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Inet News Corp by: Paul Lengemann, President/Publisher, Inet News Corp Friday February 28 1997 at 10:13:43 AM EST
EMU Already a Force to Be Reckoned With
EMU Is Here to Stay
NY, NY US - Today’s market jitters over a rumor that the European Monetary Union would be delayed by two years should tell the markets and the governments involved something about public perception of the move. It should be a wake-up call that EMU already has an impact.
It is clear that the world of finance is taking EMU and its ramifications very seriously. Although many individual traders and analysts remain skeptical about EMU, the financial community seems to have accepted EMU as a reality. More importantly, it has accepted the convergence of European economic activity, of government fiscal and monetary policies and of business sentiment.
This acceptance of EMU as a reality -- that it will become a reality -- and that the process of its introduction has changed the international inter-relationship of the global fixed income markets. Today one can no longer look at the U.S. fixed income market in isolation. Today it is viewed in the international context, where spreads between German bunds and U.S. Treasuries are as important as the supply of paper in the domestic market. Indeed, the spreads between Italian bonds and German bunds or the spread between Spanish bonds and U.K. gilts have an impact on the price of the 10-year Treasury.
It is significant, actually essential, for the expansion of the international fixed income markets that the currency movements between the European units is brought down to zero. The absence currency risk makes these markets attractive. Once that is achieved with the introduction of EMU, the European fixed income markets will become liquid enough to compete with the U.S. markets. This could mean that U.S. yields will have to go up, because the demand shift to Europe for paper will leave the U.S. with fewer customers -- albeit this will take a while.
The U.S. effort to reduce government spending and achieve a balanced budget is, thus, not only essential for the management of the domestic economy, but also for the U.S. to remain internationally competitive.
If one takes a good look at the achievements of economic convergence, it becomes clear that a great deal has been accomplished. To be sure, much more needs to be done. But the trend is towards full convergence and the postponement of EMU, as many of its detractors would like it to happen, will not change that trend.
Thus, Germany, and the other “core” EMU members might as well go forward with their targets dates. Meeting them will only help the markets and will allow the group to institute policies which will reduce Europe’s biggest problem: huge unemployment and very low growth.
Author/Correspondent's Profile: Paul Lengemann, President/Publisher, Inet News Corp