Viewing the world through euro-tinted spectacles

Date: 10/09/1998

THE euro is already doing its magic. The prospect of a brand new currency has lifted confidence sky-high. It seems nothing can prick the bubble of optimism in which Europe's economic policy-makers are currently floating.

Crisis, what crisis? A growing number of private-sector economists are warning that precipitate currency devaluations in South East Asia, the continued reluctance shown by Tokyo's dried-up political class to do anything about their tottering banking system and a quartering of the value of the rouble might actually have an impact on world growth.

Throw into the pot a deepening manufacturing recession in one of the euro-11's biggest and closest trading partners - the UK - and the increasing possibility that the long growth-enducing climb of the US dollar might well be coming to an end, and things start to look a little grim.

But not within the walls of the European Commission. Last week, after acknowledging the gloomy international picture, the institution's top economist Giovanni Ravasio insisted there was no need to worry; inflation had been licked. The fact that ordinary people are now worrying about deflation seems to have passed him by.

In targeting balanced budgets for the euro-11 within three years of the creation of the single currency area, the Commission is assuming a 'trend' growth rate for the area of 3&percent; unless the Russian or Asian crises worsen.

Of course, a large chunk of this growth could well be sparked by the catalyst of the euro itself. A single monetary area cannot suffer from currency fluctuations within the zone, but only from sudden movements against the dollar, the yen, sterling and the Swiss franc.

This alone, the Commission's economists believe, should contribute a few tenths of a percentage point to the euro-11 growth rate. When this is put together with the advent of tough, across-the-board monetary stringency from the European Central Bank and the unforgiving rules of the growth and stability pact, then the healthy ensuing 'policy mix' could spell faster growth which can be sustained.

The trouble is that this is guesswork based largely on faith.

To the rest of us, the international scene looks grey to say the least. Most analysts fully expect that at least some Japanese and Korean inward investors will soon begin pulling in their horns, closing plants in the UK, Spain and France.

The chances of disaster in Russia have still got to be high. Just looking at the direct trade effects and bank exposure does not begin to tell the whole story about the effect of the crisis on confidence and possibly on equity values.

The Commission appears to be studying a world wholly different from that in which the rest of us live. The persistent calls from Economics Commissioner Yves-Thibault de Silguy for further cuts in public spending this year are, he says, designed to ensure that member states will be able to take action if they are hit by an unexpected external economic shock in the coming years. What about now? The growth and stability pact could have been written for times like these.

The Commission might be right and prospects could be rosy. But it might be very wrong. For today's rainy day, finance ministers with billions of ecu in their back-pockets rather than spirited away to pay off debt might well be an idea whose time has come.