Economic Clouds Spoil Maastricht's Debut European Community Faces Recession and Restructuring in '94

Article excerpt

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. …