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. Last Updated: 07/27/2016

Slump Takes Gloss Off Single Currency

BRUSSELS -- Europe's economic health has taken center stage in an intensifying debate over the future of monetary union, with top officials offering conflicting views on how a downturn might affect the single currency timetable.

Signs of economic slowdown and warnings on company profits have taken the gloss off the European Union's hopes of a smooth ride to the launch of a single currency in 1999.

Germany is the key, due to its overall economic importance and a more uncertain domestic situation which threatens to weaken its leading role in constructing a single currency.

Rising unemployment, sluggish orders and a strong mark have left the country struggling to keep its finances in order.

EU diplomats say Germany is entering a critical stage, one which will either make or break its ability to meet the Maastricht treaty's criteria on public deficits for countries that are seeeking to qualify for the single currency.

"I think there will be a major debate in Germany over the next few weeks on how they get out of the fiscal mess," said one senior diplomat in Brussels.

At 3.6 percent of gross domestic product, Germany's 1995 budget deficit was well above the 3 percent target specified by the key EU treaty.

But economists warn that a strategy of further spending cuts or higher taxes would harm the economy's already meager growth performance and make the 3 percent target even more elusive.

Another source of concern throughout Europe is the outlook for corporate profits, seen as a leading indicator for economic performance.

In an interview Monday with the Financial Times, European Monetary Institute president Alexandre Lamfalussy said there was no worsening of profits or corporate indebtedness, the primary catalysts behind every downturn in the past 150 years.

Echoing such views, EU Commissioner Yves-Thibault de Silguy told a news conference the present level of profits and investment suggested an economic slowing but not a recession.

Yet a glance around Europe shows tentative signs of corporate nervousness. Several major firms in Britain, Sweden and France have trimmed their outlook for 1996 earnings.

At the official level, the response has been a mix of steadfastness and retrenchment. The Social Democratic prime minister of the German state of Lower Saxony, Gerhard Schroder, urged a delay to the currency timetable.

Otmar Issing, top economist of the Bundesbank, the German central bank, Saturday said preparations for monetary union were inadequate and warned of the risks implementing it in 1999.

Such pessimism was offset by German Chancellor Helmut Kohl, who told a weekend gathering that there was no question of delaying the timetable for economic and monetary union.

Yet Kohl also faces a tense political situation, which could unravel his fragile ruling coalition.

The leaders of Kohl's Christian Democratic Union are embroiled in a tense standoff with members of the Free Democratic Party over the budget, with rebel FDP deputies wanting tax cuts to stem their growing unpopularity.