-Caveat Lector- >From Int'l Herald Tribune Paris, Wednesday, February 24, 1999 Euro Health Depends on Budget Pact, Bonn Says ------------------------------------------------------------------------ By John Schmid International Herald Tribune ------------------------------------------------------------------------ BONN - German officials warned Tuesday that the already wobbly euro could fall further and spark a ''crisis'' if European Union leaders failed to agree by March on a reduction of EU farm and regional-aid spending. The German government, which holds the rotating EU presidency, is planning to use an informal gathering of EU leaders Friday in Bonn to warn of economic and financial fallout if national interests block an overhaul of the budget of the 15-nation bloc, officials said as they laid out Germany's plans. ''Markets will think the European leaders cannot pull their act together,'' said one official, who like the others spoke on the condition of anonymity. The comments helped to drive the euro down sharply Tuesday. Conceived as a strong, world-class reserve currency, it has eroded almost steadily since its Jan. 1 inauguration, trading at $1.0992 Tuesday in New York from its early January high of just over $1.18. One official said that, in a worst-case scenario, a slumping euro could force the European Central Bank to tighten credit to defend the currency just as a rapid economic deceleration was pressuring the ECB to ease interest rates. Oskar Lafontaine, the German finance minister, heaped pressure on the ECB to cut rates in Parliament Tuesday, warning that deflation could take hold if interest rates were not cut soon to stimulate growth. ''There is a need to act'' on interest-rate policy, he said. Tensions will accompany the informal summit meeting Friday in Bonn even without fears of a currency crisis. In Brussels, farmers from across the EU staged their second day of mass protests Tuesday to defend the EU's complex and costly system of agricultural subsidies and price supports. Farmers are holding one of the biggest protests in more than 25 years in the Belgian capital as EU agriculture ministers are meeting there this week to find a compromise to overhaul the 37-year-old Common Agricultural Policy. The volume of money involved is adding to the pressure in the talks, creating the prospect that some countries could lose EU funds. The powerful farm lobby has the most to lose. The farm budget eats up half of the EU's 85 billion euro budget. Subsidies on some farm commodities could shrink by a quarter and even push some farms into bankruptcy, with French farmers the hardest hit because they are the biggest recipients. Striking a deep chord, farmers fear the cuts will threaten Europe's romantic agrarian idyll, displacing bucolic fields with mass-production farming. According to the German position, laid out Tuesday in Bonn, the stakes extend well beyond farmers. At the meeting Friday of EU heads of state, Germany will not shy from ''speaking of the consequences'' of a ''non-solution,'' an official said. Failure to overhaul the budget could unleash a ''crisis in which all of us are worse off afterwards,'' the official said, referring to fears of uncontrolled euro weakness. The main function of Friday's meeting will be to add momentum to EU budget talks, which are to culminate at a special summit in Berlin on March 24 and 25. Germany wants to emerge with a sprawling blueprint of long-range financial reforms. Because the Friday meeting in the stately Petersberg Hotel overlooking the Rhine is a ''working summit'' to lay the groundwork for the Berlin gathering, ''there will be no resolutions,'' the official said. For now, however, talks are tangled in a conflicting patchwork of national and regional interests. Reflecting the potential for clashes, one German described a successful outcome ''for Europe'' at the Berlin summit as ''an agreement in which none of the partners are happy.'' The euro's disappointing performance lies at the heart of Europe's economic dilemma, pitting politicians against the ECB. Mr. Lafontaine, the German finance minister, argued over the weekend that a weak euro could help promote Europe's exports. But while politicians such as Mr. Lafontaine help drive the euro lower with their remarks, central bankers want to halt the erosion. The Bundesbank president, Hans Tietmeyer, a prominent figure on the ECB's board, warned Saturday that the ECB ''will certainly not be able to cut rates'' if the euro falls further. [Wim Duisenberg, head of the European Central Bank, said Monday that the euro's current weakness against the dollar was not only the result of strong U.S. growth but also of political pressure on the ECB to cut interest rates, Bloomberg News reported. [''There has been political pressure to lower rates; this expectation has been carried into the market,'' Mr. Duisenberg said at a panel discussion at Landeszentralbank Baden-Wuerttemberg. ''I think it will be only a temporary phenomenon.''] The German delegation took pains to lower expectations ahead of the meeting Friday. The ''non-summit'' is expected to yield forceful disagreements. Bonn wants EU leaders to converge behind closed doors for a final round of ''psychological and dramatic'' leverage for the Berlin summit. Most attention Friday will be directed at the ''Big 5'' EU members with the most to lose at the budget talks: France, which will fight to preserve its farm subsidies; Britain, which will fight to preserve an EU annual budget rebate it won 15 years ago; Italy, which will be expected to increase its net payments; Spain, which is fighting to save its inflows of EU economic aid; and Germany, which wants to cut its high 11 billion euro annual EU net payment. Trying to exploit the momentum of the Friday meeting, Chancellor Gerhard Schroeder will make a whirlwind tour of EU capitals from March 15 to 19 in search of a difficult consensus. Germany also seems willing to make concessions on its own position. Instead of deep immediate budget cuts, it appears willing to settle for an agreement to stretch out a decrease in German payments between 2000 and 2006. Paris, Wednesday, February 24, 1999 Blair Starts Britain on Path Toward Using Euro ------------------------------------------------------------------------ By Tom Buerkle International Herald Tribune ------------------------------------------------------------------------ LONDON - Prime Minister Tony Blair on Tuesday sent the clearest signal yet that he intends to take Britain into the single European currency, unveiling a provisional blueprint for converting the British economy from the pound to the euro. The plan includes significant government spending on preparations, even before the question of membership is put to Britons in a referendum. The plan stopped short of committing the government to entering the euro zone or bringing forward the timetable for a decision, which Mr. Blair reiterated would be taken by referendum sometime around the year 2001 or 2002. But the fact that the prime minister took it upon himself to present the blueprint to the House of Commons, and urged business and government agencies to accelerate their preparations for a new currency, was intended to demonstrate Mr. Blair's determination to join the euro as long as it proves successful, senior aides said. ''The government itself will be making active preparations for the euro in the belief that it will be in this country's interests to join in the future should our economic tests be met,'' Mr. Blair told the House of Commons. ''Business should start to do the same.'' Mr. Blair's statement drew attacks both from hardened opponents of the euro, who accused the government of trying to push the nation into the single currency without a proper debate, and supporters of early entry, who wanted a clearer commitment to joining and specific policies to bring Britain's economy into line with the 11-country euro zone. David Heathcoat-Amory, a spokesman for the Conservative Party, said the government was violating constitutional procedures by starting preparations for the euro before winning public consent in a referendum. ''They are softening us up by creating the illusion of inevitability by using the power of the state,'' he said. Malcolm Bruce, Treasury spokesman for the Liberal Democratic Party, accused Mr. Blair of trying to get to the euro by stealth rather than openly advocating membership and gearing economic policies accordingly. ''That is a very timid position that will not win a referendum because it lacks vision and leadership,'' he said. A similar view was expressed by Sir Leon Brittan, one of Britain's two members on the European Commission. ''It would be better if it was also accompanied by an acceleration of the political pace, and the prime minister made it clear that we had in effect decided,'' he said. Mr. Blair will brief other European Union leaders of his strategy at an informal summit meeting in Germany on Friday, and British officials hoped for a warm reception. In Paris, President Jacques Chirac said he was ''delighted'' that Britain was stepping up preparations, according to his spokeswoman. But one European diplomat said Mr. Blair was holding back on the front that matters. ''Sooner or later, if he wants to take Britain into the euro, he will have to come out, as it were, and take on the tabloid press,'' the diplomat said. Indeed, the Daily Mail gave a taste of the battle to come Tuesday, criticizing the government's strategy of pushing preparations before a referendum as ''a denial of real democracy.'' The National Changeover Plan, as the blueprint was called, was limited in nature, dealing only with the mechanical issues of switching from pounds to euros. It envisioned a three-year period between a government decision in favor of joining, which Mr. Blair said could come after the election that must be held by May 2002, and the adoption of euro notes and coins. The plan did not address how or when Britain might lock the exchange rate of the pound against the euro. That was a crucial omission because EU rules require two years of exchange-rate stability prior to entry, and British industry is lobbying for a depreciation of around 10 percent to lift the country's competitiveness. Big corporations and banks must be ready to do business in euros by the locking date, and the lack of a clear timetable could cause them to delay preparations, said Graham Bishop, an economist at Salomon Smith Barney Inc. The government's stance ''still boils down to an unwillingness to say, 'we really intend to do this,''' he said. Mr. Blair acknowledged that the plan represented a change of gear, not a change of policy. Calling membership ''conditional, not inevitable,'' he said the government would need to see durable convergence between Britain's economy and the euro zone, and be persuaded that the euro would be good for jobs. He included a warning to Britain's European Union partners that the EU needed to make ''fundamental reforms'' of labor regulations, competition rules and welfare systems. But his language toward the euro was the most positive yet, and he emphasized the euro's smooth introduction this year. In an effort to underline the government's seriousness, Mr. Blair said he would seek parliamentary approval to spend tens of millions of pounds in advance of any referendum to begin preparing the key government agencies - Social Security, Customs and the Inland Revenue - to be able to deal in euros. The government has indicated it could take those agencies longer than the private sector to become euro-capable, so early preparations are vital to Britain's entry prospects. Business leaders welcomed the statement but were still left looking for a clearer timetable. ''We need much greater clarity from the government as to what their intentions are,'' said Lord Alexander, the chairman of National Westminster Bank PLC. ~~~~~~~~~~~~ A<>E<>R The only real voyage of discovery consists not in seeking new landscapes but in having new eyes. -Marcel Proust + + + + + + + + + + + + + + + + + + + + + + + + + + + + Every great advance in natural knowledge has involved the absolute rejection of authority. -Thomas Huxley + + + + + + + + + + + + + + + + + + + + + + + + + + + + Forwarded as information only; no endorsement to be presumed + + + + + + + + + + + + + + + + + + + + + + + + + + + + In accordance with Title 17 U.S.C. section 107, this material is distributed without charge or profit to those who have expressed a prior interest in receiving this type of information for non-profit research and educational purposes only. DECLARATION & DISCLAIMER ========== CTRL is a discussion and informational exchange list. 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