In fact the reality has not changed, for prospects for growth this year in the two largest Continental European markets, Germany and France, have been weak for some time. But there has been a shift in perception, highlighted by figures last week showing sharply rising unemployment in Germany (in December only a whisker below 10 per cent), an estimate that the German budget deficit last year was 3.6 per cent of GDP, not the 3 per cent previously expected, and reports of a forthcoming forecast of very slow growth in France. Now the string of gloomy news has become quite relentless, for just about every day some new story emerges of a downgraded forecast or poor actual figures.
The new thing this week, though, is some defensive statement by an official or a politician. Yesterday's crop included an assurance by Michel Camdessus, the French managing director of the International Monetary Fund, that "there is no particular reason to panic" over Germany's fiscal deficit figures, and the Italian minister Susanna Agnelli's view that the Maastricht criteria should only be met if that is possible without social upheaval. "We cannot face more unemployment," she said.
But perhaps the most significant of the defensive statements came from the French Labour Minister, Jacques Barrot. He seemed to be paving the way for downgrading the forecast for French growth by explaining that, though in the past growth in the 1 to 2 per cent region would have led to a sharp fall in employment, government measures should reduce its impact. "Even if growth is insufficient to create the new jobs we need," he said, "we should be able to put a brake on a rise in unemployment this year."
At the moment the official French growth forecast for this year is 2.8 per cent. A leak from the ministry of finance suggests that it will more likely be 1.3 to 1.7 per cent.
This will naturally make the fiscal position for 1996 even worse, and if a report in yesterday's Le Monde proves correct, the government is already massaging the public finances for 1995 by adding in some tax revenue received in the first few days of 1996 and pushing some spending from last year into this one.
The cumulative effect of this stream of information is twofold: political and economic. From a political point of view it is beginning to look as though neither France nor Germany will, by 1997, meet the key Maastricht criterion for a European currency: a fiscal deficit of less than 3 per cent of GDP. In addition, Germany is perilously close to the 60 per cent of GDP limit for total public debt and a year of very slow growth could nudge it above that.
There are even suggestions that such a failure to qualify will be welcomed, if not in Bonn, certainly in Frankfurt, where the financial community has the gravest doubts about the wisdom of the whole currency plan.
But the political fallout from the inability to meet the Maastricht criteria is in the future. It is like a devaluation. Until it happens the official world not only ignores the possibility; it denies that the possibility exists. We are not yet at crunch time.
We are much closer to crunch time on economics. Either the Continental economy is going to fall off a cliff, or interest rates will.
If looking at the US gives the best feel for the behaviour of the British economy, so looking at Japan should give the best feel for the behaviour of France and Germany. Like the US, the UK has experienced low inflation and decent-ish growth. But this has been associated with a high sense of job insecurity and insufficient confidence in recovery - insufficient, that was, to ensure the re-election of the incumbent.
Now there is a real possibility that Germany and France will experience a first half of this year where there is no growth at all, maybe even decline. Japan has experienced three years of bouncing along the bottom, not technically in recession, but not growing either.
True, both Germany and France experienced sharp growth in the second half of 1994 and the first half of last year, but now the spectre of stagnation could come to haunt much of Continental Europe. It will come in particular if Germany and France (and actually that really just means Germany) make the same mistake as Japan and do not ease monetary policy quickly enough.
The markets do expect German interest rates to fall this spring, and there have even been suggestions that the Bundesbank Council meeting this week could cut them. On balance that seems unlikely, though some individual council members have been hinting in this direction.
But what we are talking about here is not the modest easing of short- term rates and the modest further falls in bond yields which the markets expect. There is a real danger of a vicious circle establishing itself, with rising unemployment leading to cuts in consumption which will lead to further unemployment, which will in turn cut consumption still further.
Of course all economies are ultimately self-correcting; in any case the Bundesbank is immensely competent and once assured of the dangers would drive down interest rates. Eventually lower interest rates would prevail and recovery would be restored. But we could wait most of this year before that happened.
Maybe that point above could be rephrased: if interest rates do not fall fast, the fading Continental economy will pull them down. Either way, the market seems likely to be surprised by a plunge in rates, just as the politicians have been surprised by the plunge in growth.Reuse content