

J. Paul Horne, chief international economist at the investment house Smith Barney in Paris, is bullish on the common currency. He says it "will have a profound impact. Interest rates will be lower; people will avoid transaction costs" on international investments.

Moreover, with a common currency, European governments will not simply be able to print more money to steer their economies. They will have to rely on fiscal policy. "That means they will have to face questions of spending and taxation squarely," Mr. Horne says.

Ulrich Cartellieri, a member of Deutsche Bank's management board, says it is unusual for a government to proceed with such a major project as this in the face of strong popular opposition. "But Maastricht is a grand design, a roof over the European home, ... and it is dawning on us all that globalization is upon us. We need to do something about all these currencies." He predicted that the Euro would be launched with a core of six to eight member countries. He adds that although violent conflict is not in the offing, significant international economic tensions may arise over the currency. In that sense, he says, Kohl's observation about "war and peace" was "not unjustified."

Horne concurs: He sees some "nasty-minded protectionism below the surface" in relations between European countries.

Public opinion shaky

Another Euro-paradox is that while no government feels as strongly in favor of the common currency as Germany's, considerable evidence shows the German public strongly opposed. In February the polling organization Forsa, in Berlin, found 80 percent of Germans oppose the Euro being introduced in 1999.

Eurobarometer, the EU polling arm, in an extensive telephone survey, has found a "solid absolute majority of European Union citizens" in favor of the single currency: 54 percent, versus 37 percent opposed. A face-to-face survey, meanwhile, showed 49 percent in favor and 33 percent opposed to currency unionno absolute majority but a strong plurality.

Italy, with the strongest popular support for the Euro, dropped out of the European Exchange Rate Mechanism amid a 1992 currency crisis. But, in a sign of further common-currency momentum, France and Germany agreed June 10 to work on helping Italy rejoin the system.