Economic Clouds Spoil Maastricht's Debut

European Community faces recession and restructuring in '94

EUROPEAN leaders may try to sound upbeat as the Maastricht Accord has now gone into effect, but from this side of the Atlantic, celebration looks premature. After examining the problems Europe faces next year in trying to pull out of a deep recession, restructure rigid labor practices amid social strife, and elect political leaders, Americans might discover that sometimes the grass is greener at home.

Contrary to earlier optimism, the widening of the European Monetary System's currency bands has merely transferred systemic inflexibility from the foreign exchanges onto monetary policy. Looser bands have not changed the fact that Germany, with Europe's ``anchor'' currency and most credible central bank, continues to suffer higher inflation and more fiscal difficulties than its neighbors, necessitating higher interest rates than other EMS nations. As a result, while the markets reaffirmed Germany's leadership role and assigned it the task of setting the pace for European interest-rate cuts, the other countries, some with half the rate of inflation of Germany, were forced to maintain much higher real interest rates than domestic conditions warranted. These countries lost credibility in the summer EMS struggle and, more important, depleted their reserves. They fear that if they cut local interest rates below Germany's levels, they may not have the resources to withstand another speculative run on their currencies.

This has resulted in a tense stalemate, as countries with weaker currencies lobby for faster monetary union to resolve the problem, while stronger countries want to postpone currency union until after 2000. For now, the conflict keeps borrowing- costs high for consumers and businesses and prolongs the recession. But with the public increasingly dissatisfied with economic policies, politicians may find the price of maintaining the status quo too costly to preserve.

Moreover, continental Europe's labor force has yet to undergo the long-term restructuring seen in the United States and a number of English-speaking nations. According to the International Monetary Fund, between 1972 and 1992 average real wages in the US fell by 10 percent. But during the same period, wages rose by 76 percent in France, 68 percent in Italy, and 43 percent in Germany. At present, average labor costs in Germany top $25 per hour, some 50 percent above US levels, and thanks to the devaluation of sterling, nearly twice the $13 rate seen in Britain. Meanwhile, unemployment in the European Community is expected to average 12 percent in 1994. The current recession could have been used to justify sacrifice, yet this year East German workers received a hefty pay raise to bring their salaries up to 80 percent of West German levels.

Survival in a more competitive global economy will necessitate major change. One would think that an estimated 2.3 percent decline in Germany's gross domestic product and a 1.3 percent decline in France's this year would give employers more leverage with unions. But when automaker Volkswagen announced recently that it must either cut its work force by 30 percent within two years or move to a four-day workweek, the union's response was that it would consider the cut in hours but ``wouldn't welcome'' the corresponding cut in wages. A major German union, IG Metall, announced recently that it wants a 6 percent pay raise in 1994 - nearly 3 percent above the expected cost of living increase - saying that its sacrifice ended with this year's wage rise, which came in less than 0.25 percent below the inflation rate.

Similarly, workers at government-owned Air France balked when Prime Minister Edouard Balladur asked the company chairman to take action to curb losses of $1 billion annually so that the government might later privatize the airline. The violent confrontation caused Mr. Balladur to back away from the plan, discrediting the chairman and his government's economic policies as the French budget assumes nearly $10 billion in income from privatizations in 1994. The official forecast of a 1.4 percent rise in French GDP next year looked optimistic to begin with, but given these complications, growth of less than half that amount will be an achievement.

This brings us to the issue of political leadership - or lack of it. The stunning defeat of the Progressive Conservative Party in Canada serves as the latest reminder that voters will exact a price from those in power during this recession. In most major global economies, incumbents and their governments have fallen; the rise of fringe parties and populist leaders has led to vulnerable coalitions, with politicians keeping one eye on the popularity polls before making any decision. From Bosnia to Blair House, Europe's leaders have proven unable to set a common policy, with their indecision inevitably leading to further instability. And things looks set to worsen in 1994: Denmark, Sweden, the Netherlands, France, and Germany all hold major elections within the next 16 months. Already in Germany, Chancellor Helmut Kohl's approval rating has fallen to 33 percent, and regional elections for the legislature have seen support decline for both mainstream parties.

For Europe the stakes are higher than ever. Instability in the East, high unemployment at home, and trade conflicts combine to form an explosive mix conducive to groups set at instigating social unrest.

In this economic cycle, the US, British, Canadian, and Australian economies have all experienced problems rebounding from their low points, or in the case of Japan, entered a ``double-dip'' recession. Given the difficulties encountered by major global economies and the unresolved issues facing the continent, can we have much confidence in the belief among Europe's leaders that they will prove the exception? The Opinion/Essay Page welcomes manuscripts. Authors of articles will be notified by telephone. Authors of articles not accepted will be notified by postcard. Send manuscripts by mail to Opinions/Essays, One Norway Street, Boston, MA 02115, by fax to 617 -450-2317, or by Internet E-mail to OPED@RACHEL.CSPS.COM.

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