`Forex Frenzies' Trouble W. Europe
PAUL HORNE says French President Francois Mitterrand was not wise to put the progress of West European unity in "the hands of cranky French voters."Skip to next paragraph
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The Paris-based economist for Smith Barney, Harris Upham & Co. expects the French electorate to approve the treaty on European union in a plebiscite Sept. 20. But it will be by "a narrow margin," he says.
In the meantime, Europe has fallen into what Mr. Horne calls "forex frenzies." Foreign exchange rates are under speculative pressures. Finland devalued its currency Tuesday, causing more market excitement. Sweden had to push up its marginal lending rate from 16 percent to 75 percent to protect its krona from devaluation. By central bank standards, the action was severe.
On June 2 the Danes said "no" to the so-called Maastricht treaty, with its goal of a single regional currency and central bank by 1999 and common foreign and security policies. Since then, average European stock prices have fallen about 15 percent, according to the Morgan Stanley Capital International index.
"The pressure on the system continues to be extreme," says Horne. What is seen as a "crisis" in Europe, probably seems remote to most Americans. Nonetheless, the flying financial feathers in Europe do affect the United States:
* A sharp drop in the value of the US dollar against the German mark and other European currencies has meant that Europeans can get cheap goods and vacations in the US. Vice versa, Americans are finding Europe and some of its goods more expensive.
* The US is not likely to get any economic boost from Europe soon. A weaker dollar and a weaker European economy work against each other in terms of US exports and the export-import balance. European Community member nations have resisted foreign exchange speculation so far and are keeping their currencies lined up with the German mark. To do so, they have had to keep interest rates high to match those of Germany, which is trying to bring down the rapid growth of its money supply out of fear of worse fut ure inflation. That means Europe "is unpleasantly close to a disappearing recovery," says Horne. Europe could see output actually decline in the fourth quarter of this year or the first quarter of next year.
* Greater European unity would make Europe more attractive in the international competition for investors.
"Generally, Europe in disarray is unhelpful to the US," says John Williamson, a senior fellow at the Institute for International Economics in Washington.
Horne holds that this "grit your teeth time" in Europe and sticking to current foreign exchange rates is worth it for the sake of European unity and reduced inflation levels in such countries as Italy, Spain, Portugal, and perhaps even Britain. France already has lower inflation than Germany. Other "mark bloc" countries, such as Belgium, the Netherlands, and Luxembourg, are also stable inside the European Monetary System.
Mr. Williamson says Europe should have realigned its currencies two years ago when Germany reunited. "The markets are telling the officials something should be done," he says. But European governments "will move heaven and earth" to prevent a currency realignment before the French vote. If the French vote is positive and the Europeans still stick to their guns on maintaining present currency exchange rates, he expects continued slow growth in Europe for years ahead.
Contrariwise, Martin Hufner, chief economist, Bayerische Vereinsbank in Munich, Germany, sees "no good argument for a realignment." Inflation differences between members of the European Monetary System are not large - really only 2.1 percent, he says. Exceptions are Spain, Portugal, and Italy.
What will happen if the French reject the treaty?
Williamson says it won't be a disaster. There will be a currency realignment, with the German mark going up. He figures the European Community will turn its attention to enlargement, bringing in Poland, Czechoslovakia, and Hungary.
Dr. Hufner is concerned that investor confidence in Europe will be weakened. Horne figures that the European single market, scheduled to begin January 1, 1993 will be "delayed and diluted" as the treaty of European unity is renegotiated and redrafted.