NMIRI

European Economy in Deep Trouble

By
M. Gene Aldridge
NMIRI
The European economy is in deep trouble brought about by, not only weakened economies at the core (Italy, Germany and France), but by a new twist in decision-making by Brussels. The issue is deficits. There will be a relaxing of deficit spending limits for EU countries, according to President Romano Prodi (La Monde, October 16, 2002) who believes that the restrictions on deficits for EU countries are too rigid and to use his words, "stupid". This has big implications for the deepening economic problems that Europe is facing.

The core countries of Germany, France and Italy will not meet their targets of 3 percent spending limits, so they want everyone to relax the standards set by the EU Treaty for all countries. Now, the little countries, like Finland, Greece and Spain will have surpluses or will have met their budget commitments under the treaty this year. This could throw the EU economics into chaos for the near term and the longer term.

The uncertainty that this produces in the markets is that the EURO, against the dollar, has fallen 59 cents on October 17th in London. Further, this may require a new or revised treaty between the EURO countries in the zone. The political implications lead to further power shifts and alignments inside the zone because now the smaller countries and the larger countries may realign themselves around fiscal discipline issues. Deficit targets are likely not to be met until at least 2006 according to various sources inside the EURO community.

What now seems clear is that those countries seeking admission to the EU may use the smaller countries to vote in their favor against the larger core EU countries. This political movement, combined with a weakened EURO will produce a loss of international confidence in both the fiscal discipline and the changing power structure inside the EU community. The implementation of the Nice Treaty coming in 2004 will be interesting to watch for this reason since the veto power has been weakened and the ten countries seeking admission to the EU community may line up on the side of the smaller countries in the debate.

So if you are an international marketer in the U.S. what does this mean for you?

" It means that pricing your product or service in the markets against the dollar could be tricky as the U.S. dollar becomes stronger against the EU currency for the foreseeable future.
" Second, it means that U.S. business interests should move to build strong marketing relationships in the 10 candidate countries leading up to the Nice Treaty in 2004 while cozying up to the smaller EU countries who do have fiscal self-discipline.
" It appears that currency traders may have a field day with the changing EU currency and economic stagnation conditions, so watch your accounts that you hold in EU currency.

The worst scenario is brewing in Europe because their political core could be affected to such an extent that the peripheral countries could take over the power structure causing both economic and political imbalance. This leads to another condition that is even worse, policy conditions become unstable and this scares business interests internationally. International marketing has become a highly sophisticated discipline. No one really knows what oil prices will do in the face of uncertainty around the Middle East initiatives of the U.N. or the United States and its allies to further exacerbate the situation in Europe.

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