Recession is haunting Europe. The situation in Germany and France may not be catastrophic, but it is very serious. Growth is slowing, consumer confidence is falling and unemployment rising. However, the most important consequences of this downturn will not be economic, they will be political. Recession and retrenchment will test the political stability of both Germany and France as well as casting a long shadow over the European Union's plans for further integration.
The signs of contraction are unmistakable. The German economy stagnated in the third quarter of 1995 and activity is expected to fall in the final three months of the year. A big jump in unemployment, to almost 10 per cent, in December has rung alarm bells across the country.
In France, where the unemployment rate is 11.5 per cent, the outlook for 1996 is even bleaker. According to a leaked report from the labour ministry, growth could be little more than 1 per cent. Consumer confidence is at its lowest for almost 10 years.
Across Europe economic conditions have deteriorated much more and much faster than expected. One principal reason is that public spending is being cut back by governments attempting to meet the Maastricht treaty criteria for inclusion within the economic and monetary union. The race to meet the EMU 1999 deadline has led to tax hikes and spending cuts, which are taking spending power out of the European economy.
In Germany, another powerful factor is at work. The slowdown there may be in part structural: the product of the high price of unification, the highest labour costs in the world and an overvalued currency. …