Outlook: Oskar's gone but the problems remain
Saturday 13 March 1999
The German government was insisting yesterday that the departure of its architect had not toppled the tax plan that caused such uproar among insurers and utilities. Allianz alone said it stood to lose 2.5 billion marks and would move abroad. Although dullard Hans will probably compromise on the corporate tax increase eventually, the stand-off is clearly not yet over.
Another part of the reason for the surge in the euro was the judgement that the ECB will now be able to cut Euroland interest rates to boost growth without appearing to give way to political bullying. German GDP declined in the fourth quarter of last year. Yesterday brought new figures showing Italy's GDP fell during the same period as well. So the odds on a rate cut must have improved. Not so fast, though. Wim Duisenberg poured cold water on the idea again yesterday, saying governments must put their finances in order first.
Nor does Oskar trotting off into the sunset resolve the really fundamental question about Euroland. It was posed by Mr Duisenberg again yesterday: will member governments engage in structural reform to move back the barriers to potential growth? Or, to put it in a way guaranteed to annoy our European partners, will the rest of the EU become more Blairite now?
Possibly - the biggest obstacle has gone. But not necessarily. There is still no consensus on the appropriate policy agenda for the EU. We still don't really know whether the euro is going to be allowed to act, as it should, as a catalyst for free market reform across Europe, or whether by contrast it will become a stultifying conduit for centralised tax harmonisation and rigid control of labour and capital markets.
Whatever the answer, the economic management of Euroland has, overnight, become much less problematic. Mr Eichel should make a point of not bullying the ECB and not hectoring his fellow finance ministers. Even if he wants to boost demand the old-fashioned way, he is more likely to get a rate cut if he makes harmony, not harmonisation, his watchword.
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