EU to keep up pressure for strong dollar

Date: 18/04/1996

By Tim Jones

THE sedate rise of the US dollar since the middle of February means that European finance ministers heading for Washington next week should have less to worry about than in the past two years.

While the downturn in the European economy over the past six months continues to haunt them, at least they can rest easy that the kind of precipitous collapses the dollar has experienced since 1993 is not making matters worse.

As they gather for the annual meeting of the World Bank and International Monetary Fund on 22-23 April, EU ministers will be hoping that Bundesbank President Hans Tietmeyer will keep up his barrage of verbal support for a strong dollar.

The German economy is highly dependent on sustaining its export markets, since it is dominated by firms producing high-value capital goods used for manufacturing. Unlike some European economies, it cannot rely on the domestic consumer to feed growth.

The mark surged in 1995, not just against the dollar but also against southern European currencies, causing big German companies such as Mercedes to shed jobs and even threaten to diversify to lower-cost production bases in other countries.

Growth has slowed markedly in Germany. In the last quarter of 1995, the economy shrank compared with the same period a year earlier, reducing the overall growth for the year to less than 2&percent;.

Unemployment is running at more than 10&percent;. The health of the European economy is so dependent on that of the German locomotive that a slow-down there quickly results in a generalised deceleration of growth.

The gloom at the beginning of the year is currently less pronounced. A revival of economic growth prospects in the US - where jobs are being created at a fantastic speed - has fed through into demand for the dollar, pushing it from a low of around 1.40 deutschemarks to more than 1.51 today.

As the mark weakens against the dollar, it tends to fall against other European currencies. This takes pressure off other European central banks to keep their interest rates high in support of their currencies and allows German products to be sold more cheaply abroad.

But the Europeans cannot assume this will go on forever.

Before the IMF-World Bank meeting gets under way, the finance ministers of the Group of Seven most powerful industrialised states - including Italy, France, the UK and Germany - will meet.

Talks will concentrate on the need to sustain jobs and avoid the recent slowdown in growth turning into a recession.

One key to this will be to keep the dollar at about its present level or higher.

At the moment, this is unlikely to be a problem for the US but, as the presidential elections approach in November, the administration may become increasingly willing to listen to the squeals of some business lobbies keen to export their products at low prices.

For Economics Commissioner Yves-Thibault de Silguy, who will also attend the meetings, the stability and predictability of markets is most important.

De Silguy will renew his call for a formal multilateral system of monitoring of monetary and fiscal divergences to avoid a repeat of the Mexican crisis and the impact it had on the dollar in late 1994.