P&I: Do you expect it to occur on schedule for those countries?
MR. SNIJDERS: I think so, yes.
P&I: Germany, France and the Netherlands?
MR. SNIJDERS: Yes.
P&I: Does anybody disagree with that? Some other thoughts?
MR. BUCKLEY: We would probably add Ireland to the list of those making the first cut. We think the process will be challenged in the German constitutional court so there will be strict adherence to Maastricht.
But it is going to be kind of interesting watching the fudges that take place over the next 12 months. We already have had one with France Telecom. It will be interesting to see what Belgium does with their debt. But, in broad terms, we agree with Dick. We would not expect Spain and Italy to make the first cut.
P&I: Will the U.K. go in on the first cut?
MR. BUCKLEY: We would attach a probability of zero.
P&I: Tony, any thoughts?
MR. THOMSON: Zero for the U.K. first. That is the easy one.
MR. SNIJDERS: Is that because you think the U.K. does not want to come in or is not in a position to fulfill the criteria?
MR. THOMSON: I think the U.K. will be in a position to fulfill the criteria, but I think it is politically impossible. It is now so distasteful to people on every side of the political spectrum. Opinion polls showed 70%, 80% of the people are opposed to it.
MS. SIKORSKY: But that shows the U.K. is a weak democracy because opinion polls outside the Netherlands would show exactly the same. Therefore, I do not think it is a done deal because you have something which is pushed by governments and not at all followed by public opinion.
MR. THOMSON: Yes, it is a political deal and there must be some question (that it is a done deal). I spent quite a bit of time in France and the people I talked to were not in favor either.
There is a question to me as to whether the French could take the pain of this thing or whether we will have another crisis probably toward the end of next year. You have one French man out of four officially unemployed under the age of 25. I think the true number is probably quite a bit higher if you look at the Algerians, etc.
We are starting to have some extremely nasty politics in the part of France that I go to, much nastier than anything I am aware of in Germany, though the Germans always get much worse press, not least because of their past. I regard this as a deeply flawed concept dictated by politics. If Helmut Kohl, who is 65 and grossly overweight, should suddenly blow up, it (EMU) would not happen.
MS. SIKORSKY: It may not happen even if he does not blow up because he has an election in 1998, remember, and if the polls show he has no chance of getting re-elected because of the new Europe . . .
MR. THOMSON: It strikes me that, because this is so political, there must be a good chance they will try to drag Italy and Spain into it to try to make it as big as possible. It is a balance sheet thing, is it not? You can fudge your balance sheet.
P&I: If you let Belgium in, how can you turn down the others?
MR. THOMSON: Well, this is the fascinating thing. If Belgium is not a sovereign credit, what is its credit? Is it a C, a C-? Unrated? I assume that S&P, which has been soliciting me, has been soliciting other people saying Europe will become a credit-rating issue like the American states and localities. But the American states and localities, practically all of them, run balanced budgets. I cannot see Belgium running a balanced budget; it never has. How exactly it is going to meet the Maastricht Treaty is quite beyond me. It will be a one-shot fudge.
MR. MCKENZIE: There has to be a real danger in that if they do fudge the issue it just causes a lot of problems and questions on what the Euro will do, whether it will depreciate because it will have no credibility. So there will be lots of problems.
But I agree with Nilly in that I am sure public opinion, if you had a referendum in all the individual countries in Europe, would all give the thumbs down. But the politicians will drive it through if they possibly can.
P&I: What does that mean for the U.K. markets?
MR. MCKENZIE: Obviously, it will cause uncertainty. There is a feeling that the politicians are outweighing the central bankers. So I think that is the uncertainty and, perhaps, some volatility as you go through.
Obviously, there is the move toward the perception that convergence is going to take place and we are all going to go into areas that have a very powerful impact on bond markets, in Europe particularly. So if there was any weakening or to-ing and fro-ing, that would impact bond markets.
MR. THOMSON: Is that clear, though? What if the Euro is a rather soft currency and it speeds up economic activity?
MR. BUCKLEY: Will the Bundesbank allow it to be a soft currency?
MR. THOMSON: Will the Bundesbank have the option? The Central Bank (of the European Union) is not the Bundesbank. There is a very strong chance, if it goes ahead, it will be a softish currency.
MR. SNIJDERS: If you look back, perhaps, over the last two or three decades of what happened in Europe and on the Continent and all the history of the European Monetary System, in the end it proved we managed to get more discipline.
If we had had this discussion about 20 years ago, about whether the EMU was possible two years from now, then I think everybody would have said you were crazy. So, I think we actually are a lot further than we thought even five or six years ago.
I do not think the issue is whether the Central Bank should be independent or not. Everybody is clear on the fact that it should be a very independent bank in this environment. But I think they should stick to their initial targets.
MR. THOMSON: Of course, Belgium will be there. The issue is, will there be a mechanism subsequent to that to control the issue of Belgium's debt, which will not be a sovereign. It will have a very poor credit rating.
MR. MCFARLANE: I think there is a risk to the markets next year. You asked the acute question: What does it mean for markets? The European governments, for whatever motivation, have grasped their budget deficits in the form of the Maastricht criteria and have collectively used that as a tool to deal with some very fundamental crises.
Now, the question is, are the pressures brought to bear on European economies by either rhetoric or fundamental factors? Are those pressures more likely to develop an environment in which one can pick great stocks in Europe?
My betting is yes, they are. But I do not know what is going to happen with the EMU. Frankly, whether it is six or five countries, I do not care. Even were the U.K. to stay out, it could not stay out and become some basket case of high-inflation relative to Europe.
If CalPERS comes over here and gives lectures on corporate governance, watch out. That is really the key issue: A deflationary budget, a deficit control-oriented, more competitive environment; the bastions standing against those forces are under pressure in Europe.
So, I think EMU is a smokescreen for what is actually going on underneath in governments and in companies. But, in the end, do people invest in the States because of policies pursued by Bill Clinton? At a margin, yes, they do; but they invest there because of a low-inflation/high-productivity, free-market environment. Is Europe moving in that direction? I think the balance is yes, it is. (contd.)
