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Too Pluribus for Unum : Exchange System Collapse Blow to Hope for Union


NEW YORK — The European currency system all but died over the weekend--and with it immediate hopes for European economic and political union stalled.

And while some European leaders woke up Monday in a vituperative mood, currency traders around the globe were reflective, pausing from their frenzy to sort out the meaning of the exchange mechanism's collapse.

The French franc lost 2% of its value against the German mark, and other weak European currencies fell as well. But trading was lighter and the declines smaller than many had expected, given the decision in Brussels early Monday by Europe's finance ministers to allow their currencies to rise or fall against each other by as much as 15%.

The relaxation of the links between Europe's currencies--they had been allowed to vary by only 2.25% under a system in effect since 1979--is expected to free national governments to cut interest rates and devalue their currencies. Those steps, in turn, are counted on to kick-start sluggish European economies out of recession, helping prop up unpopular regimes and revive consumer demand across the Continent.

"The only alternative to integration is a set of separate nationalist, go-for-growth policies," said David Roche, a strategist at the London-based investment bank, Morgan Stanley International.

But only Portugal moved immediately Monday to reduce its interest rates, with France, Spain and other larger economies holding pat.

Apparently, those nations feared that their currencies would resume the free fall of last week, when speculators showed that they could out-muscle the European central bankers' efforts to prop up the franc and other weak European currencies.

With central banks quiet, many money managers and speculators in the United States and Europe sat on their hands.

"If you had taken a consensus of market participants at the end of last week, people would have been very surprised that trading wasn't more explosive" Monday, said Kevin McCarey, a manager of foreign portfolios for Fidelity Investments.

The big losers from last week's test of wills were European taxpayers.

The Bundesbank, Germany's central bank, and other central banks spent the equivalent of tens of billions of dollars buying francs and other weaker currencies in the failed attempt to keep them from going lower against the German mark. Now, those marks will have to be bought back with francs and other currencies that have declined significantly in value.

Their losses were the currency speculators' winnings.

"What this shows is that no central bank--or even group of central banks--can stop a concerted speculation against a currency," said Kenneth McCarthy, managing director of Economic Intelligence Co. in New York. "That's never happened before."

But other economists said speculators were not to blame for what happened.

"History will vindicate the speculators," said John Rothfield, an international economist with First Chicago Capital Markets. He and others blamed the stodginess of the Bundesbank, which stuck to its narrowly defined task of preventing German inflation in the face of the huge post-Cold War costs of German reunification.

European leaders and analysts tended to view the events through the prism of national policy.

At a news conference in Bonn, German Finance Minister Theo Waigel, a key architect of the Brussels agreement, hailed the accord as a double-barreled success, simultaneously rescuing the European monetary system from collapse and freeing governments and central banks from the pressures of currency speculation.

He said all finance ministers at the weekend meeting pledged themselves to work for a quick return to tighter currency linkage. Germany, Waigel added, remains committed to the goal of monetary union by the end of the century.

In Paris, however, a bitter editorial in the influential daily Le Monde on Monday denounced German monetary policy: "All Europe today pays for the Bonn government's mistakes in the unification process."

Ironically, it was the sudden prospect of German unification that initially led European Community leaders to agree to an accelerated timetable for economic and monetary union. For them, this union was the ideal way to bind Germany into a larger entity and prevent its isolation, which twice this century had brought Europe and the world to war.

If the loosening of currency ties succeeds in prompting growth in Europe, the ramifications for America will vary.

A faster growing Europe would help boost the American economy, while devaluations of European currencies would effectively reduce prices for Americans traveling in Europe. But a stronger dollar would increase the price of American products in Europe, cutting into the gains U.S. companies could expect from economic growth on the Continent.

On Monday, however, the dollar dropped sharply against the mark, falling over 3 pfennigs to 1.7085 marks in New York, down from 1.7405 marks on Friday.

The franc dropped to 3.535 to the mark before recovering somewhat to 3.515 in afternoon trading--well below its previous floor of 3.430.

Times Staff Writer Tyler Marshall in Bonn contributed to this report.

Franc vs. Mark

Figures indicate the number of French francs required to buy one German mark.

Monday: 3.5175 francs

July 28: 3,4098 francs

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