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
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. …