Paris and Bonn set course for 'Euro'

EMU crisis: France and Germany unveil plans to stimulate economies and win support for monetary union

Germany and France yesterday countered growing scepticism about the European Union's planned single currency by unveiling measures to stimulate their flagging economies, create jobs and keep the project of monetary union on schedule.

They announced their proposals for economic expansion as the European Commission President, Jacques Santer, worked on a speech to the European Parliament in which he is expected to call today for an EU-wide effort to promote jobs and investment, while reaffirming the January 1999 deadline for starting monetary union.

France, Germany and the Commission are worried that European public opinion is increasingly associating high unemployment and a slowdown in economic growth with the efforts of EU governments to meet the Maastricht treaty's conditions for launching the Euro, the recently named single currency. French and German leaders hope that the measures set out yesterday will boost their economies sufficiently to enable both countries to meet the Maastricht targets and to convince voters of the Euro's merits.

"We believe that this slowdown is temporary and that a rebound in growth must be expected from the end of the first half of this year," said France's Finance Minister, Jean Arthuis.

Although the announcements were made simultaneously in Bonn and Paris, diplomats and economists said the German government had been doubtful about French attempts to present the measures as a grand, co-ordinated initiative to restore Europe's fortunes. The two programmes share the broad aim of breathing fresh life into wilting economies, but German officials noted that each country faced distinct challenges and was developing separate responses.

The highlight of the French measures, which were generally modest in scope, was an attempt to increase consumer spending by cutting the interest on the most popular tax-free savings account, the Livret A, from 4.5 to 3.5 per cent. Big French banks responded quickly by lowering base lending rates from 7.5 to 7 per cent as of tomorrow, a move that could generate extra economic activity.

The more ambitious German measures, described by the Economics Minister, Gunter Rexrodt, as a "vitamin dose" for the economy, involve a variety of business and wealth tax cuts. In addition, there is the DM4bn (pounds 1.8bn) reduction from July 1997, announced on Monday, in the "solidarity surcharge" on income tax - an unpopular supplementary tax designed to raise money for modernising the former Communist east German economy.

Chancellor Helmut Kohl's centre-right coalition government was criticised on three fronts yesterday for cutting the tax surcharge. East German politicians said the measure looked as if the rich west was abandoning the east, still much poorer despite an infusion from the west of hundreds of billions of marks since unification in 1990.

Several big western Lander also opposed the tax surcharge cut, arguing that the federal government was asking them to make up DM3bn of the lost revenues. Meanwhile, opposition Social Democrats accused Mr Kohl's Christian Democrats of introducing the measure in an effort to boost the chances of the struggling Free Democrats, the junior partner in the Bonn government, in three Land elections in March.

The French and German governments stressed that their renewed drive for growth would not come at the expense of more public spending and bigger budget deficits. In public, at least, German and French leaders remain fully committed to strict adherence to the terms for monetary union, which require participating countries to have a budget deficit of no more than 3 per cent of gross domestic product in 1997.

This target is not proving easy for either Germany or France to meet. The German government's annual economic report, officially released yesterday, predicted a 1996 budget deficit of 3.5 per cent of GDP, after an unexpectedly high 3.6 per cent last year.

Moreover, the government is forecasting average unemployment this year of 10 per cent and economic growth of only 1.5 per cent, after 1.9 per cent in 1995. Mr Kohl hopes that the new tax-cutting measures, coupled with falling German interest rates, will inject enough dynamism into the economy to enable Germany to qualify for the single currency in 1997.

France's efforts to cut its budget deficit from an estimated 5.2 per cent of GDP last year to 3 per cent in 1997 are being blown off course by a much sharper slowdown in economic activity than the centre-right government anticipated. Last autumn it predicted 1996 growth of 2.8 per cent, but the estimates of independent economists range from a poor 1.8 per cent to a sickly 1.25 per cent.

Worse still, unemployment figures for last November and December, due to be published shortly, are expected to show a rise from the 11.5 per cent recorded in October.

All this will put pressure on France's budget deficit by reducing the tax revenues that a government expects to receive when an economy is expanding and unemployment is falling.

Economists believe that, to meet the Maastricht deficit target, the government will have to redouble the austerity measures which, late last year, provoked France's worst social unrest since 1968. However, as yesterday's announcement in Paris indicated, the government wants to focus its attention as much on job creation and growth as on rigid fiscal discipline.

The problem for France and Germany is that there is not much room for manoeuvre if the Maastricht conditions are treated as sacrosanct. Goldman Sachs, the investment house, forecasts that both countries will miss the deficit target in 1997 - with France at 3.4 per cent of GDP and Germany at 3.3 per cent.