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MORE REALISM IN A FLEXIBLE EMS AND MAASTRICHT

 MORE REALISM IN A FLEXIBLE EMS AND MAASTRICHT
 FRANKFURT, Germany, Oct. 27 /PRNewswire/ -- In the latest issue


of its "Market Trends" series, entitled "A New Monetary Paradigm for Europe," DB Research calls on the EC Commission and member governments to be more realistic in achieving monetary union. To this end, the institute proposes a "flexible EMS and Maastricht" that recognizes a staggered membership in an eventual monetary union and does not shun exchange rate realignments as a "last resort" of monetary policy.
 Economic convergence, writes Deutsche Bank Research, is "a hugely complex undertaking aimed at encouraging countless numbers of enterprises, consumers, workers and others to change their economic behavior over time." But this effort is supported by a strong EC constituency largely consisting of the same groups, who are ultimately the ones benefiting from and therefore demanding exchange rate stability in Europe.
 As the institute notes, there is nothing in the Maastricht Treaty to prevent compatible countries from limiting the fluctuations of their currencies against the DM to 0.25 percent. "A two-speed Europe is nothing new," writes DB Research. Unlike the "peripheral" members (United Kingdom, Italy, Spain, Portugal, Ireland, and Greece), a core group of EC members (Germany, France, Belgium, the Netherlands and Denmark) has experienced a correlation of supply and demand conditions, which are comparable to the behavior of the unified U.S. economy. Though not members, Austria, Switzerland and Sweden also fall into this category, writes DB Research.
 If these countries enter a narrower band -- a development which Deutsche Bank Research calls "quite likely" -- this would not only enhance "the credibility of their commitment to monetary union," but would also prepare public acceptance of a fixed exchange rates system, the institute writes.
 At the same time, DB Research warns against conducting such a "two-speed" Europe as an intentional policy outside the framework of the EMS and Maastricht Treaty, since it would be "dangerous and counter-productive" to the idea and practice of European integration. An intentional two-speed Europe contains the risk of "polarizing western Europe into its version of North and South, precisely at a time when the forces of disintegration have risen significantly in eastern Europe and have threatened to spill over into the western part itself."
 In this context, DB Research points out that the Maastricht Treaty itself envisions "a staggered membership in future monetary union." According to DB Research, it would for example be "foolish" for countries facing drastic economic reform "to aim for an arbitrary deadline at the risk of causing a significant in crease in unemployment and other social dislocations."
 DB Research also argues that, up to now, vital economic factors such the unemployment rate and external imbalances have not been given adequate attention in the EMU framework. Lest the convergence process be treated as something "mechanical and deterministic," these factors ought to be considered in addition to the formal convergence criteria.
 Concerning the currency markets more directly, DB Research adds that given the recent easing action by the Bundesbank, the French franc has -- "with a very high probability" -- weathered the storm. The British pound, the institute finds, "is set to weaken further against the DM over the next few months."
 For a copy of the complete text, please contact Arley Lewis, TransAtlantic Futures, Inc., Washington, D.C. phone: 202-462-1222; Fax: 202-462-1229.
 -0- 10/27/92
 /CONTACT: Hung Q. Tran, 011-49-69-71007-300, or Larry Anderson, 011-49-71-971-7080, both of Deutsche Bank Research in Frankfurt/ CO: Deutsche Bank Research ST: IN: FIN SU:


IH -- DC011 -- 5379 10/27/92 12:00 EST
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Date:Oct 27, 1992
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