U.S. may be helped more than hurt by developments, experts believe CRISIS IN EUROPEAN UNITY

September 18, 1992|By Gilbert A. Lewthwaite | Gilbert A. Lewthwaite,Washington Bureau

WASHINGTON -- The Bush administration and U.S. markets were unfazed yesterday by the chaos engulfing European currencies and threatening economic union on the continent.

"In some sense we are on the sidelines," said David Jones, chief economist with Aubrey G. Lanston and Co., New York securities dealers.

An early consensus was developing that the outcome of what's happening in Europe is more likely to be positive than negative for the United States. Wall Street traders took the crisis in stride yesterday, as the Dow Jones industrial average slipped 3.51 points, to 3,315.70, in slackened trading.

Potentially the United States stands to benefit from stronger economic growth in Europe if the European currency system is loosened enough to enable its weakest members -- Britain, Italy and Spain -- to reduce interest rates to stimulate their troubled economies.

This would increase pressure on the German Bundesbank to ease its interest rates further to avoid slowing its neighbors' growth out of its own persistent and self-centered fear of inflation. The Bundesbank's steadfast refusal to lower interest rates until it made a modest cut this week was an increasing source of tension in Europe.

"To maintain even general stability within that system we will be seeing significant-size interest rate declines, starting with Britain," said Mr. Jones. "It looks like we have reached a crossroad. We could either have gone toward default and depression or toward re-inflation. The rapid developments suggest we are going toward the latter."

The best-case result would be that lower interest rates, particularly in Germany, would foster economic activity throughout Europe, creating a stronger market for U.S. exports and promoting global recovery. The latest proof of the weakness of current European demand for U.S. exports came yesterday, when the Commerce Department reported that the U.S. trade deficit with Europe in July was $1.14 billion, a two-year high.

The worst-case scenario would have been for the high interest rate increases briefly imposed in Britain Wednesday to have taken hold there and then spread to other European countries. This would have choked off what little life there has been in continental economies.

The actual outcome will depend largely on Sunday's French referendum on European unity and on how the European Exchange Rate Mechanism, which ties 11 major continental currencies within a narrow band of values relative to each other, is realigned.

"We have to wait to see what sort of [currency] exchange pattern they come out with next week," said John Williamson, economist with the Institute for International Economics.

The dollar is likely to strengthen as the turmoil in Europe frightens investors away from unstable currencies.

"The dollar is off the floor and appears to be reasonably healthy," said Robert A. White, director of foreign exchange with First Interstate Bank in Los Angeles. "The chaos that seems to be afflicting Europe at this point is obviously beneficial for the dollar."

David C. Mulford, undersecretary of the Treasury, made clear yesterday that the administration was not currently concerned that a stronger dollar might make U.S. exports more expensive.

"The present level of the dollar is one at which the dollar is competitive," he said.

The United States is ahead of the international game in lowering interest rates in an effort to stimulate economic growth, although 24 cuts since 1989 by the Federal Reserve have had limited impact. If the dollar now becomes a safe haven from the currency turmoil in Europe and increases in value, the Federal Reserve could have room for yet another rate cut next month if the economy is still flat.

The recent weakness of the dollar limited the Fed's options in the face of a disastrous loss of jobs in August. It felt able to reduce only the federal funds target rate and left the higher-profile discount rate unchanged, limiting the impact of its last initiative.

"If this [currency crisis] promotes the easing [of interest rates] we expect in Europe, then it brings sooner the day that the Fed can face up to its requirement" of another rate cut, said Philip Braverman, chief economist with DKB Securities Corporation.

The currency crisis and the need to stimulate international growth will be the focus of two international meetings in Washington in coming days. Finance ministers of the world's seven leading industrial nations will meet tomorrow, and the joint annual meeting of the World Bank and the International Monetary Fund will open next week.

The focus of both sessions will be the need to stimulate international growth, and the European currency upheaval will be a new factor helping shape a formula for ending the global economic depression.

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