Mr Shroder, it's not the British, but you who has let the euro down

THE CRISIS of confidence for the euro - which has helped to send the new currency down by 17 per cent since it commenced trading in January, so that now it can now be exchanged one to one with the dollar - is the fault of Germany. This is the exact opposite of what was expected to happen.

The Germans had been reluctant to give up the Deutschmark for the euro in case it wasn't as hard as their national currency had been since the war. A strong Deutschmark, riding high in the foreign exchange markets, had given reassurance that the country would never again experience hyperinflation as it did in the early Twenties. The memory of that nightmare, in which the middle classes were ruined by economic mismanagement, was still strong. So Germany did everything it could to ensure that, if it had to embrace the euro, the new currency would be as rock-solid as her own had been. All member countries would have to observe German standards of fiscal rectitude. The European Central Bank (ECB) should be as strict as the Bundesbank.

Germany's neighbours were compelled to work hard to pass the examination. Italy struggled to restrain its government spending and finally did some creative accounting to get through. France had difficulty in qualifying. There was even a moment when it looked as if Germany herself would fail, so demanding were the tests. Of the big countries, only the United Kingdom could have passed with ease - had we decided to enter.

As it has turned out, inflation hasn't been the problem. Prices are subdued all over Europe. German inflation's been running at less than 1 per cent. Middle-class savings are as safe as they've ever been. What's under threat is a very German form of capitalism: consensus capitalism. It is a softer, kinder, less demanding and more protective kind of capitalism than the Anglo-Saxon version. Under its rules, it is difficult to declare workers redundant. And the Germans don't wish to give it up.

That is why the decision by a British company, Vodafone AirTouch, to make a hostile bid for a famous German company, Mannesmann, has horrified them so much. Traditionally in Germany, mergers must be accepted by both sides or they don't happen at all. Job losses are kept to a minimum. The German Chancellor, Gerhard Schroder, was so dismayed that he quickly condemned the move. But foreign investors saw the matter differently. They perceived the Chancellor as disapproving of an attempt to consolidate and strengthen the European mobile phone market at a moment when the old Continent has a world lead in the use of such technology, which in turn is at the centre of the industrial revolution through which we are now passing. They saw this as a sign of Germany's crippling lack of enthusiasm for open markets.

But it wasn't for this that the German government last week earned a reprimand from the president of the European Central Bank, Wim Duisenberg. Instead Duisenberg focused on the decision to pledge pounds 80m of taxpayers' money to rescue a failing construction company, Philipp Holzmann. This simply couldn't happen in Britain. Were, say, Wimpey to get into difficulties, nobody, not even the trade unions in the construction industry, would ask for an injection of public money. As Duisenberg told the German government: "It does not enhance the image that we want to have of being an increasingly market-driven economy across the euro area".

Then, on Friday, the German Chancellor really let off steam. Referring to Britain's decision to veto the imposition of a European withholding tax on interest and dividends derived from cross-border savings, which would damage the City of London's substantial international business, the Chancellor condemned UK "intransigence", and said: "if all else fails, one will have to consider national solutions." National solutions? The very country that had tried hardest to impose European limits on individual governments' freedom to tax and to spend is now considering going it alone. One analyst said: "This isn't so much Fortress Europe as Schloss Deutschland."

The problem for the 11 countries comprising the euro-zone, of which Germany is the largest, is that the Anglo-Saxon business model is not simply a theoretical concept that individual nations can choose to disregard. It is the ruling ideology of money managers around the world, who control and direct capital flows. The expected behaviour of interest rates and stockmarkets are naturally major influences on the way international funds are invested, but countries and currency zones are also rated on their adherence to the principles of hard capitalism. On this last criterion the euro-zone gets an increasingly poor mark. The result is that since 1 January $480bn of capital has been withdrawn from Europe while only $230bn has gone in, leaving a huge net deficit. This is the technical reason why the euro has been so weak.

I admit that you can make the argument that none of this matters very much. The decline in the euro is not a threat to inflation on the Continent as euroland, like the US, is a large, relatively closed economy in which imports supply only some 10 per cent of demand. On many tests, the European economy is at last performing better. Growth should be close to 3 per cent in 2000 and 2001. Aggregate unemployment is expected to fall from 11.5 to 8.8 per cent in that period; budget deficits are under control and inflation is not expected to exceed 2 per cent.

However, look again at the forecast for unemployment. After two years of relatively good growth, the proportion out of work would still be closer to 10 per cent than to 5 per cent. And, on the same day that Gerhard Schroder was fulminating about British obstinacy, President Clinton was able to announce what he called "one more piece of stunningly good economic news". Some 20 million new jobs had been created during his seven years in office, the greatest jobs growth of any American administration. And, at 4.1 per cent, the US's unemployment rate is at a 30-year low.

Indeed, compare the defensiveness of the German Chancellor with the boastfulness of the American President so far as economic growth and employment is concerned, and you can understand perfectly why the euro is weak and the dollar is strong.

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