1996 Issue # 7

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7here is a huge debate fer-menting over the future ofEurope. In Britain, this de-

bate is also heating up as the infa-mous date of 1999 moves closer toour focus. Many argue that Europemust pull together to fight off therising tide of trade around theglobe. A united Europe is seen asthe answer to keeping the Marxistfoundation of socialism alive. Tosome observers this appears as aclose parallel when Rome trieddesperately to fend off the inva-sions of barbarians that alsoproved fruitless in the final histori-cal analysis.

The one sales pitch that hasbeen used to sell this reviveddream of a united Europe is noneother than the currency. It has beenpointed out that if one begins inLondon with a 100 pounds, aftertraveling around Europe exchang-ing the currency in every port, when

Issue #7 July 1996 Copyright Princeton Economic Institue all rights reserved214 Carnegie Center,Princeton NJ 08540 609-987-9522 Annual Subscription US$49.95

you return to London you will haveonly 60 pounds left after spendingnothing.

While this argument appears toinvoke much common sense abouthow inefficient currency transac-tions might be between nations, atthe same time, it fails to deal withthe reality behind creating a singlecurrency. The proponents of a sin-gle currency for Europe often pointto the success of the United States,albeit behind closed doors and faraway from the public eye, as thejustification behind a single cur-rency. Many fund managers andmultinational corporations also hailthe move to a single currency asthe future for Europe simply be-cause they are finding it extremelydifficult to cope with the rising vola-tility in foreign exchange.

Nonetheless, Europe does notquite understand the United Statesmodel of a single currency. Europelooks at the US and sees one singlecurrency as being extremely effi-cient with a by-product of consis-tently lower unemployment as onegoal. However, it is in fact a singlecurrency policy that is actually partof the internal problems that arecausing much concern within boththe United States and Canada.

It is of vital importance that weunderstand the benefits as well asthe nasty side-effects of a singlecurrency for Europe as a whole andin that context US and Canada doserve as an excellent model to ex-plore for answers. Prior to 1927 thecentral banking system in the USwas established in 1913 with 12INDEPENDENT branches. Eachbranch maintained its own sepa-rate discount rate. This is very im-portant to understand. It was notuncommon to find rates at 7% inCalifornia and 3% in New York.This is far too often a point totallylost in history, but it is paramount intrying to define whether or not EMUwill succeed or fail for Europe.

The central banking systemknown as the Federal Reserveemerged as a solution out of thedisaster of the financial Panic of1907. The Federal Reserve was

formed in 1913 because the evi-dence revealed in the investiga-tions by Congress discovered thateven though a single currency hadexist ed in the US since 1792, theregional capital flows within the USwere often to blame for numerousfinancial panics - 1907 being theprimary Panic that drew the atten-tion of government to this problem.

The differences on a regionalbasis within the US economy as awhole were the source of Panicsdue to cash flow problems on anationwide scale. Even today, thedifferences between the localeconomies in Texas and New Yorkare staggering. We call this theTexas/New York arbitrage. WhenTexas is booming, New York is inthe depths of a recession and viceversa. The New York economy ismore financial and business re-lated today while Texas is morecommodity oriented with farmingand oil production. Therefore,when inflation is running high,Texas booms at the expense ofNew York.

This is the same regional capitalflow problem is silently tearing Can-ada apart. When real estate wasbooming in 1987 in the Eastern re-gions of Canada, interest ratescontinued to rise in an attempt tostop the speculation. However,while there might have been a realestate boom in the East, the risinginterest rates policies were drivingfarmers into bankruptcy in Alberta.

The Panic of 1907 followed onthe heels of the Great San Fran-cisco Earthquake. The claims wereobviously on the West Coast but allthe insurance companies were ofthe East Coast. As capital flowedfrom East to West, shortages inmoney supply emerged amongNew York banks that culminated inbank failures.

A single currency does not nec-essarily make things great. In fact,there is more to the issue of a stableeconomy than merely a single cur-rency.

The regional cash flow problemswere initially resolved between

1913 and 1927. However, a verysignificant development took placein 1927 that would forever alter thecourse of our economic destiny forthe entire century.

By the mid 1920s, it was noticedthat there were significant prob-lems emerging on a cash flow basisinternationally. In a power strugglewithin the US Federal Reserve, theNew York branch managed to con-vince the government that thesame system of regional cash flowmanagement should be extendedto the international level. The NewYork Fed won the battle againstChicago who warned that changingthe focus would undermine the do-mestic policy objectives of thebank. In the end, the entire powerof the Fed was shifted into a singlenationwide system where one in-terest rates policy would be usedthus abandoning the original mis-sion of the the Federal Reserve asthe guardian of domestic cash flowproblems.

1927 this marked the beginningof the very first G4 effort at influenc-ing international cash flows. Thediscount rate in the US wasusurped into a single rate. The firstaction was to lower US interestrates in an attempt to divert capitalback to Europe. The manipulationbackfired because it gave cre-dence to rumor that there was aproblem with the escalating debt inEurope. As the cash flows into theUS intensified, the Fed moved intoa state of panic. Capital poured intothe US driving the stock market updramatically - doubling between1927 and 1929 despite the Fedraising interest rates from 3% to6%.

The post-1927 economy has re-mained on the international re-gional focus rather than on theoriginal intent of domestic regionalcapital flow management. This iswhere our modern problems of re-gional disparities emerged. Theone-size-fits- all approach to inter-est rate policy is now increasing thetensions between regions withinmost nations. It is this very issuethat is tearing apart Canada pittingone province against another.

Providing Economic & Market Analysis Worldwide

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This theory that a single cur-rency for Europe is NOT the an-swer. It will not solve the vast dis-parities between the economies ofEurope but in fact will be a meansof exporting deflationary policies atwork in Germany to other nationssuch as Britain. What EMU must beabout is more than a single cur-rency. While a single currency willease some risk problems for busi-ness associated with currency, itposes significant dangers thatwould breed resentment betweenmember states.

If EMU were to adopt a singlecurrency, it must NOT, under anycircumstances, lead to a singlemonetary policy that would imposea one-size-fits-all approach. Thebasic sovereignty over establishinglocal interest rates must reside witheach state. Allowing this vital powerto be usurp into a single rate willundermine the entire framework ofEurope much in the same manneras is taking place in Canada oreven the United States.

The individual nations of Europehave distinctly different economiesas is the case among the 50 US

states. When US auto manufactur-ers lost market share to the Japa-nese and European cars, the econ-omy of Michigan was devastated.When IBM was forced to restruc-ture, Massachusetts was devas-tated. When oil prices fell sharply,million dollar homes in Texas fell to$100,000. Regional problems existtoday as they did prior to 1913. IfEurope follows-through with itsone-size-fits-all plans for EMU, itvery well may lead to the worsteconomic disaster in the economichistory of Europe.

Copyright PEI July 1996 All Rights Reserved

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7he political scene is aboutto go completely nuts aswe approach mid to late

August. At the Republican conven-tion, rumor has it that Buchanan willnot get an opportunity to speak.Amazingly, there is yet another 3rdParty movement going by the nameof the US Tax Payer’s Party whojust so happen to be holding theirconvention across the street fromthe Republicans in San Diego. Thestart date will be Friday, August16th coinciding with the end of theRepublican convention. The rumorpart is that Buchanan is going tostage a protest on national TV andwalk across the road to assume thenomination of this new 3rd Party.The US Tax Payers Party is on theballot in 28 States. AlthoughBuchanan running as yet another3rd Party candidate may not standa chance of winning, combined withPerot, the US political scene is go-ing to start looking like some Euro-pean nations with multi-party frag-mentation. This is likely going tomean that Clinton will win rathereasily as our computer models hadforecast.

Yet the second party of our long-term Presidential forecast for theUS remains quite provocative. AClinton victory in 1996 will meanthe end of the Democratic Party.Clinton should be the last Demo-cratic President to hold office!While this might appear to be apartisan statement, it is not! Thereare two factors taking shape herein the US political scene that aresimply not addressed by the mediaor many politicians for that matter.

1)DEMOGRAPHICS: If we lookat the great socialistic movement ofthe 20th century, we see that itactually reached a peak with thefirst election of Roosevelt. That firstelection marked the highest con-centration of Democratic power inthe Senate and the House. Whilethe Democrats managed to retain

control of Capital Hill for 40 yearsor so, they did so with a steadilydeclining majority. If we analysisthe generational cycle, we find thatthe bulk of the support for theDemocrats tends to be concen-trated within the elderly and lowincome minorities. As we lookahead, the elderly generation of theNew Deal will die off as we movebeyond 2000. This shift from onegeneration to the next will be pro-found. The Democrats have neverbothered to build much of a coali-tion among the middle class whoremain the bulk of the independentvoters. Consequently, the mostconservative groups among votersare not the elderly or low incomeminorities. As we move beyond2000, the Democratic Party beginsto fade in its support.

2) CORRUPTION: There is littledoubt that Clinton and his wife areperhaps the most corrupt couple tohave ever held the office of Presi-dent. Hillary is clearly guilty of justabout everything under the sunfrom laundering funds via cattle fu-tures and land deals to obstructionof justice in dealing with the Con-gress. Since the IndependentProsecutor Ken Star is holding offon filing any charges against theClintons unti l after the election, anew possibility arises. There is areasonable chance that during thefirst half of 1997 Clinton may resignor at least standby and try to defendHillary. In any event, the post-elec-tion period may become far moreinteresting than the pre-electionspeculation. This could be one fac-tor that drives the dollar to a newlow against many Europeans earlynext year.

ECONOMY:

The US economy appears tohave reached a temporary top as ofMay 1996. The back-dated statis-tics will continue to be strong rais-ing the serious possibility of a ratehike by the Fed come August. Thismay have a profound impact upon

the share market as well as bondmarkets in the US and elsewhere.If the US 30 year bonds close below10801 at the end of July on a near-est futures basis, then there will bea risk that a rate rise is possible inAugust causing the second legdown in the stock market prior toLabor Day.

SOCIAL SECURITY:

Thanks to Clinton’s clever trickswith the funding of the nationaldebt, there is a real risk that SocialSecurity will move into deficit nextyear - not 2010 as previous fore-cast by the government. This willhelp to add to the confusion of in-flation and market behaviour nextyear promising to make 1997 ayear to remember.

TAX REFORM

The Flat Tax is dead. Long livethe Consumption Tax. If the Re-publicans do manage to hold Capi-tal Hill (A BIG IF), then we shouldexpect a compromise plan toemerge from Armey- Archer. Theplan will be replacing the incometax with a national sales tax whilebusiness will still be taxed on anincome basis. Reforms in the busi-ness tax may also include the abol-ishment of worldwide income.

Congress is clearly concernedabout the Internet and the emer-gence of a new quasi-electronicform of money. They know that taxreform is going to be necessary butat the same time they also knowthat money, as we know it, mayalso be changing. There are someon Capital Hill who do envision theday where cash will be abolishedand all transactions will be takingplace with some sort of a debt-card.This will answer the prayers of thetax collector and perhaps begin the21st century on a completely newset of rules.


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Professor, Sir Alan Walters,the former economic adviser toMargaret Thatcher was the guestspeaker at our London seminar inJune. He is also a member of TheReferendum Party set up by SirJames Goldsmith to contest thenext UK elections on the issue ofBritish sovereignty in Europe andthe right of the electorate to ex-press a direct view by referendum.He spoke on the subject of theEuropean Monetary Union (EMU)and the single European currencyas well as broader issues. From hisbackground at the heart of Britishpolitics in the 1980’s he provided aninsight into the lead up to the Euro-pean position today and a thought-ful analysis of economic and politi-cal motives currently at work. Pro-fessor Walters speech, included inthe video of the London Seminar, issummarized below.

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There is a great distinction be-tween a monetary union and a sin-gle currency, though in economicterms broadly speaking they arethe same. Hong Kong and the USare an example of monetary unionwith the exchange rate fixed at 7.8.Interest rates in Hong Kong movebased on those of the US. And theGerman, French and Benelux cur-rencies are effectively in monetaryunion within the European Ex-change Rate Mechanism (ERM)with very little movements in theirparities. You get all the economicbenefits of a single currency with-out the need to create one due tofixed rates.

Economically, it doesn’t matterwhether you have a single currencybut politically it matters a greatdeal. Because once you have asingle currency you have lockedyourself in and thrown away thekey.

The Gold Standard from 1870through 1931 is cited by some as acase for a single currency but thatwas a monetary union, gold itselfdid not circulate to any degree. Sothat allowed Britain to get out of thestandard at various times such asin 1913. Britain went back into thestandard at $4.85 in 1925, went intoa great slump in 1926 and essen-tially stayed in it until coming off thegold standard in 1931. The USwent off in 1933 and the Frenchheld on until 1936.

Monetary Union and Inflation

The economic argument formonetary union was that all coun-tries would have the same inflationrate; Britain joining the ERM wouldborrow the Bundesbank’s credibil-ity, control the French and gang upon the Germans. There was enor-mous political pressure to join.However, there is no reason to be-lieve that monetary union or even acommon currency will result incommon inflation rates. Hong Konghas had inflation rates spread 5%above those of the US over thesame period. The central point isthat you would have the same infla-tion but only for tradeable goods.Non-tradeable goods such as realestate can be very different. TheUS itself is an example with priceinflation different in different areas.

Optimum Currency Area

A single currency for Europe hasnever been rationally arguedthrough. To argue for this youwould have to prove Europe is anoptimum currency area - all econo-mies reacting broadly in the sameway to monetary policies and mov-ing in concert. Now Europe doesnot react this way. Even the US

does not react this way but there isa great mobility of resources andlabor in the US against minimalmovement in Europe. There arestrains in the US - when oil goes upits good for Texas but the EastCoast cries. In Europe thosestrains would be two or three fold.It will be very difficult . Countries willwant to break out of the straightjacket.

Conclusion

It is likely therefore that Europewill have Monetary Union but not acommon currency beginning in1999. Kohl is in a hurry; he wantsthis established before the 1998German elections when he is likelyto retire.

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Direct investment in the UK hasincreased for a third year running torecord levels. Although the largestnumber of projects still come fromthe US, Germany has moved to thenumber two position. More than1500 German companies nowhave an operation in the UK, andinvestment from other Europeancountries is increasing. Britain re-mains the favored destination fordirect investment into the Euro-pean Union accounting for 38% ofall investment last year. The wellpublicized investment by Korea’sLG Group of £1.5 billion creating6,000 jobs has created euphoria inthe Welsh valleys around the cho-sen site. A government grant of£200 million no doubt helped inattracting this Korean investment tothis region along with the presenceof existing successful Korean ven-tures. However, stable and lowtaxation and liberal labor regula-tions remain major factors in at-tracting inward investment.

A meeting of twenty eminenteconomists recently debated em-ployment issues under the aus-pices of Southbank University’sEuropean Institute in London.


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Could regulation and non-wagecosts such as welfare and sever-ance be responsible for Europe’shigh and persistent unemploy-ment? The unanimous decision bythe economists was “No”! How-ever, it was noted that a viciouscircle of the public sector providingalternative jobs or compensationtriggers increased governmentspending, higher taxes or interestrates or both and that the extremelyhigh severance pay rules in Spaincould contribute to that country’s22% unemployment. No Korean in-dustrialists were observed in theaudience.

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The exclusion of pension liabili-ties from the Maastricht criteriajudging qualification for the Euro-pean single currency does not ap-pear to be causing too much con-cern. Unfortunately, if they were in-cluded, it is unlikely any countrywould come close to qualification.Apart from Britain, Ireland and Hol-land, pensions for the expandingranks of the elderly are funded notby past contributions but by taxfrom the dwindling ranks of theyoung employed. Unfunded liabili-ties as a proportion of national in-come run at 69% in France, 122%in Germany and 107% in Italy.Members of the currency unionwould be jointly liable to bail out theproblems with tax payers money.Euro interest rates could gothrough the roof as each of the 400million citizens of the European Un-ion would be saddled with $50,000in debt. It is a compelling argumentfor Britain to bail out now ratherthan bail out Europe later.

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Brussels has finally acknow-ledged that it would appear to becontradictory to remove currencydistortions in free trade within theEU while leaving taxation distor-tions in place. There are very largedifferences in tax systems, taxrages and tax bases between

member states which significantlyfrustrate free trade. A "Communi-cation on direct taxation” is due tobe released by the Commissionthis summer with proposals for har-monisation perhaps a little bit be-hind the drive for harmonisation ofcurrencies and subject to very littlepromotion in public. Tax, however,sits right in the door of governmentswhilst differences in foreign ex-change can be blamed on specula-tors.

Reform of Value Added Taxation(VAT) is also under discussion.Three proposals put out by single

market commissioner Mario Montiwere to make businesses pay forBAT on cross border transactionsin the country of origin, bring allBAT rates to the same level (toavoid low tax countries having and"unfair” advantage) and to “mod-ernize” and standardize the scopeof VAT as who would pay and whowould be exempt. No doubt therewill be opportunity for a little reve-nue raising. It has been suggestedVAT should be added to the ticketprice of all aircraft travel within theEU. Good news for holiday resortsin Thailand, but not in Spain!


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Telekom Germany has plannedto issue the first portion of 500 mil-lion shares (par value 5.00 DM) inNovember as part of the privatiza-tion program. The second allot-ment is scheduled for 1998. With abalance sheet of 160 billion DM($105 bln), sales of 66 billion DM($43 bln) and a profit of 5.8 billion($3.8 bln) for 1995 it appears to bean interesting investment - at leastinitially. The issue price is esti-mated between 25 and 30 DM - thesale shall fetch about 15 billion DM($10 bln).

Deutsche Bank, Dresdner Bankand Goldman Sachs as lead under-writers need to be successful, oth-erwise the second portion in 1998wont sell. 60% of the shares shall

be placed in Germany, 20% in theUS and 20% in the UK and Europe.

60% of the total of 15 billion forGermany means a capital require-ment of 9 billion. This is a decentamount for the German Stock-Ex-changes. In 1995 a total of 20 com-panies went public and they alto-gether raised just a total of 8.3 bil-lion. In the rest of the world, irre-spective of the fact that Telekom isnumber three on this planet, theinstitutions do hold a lot of telecom-munications shares like AT&T,NTT and BT not mentioning thesmall companies. I doubt that anysubscriber of the new issues ofNTT or BT is happy with his invest-ments - only AT&T has performedwell. Those who place and issueshares look always with optimisminto the future. They estimate thegrowth rate for telecommunicationat 15% p.a. worldwide for the next

decade. For the domestic marketthe forecast hovers around 7%.

What is worth knowing aboutTelekom? Their debt is more than120 billion DM ($79 bln) and theypay more than 8 billion ($5.2) oninterest. Telekom used to be part ofthe government. The German civilworkforce has the same reputationas other civil work forces in anyother country. Telekom also has ahuge obligation on old pensionschemes and has not yet experi-enced competition in its core mar-ket. It was also exempt from reve-nue tax until 1996.

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Theo Waigel, the German fi-nance minister, recently received aletter from Mario Monti, the EU-Taxcommissioner. Certainly diplomaticbut down to the point: The German

Tax Burden of Publicly Listed Companies(percentage of profit)


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corporation income tax (Körper-schaftssteuer) is against some ba-sic rules of the Maastricht treaty. Ithinders and restricts free capitalflow.

Tax burden of publicly listedcompanies, percentage of profit

That is not all. Germany now hastotal of 1500 companies with op-erations in the UK, the tax-haven ofEurope. Why, because businessesare voting with their wallets andinvesting abroad in order to avoidtaxes. It is as simple as that. Aslong as politicians do not learn thelessons of history they are con-demned to repeat the misery. TakeMunich as an example. A referen-dum voted with 50.6% for threenew tunnels in Munich. Three dayslater it was obvious that this wouldcost some money. The city councilvoted and decided for an increasein trade taxes. They call it the “Tun-nel-Strafsteuer” (tunnel penaltytax). What is going to happen? Anydecision upon location will be influ-enced more by the local taxes thanby economic parameters and themunicipalities will get less incomein the end.

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The debt increase for 1997 willbe 7 billion DM more than plannedbecause spending reductions cannot offset the loss of income due tothe lower and/or negative growthrate. Waigel has to deal with anadditional 5 billion for social costsmeanwhile missing 30 billion of taxincome. How does he do that? Hecuts the defense, the agriculture,the transport and the sciencebudget. The capital investment pro-gram is also reduced by 10%. Thesocial side, still 28% of the overallbudget will only be cut by a meager2%. His interest expenditures arenow a total of 93,7 billion DM, whichis 21.3% of the total budget.

This is the plan. The question is,how realistic are the assumptionsthis plan is based upon? The gov-ernment believes in a real growth of0,75% for 1996 and a growth rateof 2,5% for 1997. Even with thisslightly optimistic figure, public debtwill increase and lead to serioustrouble.

In 1994 the national debt stoodat 1,169 trillion - municipalitiesowed 938 billion. Neither the Bun-desfinanzministerium, nor the Bun-desbank, nor the Statistische Bun-desamt yet has been able to pro-vide us with the official numbers for1995. Still, we can do some home-work. If it would really be possibleto increase the income according toabove table and if it would also bepossible to control spending, whatwould happen to the national debt?

Until 2000, the national debtwould rise by 228 billion DM. Let usbelieve that the government hasconsidered the effect of com-pounded interest and let us as-sume that the above numbers canbe achieved - still, Germany willincrease its overall debt.

But how long can they do that?

“Any government, like any fam-ily, can for a year spend a little morethan it earns. But you and I knowthat a continuance of that habitmeans the poorhouse.”

President Franklin Roosevelt,1932

Germany’s Plan 1996-2000(in billions of DM)

Target Budget Plan Plan Plan1996 1997 1998 1999 2000

I. Spending 451.30 440.20 447.30 458.70 469.0(%change) -2.5 +1.6 +2.5 +2.2

II. Income

1. Tax Income 351.2 350.3 357.3 372.8 389.2 (% change) -.025 +1.99 +4.34 +4.4

2. Other Income 40.2 33.4 33.8 30.5 30.9

III. Net Increase in Debt 59.9 56.5 56.2 55.4 48.9


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,nvesting in Russia is arisky undertaking. The po-litical environment is by no

means shatter-proof. Although therecent elections boosted stabilityand confidence in the fledgling de-mocracy and emerging market, thehealth of President Yeltsin loomslarge. Speculation is in the newsabout who would assume control ifthe president were incapacitated.Alexander Lebed, who won 15% ofthe vote in the final presidential bal-lot, has been appointed as SecurityChief and is presently seen as alikely candidate. The CommunistParty acknowledged defeat butvowed to press their agendathrough their majority in the Duma.This could hold up confirmation ofYeltsin’s Prime Minister and othergovernment officials as well asmarket and economic reform legis-lation. The most pressing issue istaxation as the IMF has held upover US$ 300 million in a loan dis-bursement until Russia acts on im-proving collection that is down over60% than projected for the first halfof 1996. So Yeltsin’s victory, al-though preferred, does not dis-place concern about political andeconomic stability in Russia.

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Investing in Russia is undeni-ably appealing. The vast amountof natural resources has investorsanxious. Statistics reported fromthe State Geological Committeeshow why: Russia has 13% of theworld’s proven oil reserves; 12% ofthe coal; 35% of the gas re-sources; and a large chunk of theworld’s diamonds, timber, iron ore,gold, and rare metals. It has beenestimated that only about 10% of

these resources are under devel-opment/production.

Russia ranks sixth in terms ofpopulation (148 million) and exhib-its one of the most product starvedof consumer markets. The Ministryof Economics reported that in 1995,foreign investors put the most capi-tal into the trade and public servicesector to total 17% or US$ 471.9million. Banking and finance camein with 14.3% (US$ 386.6 million);the food sector received 10% (US$282.9 million); oil and gas industryat 9.4% (US$ 199 million); con-struction sector received 7% (US$199 million); and the chemical andmachine production both stood at5.9% (US$ 166 million and 165 mil-lion respectively). For the 1995 to-tal, foreign investment is estimatedat US$ 2.5 billion (Rbl 1,032 billion)of which direct investment was US$1.88 billion (Rbl 652.8 billion). How-ever, over US$ 890 million (Rbl155.5 billion) was received viacredits in trade, banking accountsand international financial organi-zations.

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By mid-1995, over 70 ex-changes had been registered.Several main exchanges have de-veloped in Russia - St. Petersburg,Moscow, Yekaterinburg, Vladivos-tok, and No vosibirsk. T heRFCSCM (Russian FederationCommission on Securities and theCapital Market) oversees the ex-changes and investment instru-ments; issuance, trading, and re-porting systems and enforces mar-ket rules. The RFCS is modeledafter the US SEC but by no meansdoes the Russian counterpart en-joy its seemingly broad powers asenabling legislation, mechanisms,and agencies still need to develop.

The RFCS was established bypresidential decree in November of1994 after a large portion of priva-tization had already begun. Thelate arrival of this vital agency wasin part responsible for the fraud andinefficiency that affected the execu-tion of the privatization schemes.Consequently, the role of the RFCSis complicated by correcting prob-lems that were incurred in the pastcouple of years while trying to fore-see and headoff problems of to-morrow.

Rossiyskiy Kredit Bank Re-search cited that some 40 millionshareholders appeared by July of1994 after the process to privatizeover 16,000 large-scale enter-prises via a voucher system startedin October of 1992. More share-holders were added as the numberof privatized enterprises reachedover 100,000 by the end of 1994.Additionally, estimates of marketcapitalization for top 100 Russiancompanies as of April 1996 was atUS$ 13,935.48 (million).

The Rossiyskiy Kredit Bank re-ports that over 98% of activity inRussian stocks takes place in theover-the-counter market. Withinthe entire OTC market, there is thedeveloping electronic trading sys-tem - the Russian Trading SystemPORTAL - RTS/PORTAL. POR-TAL is the portalelectronic tradingsystem set up in the Spring of 1995that reports trading prices and vol-umes

Many professional associationshave developed in each exchangeloction. The PAUFOR is an inde-pendent professional associationof broker-dealers in Moscow. Cur-rently, PAUFOR consists of over 90members and is evolving toward awell recognized, self regulating andtraining organization. Members ofPAUFOR gain access to partici-pate in the electronic trading sys-tem through PORTAL.


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This screen based systemgreatly improved the transparencyof th e market. Members ofPAUFOR have committed to issu-ing firm bid and ask quotations tobe posted daily on the PORTAL. Itis the most accurate and up to datesource on market activity. TheRTS reports of pricing are out at12:00, 15:00, and 18:00 Moscowtime. It is expected that that theRTS/PORTAL system will be ex-panded nationwide to incorporateother exchanges in a similar fash-ion to the NASDAQ.

Outside of PORTAL, the systemto obtain timely and accurate mar-ket data is undeveloped. Manymarket players still telephone oneanother for bid and ask quotations.A cottage industry of independentbusiness has sprung up to fill thisvoid - providing not only currentprice information but badly neededcompany and sector research.Several of these businesses haveestablished indices. The price in-formation, method of inclusion, orweighting/calculation is not univer-sally established and is subject tochange frequently since this mar-ket is quite thin.

Currently, the Moscow Timeshas an index of the top 50 compa-nies and is emerging as the widelyaccepted index. Other privatebusiness calculate "Blue Chip"company indices or have createdother indices by sector, such as oiland non-ferrous metals. The repu-tation and credibility of these com-panies promote the index and notan industry recognized accuracy ormethodology.

Although the RFCS, PAUFOR,and the electronic trading systemPORTAL have helped the marketsystem to be a more open, trans-parent, and regulated market - anindependent and reliable registrysystem is not yet fully developedand organized. Manipulation, in-sider trading, and outright fraud,particularly outside of Moscow, isnot uncommon as estimates listover 400 share registrars. Manyshares are maintained by book en-tries written in by independent issu-

ers and registrars without over-sight. Realistically, the laws on thebooks are not enforced nor is abody set up to clearly supportregulation. Without a verifiableregistry system in place, foreign in-vestors will remain on the sidelineswhen it comes to the domestic eq-uity market.

The pursuit of ADR’s (AmericanDepository Receipts) by large Rus-sian corporations through Westernfinancial institutions is an attempt toacquire foreign shareholders in anotherwise unsecured and high riskenvironment. The huge govern-ment demand for capital as well asthe embattled economy has madeit very difficult for Russian businessto secure domestic share holders.Any capital looking for work is cur-rently put toward buying up the gov-ernment debt offering due to thehigh yield and short-term maturity.Sector giants such as LUKoil haveused ADR’s to get their shares tothe international marketplace.ADR’s are appealing to those in-vestors who are impatient for Rus-sia’s system to evolve. ADR’s aredollar based in their pricing andinterest and dividends are paid in

dollars. Clearing and settlement isalso operated by US standards soinconsistent and murky locallaws/custody and shareholderrights are by-passed. However,ADRs are vulnerable to currencyexchange rates as reflected inprice.

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The July 3rd Russian Presiden-tial elections have concluded,firmly placing Yeltsin at the helmwith 53.82 percent of the vote. Thechallenger Zyuganov received40.31 percent. Yeltsin’s margin ofvictory was 10 million votes, or13.5%, over the 30.11 million votescast for Zyuganov. Out of Russia’s108.6 million voters, 68 percentmade it to the polls casting a totalof 73.9 million votes as reported bythe Central Electoral Commission.The turnout was 1% lower than thatof the June 16th first round dispel-ling fears of low voter turnout thatwould favor the communists. Theshowing bolstered Yeltsin’s claimto a popular mandate for continuedreforms under his leadership.


10

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Ask investors why they invest inAsia and invariably the first two rea-sons will be strong economicgrowth and political stability, par-ticularly in comparison to alterna-tive emerging markets. While thelatter has largely been achievedwithout the shackles of democracy,and elections are typically a onehorse race, it has provided a de-gree of certainty where the politicaland economic systems are inextri-cably linked. However now we areseeing that this is being increas-ingly challenged as many of theleaders are nearing the end of theirtenures whether it be the British inHong Kong, Suharto in Indonesia,or Lee in Singapore. In China thereis the perennial rumor mill on DengXiaoping’s imminent demise - over-night an offspring of Deng on theboard is no longer a guarantee toguanxi. Positions of privilege likenepotism and monopoly rights arelikely to be threatened from the ex-colonial hongs in Hong Kong to the"first family" business empires ofPresident Suharto in Indonesia.Clearly the changing economic/po-litical landscape is one investorsmust prepare for.

China - soft landing likely

China’s half year report card wasmostly positive as further signsemerged that inflation and eco-nomic growth have been broughtunder control and it looks likely thatthere will be a further loosening inmonetary policy later in this year.The only black spot was a weaken-ing in exports. Gross domesticproduct rose 9.8 per cent in the sixmonths of June to 2.97 trillion yuan(about US$356 billion) which, afterGDP growth of 10.2 percent in thefirst quarter, shows that growth inthe second quarter slowed toaround 9.4 percent. Inflationarypressures continue to ease with the

retail price index showing an aver-age rate of 7.1 percent in the firstsix months. China is well on coursefor its 10 per cent inflation target forthe whole year and single figuresremain within reach.

There was a fall in exports by 8.2per cent to $64.06 billion in the firsthalf which was attributed to risingwages and a strengthening cur-rency, although it is expected thatthere was some reallocation of ex-ports to the stronger domestic sec-tor. Imports rose 11.6 per cent to$63.8 billion and the half year tradesurplus fell to just US$880 million.A sharply lower trade surplus forthe full year is forecast after a sur-plus of $16.9 billion last year. How-ever, increases in fixed asset in-vestment and consumption shouldcompensate for the traditionallystrong export sector. China’s fixedasset investment grew 19.9 percent in the first half after a largeincrease in the second quarter asausterity measures were graduallyrelaxed. Contracted foreign invest-ment jumped sharply in the first halfof this year as investors rushed tosign contracts before the tariff ex-emption for imported equipmentexpired on April 1st. The value ofcontracted foreign investment grew a robust 46.3 per cent toUS$45.6 bill ion in the first sixmonths. The May cut in interestrates is helping consumption toplay a larger role in driving theeconomy - retail sales rose a robust19.5 per cent in June year-on-yearas consumers see sustained dis-posable income growth.

Looking ahead China is ex-pected to see further loosening ofmonetary policy by the end of theyear according to remarks made byChina’s Central Bank Governor DaiXianglong. Despite May’s cut of anaverage of 75 basis points, due tothe continuing low levels of infla-tion, positive real interest rates ofaround 4 per cent allow scope forfurther cuts. It was also hinted thatthe People’ s Ba nk of China

(PBOC) was considering a cut inthe reserve requirement’s forbanks from 13 per cent to 10 percent. Although Mr. Dai said thismove would be offset by a similarreduction in loans that the PBOCgave the banks, the multiplier effectwould clearly make the move ex-pansionary. The surplus credit willbe directed at the cash starvedstate enterprises which remain apriority. Statistics showed thatlosses at state-owned enterpriseswere up 51.6 per cent to 41.6 billionyuan in the first half and about 45per cent remain in the red. It is alsoexpected that the cut in reserverequirements will help developChina’s capital markets as banksare able to invest excess cash intreasury and enterprise bonds.

Will China devalue yuan?

China’s weakening balance ofpayments and sluggish exports,taken with a looser monetary policyare likely to see attention focusingon the possibility of a yuan devalu-ation. While as expected officialshave denied any such plans,speculation is increasing on themost opportune timing of such amove. Pragmatism suggests it isunlikely to happen prior to the han-dover of Hong Kong next July tomaintain confidence. China’sstrong foreign currency positionand relatively low inflation rateshould reduce the negative impactof devaluation, while the movewould likely benefit both econo-mies. Two way trade would get aboost and as we saw during theprevious yuan devaluation in1993/94 hot mainland money willbe attracted into the currencyhedge offered by the Hong Kongproperty market. In the past fewmonths it is estimated that morethan $5.4billion worth of mainlandbacked investment has been madein the local property market. Thosestocks with costs in yuan and reve-nues in foreign currency wouldbenefit and vice versa.


11

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Th e federal governmen t’ s1995/96 underlying (net of pro-ceeds of asset sales) budget defi-cit, inherited from the previous La-bor government, has blown-out toapproximately A$10 billion. Thishas strengthened the Treasurer’sjustification to bring down a budgetin August with expected massivecuts and rationalization of federalprograms. The government nowdoesn’t expect an underlying bal-anced budget for at least 3 years -the life of the current parliament.The Prime Minister however stillexpects to be able to deliver on thebulk of the coalition’s promises dur-ing this term of office.

The deficit revelations havetaken the heat off the governmenton several fronts. Treasurer PeterCostello faced an embarrassingback down over an attempt to im-pose federal sales tax on state, ter-ritory and local governments. Thestate premiers emerged with a one-off drop in federal allocations whichwere hastily passed on to the tax-payer via the raising of severalstate taxes. Meanwhile troubleprone Foreign Minister AlexanderDowner had to first admit to mis-leading parliament over variousAsian governments’ protests at theaxing of the soft loan aid schemefor importing Australian productsinto developing countries, then par-tially back down on axing thescheme due to those protests. Hisperformance has been widely seento have damaged Australia’s stand-ing in the Asian region and a diplo-matic appointment somewhere inAfrica is probably awaiting his nextmishap.

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RTZ-CRA subsidiary CenturyZinc has announced it intends todevelop its north Queensland mineafter resolution of disputes over theproject with local aboriginal com-munities. The mine is also impor-tant for Pasminco which needs therelatively clean ore from the area tosatisfy new government environ-mental standards imposed upon itssmelters in the Netherlands. Theproject proceeding is seen as a vic-tory for the framework set by thecontroversial yet popular Austra-lian Native Title Act. This agree-ment acknowledges a principle thatindigenous peoples whose ances-tors formally occupied lands overwhich pastoral leases have sincebeen granted by the Crown, have aright to negotiate compensationfrom but not to veto a mining projecton that land. This is an issue not asyet tested by the courts and affect-ing huge tracts of Western Austra-lia, the Northern Territory andQueensland where, although na-tive title has been extinguished bythe Crown grant ing pastoralleases, there are remnant commonlaw rights enjoyed by the descen-dant aboriginal inhabitants. Any at-tempt by a state or territory govern-ment to extinguish these commonlaw rights would contravene theFederal Racial Discrimination Actand suggestions of suspending theAct have provoked widespreadprotest.

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The federal government justmanaged to get its remaining 50%share of the Commonwealth Bankof Australia floated before the localshare market gave way in sympa-thy with Wall Street’s decline. Pri-vate investors heavily oversub-scribed the float and offshore insti-tutions bid strongly to nudge outmany of the local institutions in

Australia’s largest ever float andthe largest worldwide this year. Un-fortunately the approximate $4bil-lion proceeds of the float will be puttowards covering the budget deficitas were the earlier proceeds of theQantas Airways float. The floatleaves only the Queensland StateGovernment as the owner of a in-surance and financial institution.That government recently thwartedthe takeover of the state’s largestprivate bank in order to effect areverse takeover of it by the gov-ernment owned insurance andbuilding society and developmentbank. It then hopes to graduallyprivatise the combined institutionby selling down its share while atthe same time preserving a majorstate based bank-assurancegroup. While politically perhaps awinner this type of political interfer-ence in the market place has beenwidely condemned around thecountry by governments and busi-ness alike.

This follows on from the NationalParty dominated Queensland gov-ernment decision to ax a power lineto connect the state to the nationalelectricity grid which it is estimatedwill save the state’s consumers$700 million over the next fiveyears. Rural based Queenslandwhile developing exceedingly wellon the back of mining and tourismhas always exhibited a quirkysense of sovereignty and this issueis but the latest. Many predict abattle to free up the state’s monop-oly controls over the marketing ofsugar - its major agricultural export- to be next.

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The Federal Government andthe New Zealand Governmenthave announced the formation of acommon aviation market betweenthe two countries following on fromAir New Zealand’s intention to pur-chase TNT’s 50% of Ansett Austra-


12

lia. This will allow both countries’carriers to operate domesticallywithin the other and eventuallyshould lead to common customsand immigration controls at interna-tional ports. Ansett Australia will re-main under the control of 50%shareholder News Ltd and owner-ship of Ansett New Zealand will beassumed 100% by News, 50% ofAnsett International will be placedwith Australian institutions. Al-though Air Zealand is 20% ownedby Qantas Airways the two carriersare fierce competitors and the com-bined Air New Zealand/Ansettgroup should pose as a strongerdomestic and international com-petitor in Australasia and the fastgrowing Asia Pacific market. Al-ready the largest airline in SouthEast Asia, Qantas is set to benefitagain from the new worldwide alli-ance it recently helped to match-make between 25% shareholderBritish Airways and Qantas’ U.S.ally American Airlines. Buildingupon the decade old Closer Eco-nomic Relations (C ER) free tradeagreement between Australia andNew Zealand, the Australian gov-ernment recently announced therecognition of all New Zealandregulatory standards for productsto be sold within Australia. In whatis now the most open free tradezone in the world the extensioncomes only a few years after similaragreements were finally put inplace between the AustralianStates and Territories. No politicalor monetary union is seriously con-sidered between the two countrieseven though a place is reserved forNew Zealand in the Australian Con-stitution. The relative ease at whichinternational confederative agree-ments can be brought about as op-posed to drawn-out federal/statenegotiations perhaps explains whyfrom an economic perspective (andleaving aside sport) New Zealan-ders are glad they never joined theCommonwealth!

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The Chairman of the Committeeof Inquiry into the Australian Finan-cial System covering the regulatorycompliance roles of the ReserveBank of Australia (RBA), the Insur-ance and Superannuation Com-mission (ISC), the Australian Con-sumer & Competition Commission(ACCC), the Australian FinancialInstitutions Commission (AFIC -non-bank financial institutions),and the Foreign Investment Re-view Board (FIRB) has alreadyhinted that big bank mergers are agood thing. Also the Chairman ofthe ACCC has hinted at a morerelaxed attitude to big bank merg-ers. Already the bets are on Na-tional Australia Bank (NAB), whichemerged from the ’80s relativelyunscathed and has just announceda $2billion profit for the 2nd year ina row, having a go at one of the bigbank losers of the ’80s Westpac orpossibly ANZ Bank. NAB has beenvoracious in swallowing regionalbanks in the Republic of Ireland,Scotland, the north of England,New Zealand, and Michigan USA.Its weakest domestic markets arein New South Wales, Queenslandand Western Australia and withWestpac strongest in these statesit is a logical acquisition, howeverANZ Bank owns UK’s Grindlayswhich has a strong Asian presenceand which would also complimentNAB’s existing market coverage.The rationalization of regionalbanks which has been taking placefor some time could also providesome prize pickings for the big 4 toeither expand through or dilute thebalance sheet with in defense. Thisscenario could turn the Queens-land government’s state based in-stitution into a prize victim for amuch larger predator!

The big insurance companiescan’t be left out of the picture either.AMP was once aligned with West-pac and National Mutual with ANZ.Paul Keating said no to any merg-ers and National Mutual was takenover by the French insurer AXA.Colonial Mutual successfully bid forState Bank of NSW and AMP hasnow entered the home loan market.Watch this space.

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Ever since the former Labor gov-ernment changed the rules for Aus-tralian citizenship specifica lly in or-der to deny Rupert Murdoch dualcitizenship the media foreign own-ership and cross-media rules havebecome a bigger and more com-plex farce as politicians sought tothwart then court Murdoch andKerry Packer, and court then thwartthe likes of Canadians ConradBlack and Tsi Asper. There arestrong signs that the rules areabout to be done away with and thiscould see some major media as-sets put into play. Despite the factthat they are currently suing oneanother Rupert Murdoch and KerryPacker would likely emerge as thebig winners controlling the majorityof Australia’s newspapers, televi-sion and satellite/cable assets -these two usually have the ability toput aside their differences in orderto do a much bigger deal together.Though Seven Network Australiarecently won control of MGM/UAusing Kirk Kerkorian’s money, don’tbe surprised if Rupert Murdochends up in there somehow - healready has 15% of Seven.

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Former Commonwealth Secre-tary of the Treasury and NationalParty Senator for Queensland JohnStone wrote in the Australian Fi-nancial Review that exit polls at theMarch 2 Australian federal electionrevealed:

- More blue-collar workersvoted coalition (47%) than Labor(39%);

- Compared to the previous fed-eral election (1993) there was a16% drop in Labor’s vote amongtrade union members;


13

- For probably the first time ever,more Catholic voters (48%) opteddirectly for the coalition than forLabor (37%);

-The "bush" (rural areas),which has always been more favor-able to the coalition but where La-bor previously held many seats,swung violently further against La-bor; on mainland Australia Labornow only holds two seats outsidethe major cities;

- Of the 57 House of Repre-sentatives seats in the outlyingstates , (other than New SouthWales, Victoria & ACT - the Syd-ney, Melbourne, Canberra axis)Labor now holds only 10 (3 in Tas-mania).

Since Stone’s article was pub-lished several other commentatorsincluding former Labor leader andGovernor-General Bill Haydenhave since essentially drawn simi-lar conclusions to Stone on theabove and also the strong vote forseveral populist candidates openlyopposed to traditional small "l" lib-eral causes such as so-called "gay"rights, feminism, multiculturalism,aboriginal rights, and green politics- that with the Labor Party’s eternaldrive to capture these minority con-stituencies it rightly or wrongly hasbeen seen to be hijacked by themand this has proved a real turn-offin Labor’s own heartland whereyouth unemployment is as high as30%. Shades of the current state ofthe Democratic Party in the U.S.?


14

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The Cuban Liberty and Demo-cratic Solidarity Act (LIBERTAD),better know as the Helms-BurtonAct, was passed into US law thispast March. The law was designedto tighten the existing US embargoagainst Cuba and prepare a contin-gency plan for the US to aid a tran-sitional democratic government inCuba. Two controversial sectionsof the legislation have caused asharp reaction from US tradingpartners. Titles III and IV allow forlegal action against foreign firmsoperating on or profiting form con-fiscated US property in Cuba. Spe-cifically, Title III “Makes any personthat traffics in property confiscatedby the Cuban Government on orafter January 1. 1959 liable formoney damages to any US na-tional who owns the claim to suchproperty.” Title IV “Directs the Sec-retary of State to deny a visa to, andthe Attorney General to excludeform the United States, aliens (in-cluding their spouses, minor chil-dren, or agents) involved in theconfiscation of property, or the traf-ficking in confiscated property,owned by a US national.”

The bill is trying to hammer thefinal nail into the coffin of Cuba’scentrally planned economy. Cubalost the aid it had been receivingfrom the Soviet Union and EasternBloc nations after those communistregimes began to fall. However, Fi-del Castro began to relax restric-tions on foreign investment and for-eign money started pouring in, tak-ing the place of Soviet aid. Cana-dian companies have committedmore than C$ 250 million to invest-ments in Cuba and two way tradebe tween Cana da and Cu baamounted to C$ 576 million lastyear. European Union (EU) na-tions, led by Spain’s $62.4 million

in direct investment, accounted for45% of Cuba’s total trade in 1994.This new found money is, in theeyes of the US government, help-ing to keep Castro propped up asdictator.

The bill would never have madeit out of Congress much less beensigned by President Clinton had itnot been for Cuba’s downing of twoUS civilian aircraft flying near Cu-ban air space back in February.The Administration, the Stare De-partment and many Congressmenwere initially against Helms-Bur-ton, but this is an election year inthe US and no one - not the Presi-dent, not Congress - wanted to ap-pear soft on Cuba. Therefore, inorder to show the Cuban-Americancommunities in the key electionstates of New Jersey and Floridathat politicians were ‘getting tough’with Cuba, the legislation sailedthrough Congress and was imme-diately signed by Clinton. Almost asquickly, the EU, Canada and Mex-ico announced plans to retaliateagainst Helms-Burton.

The United States recognizes anestimated $1.8 billion in claimsagainst Cuba. Under Helms-Bur-ton, over 40 US companies andthousands of Cuban-Americanswould be allowed to file suitsagainst foreign firms. Already,many companies and former Cu-ban citizens are readying claims.However, Bill Clinton exercised hispresidential option to suspend TitleIII for six months - stopping anyclaims from being filed until at leastFebruary of 1997. But, this actionby Clinton did little to stem thegrowing controversy over a law thathas been assailed by critics in theUS and abroad.

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All of the United States’ tradingpartners have spoken up aboutHelms-Burton. And from the EU toVietnam, not one has sided with theUS. The EU is preparing sanctionsthat include publishing lists of UScompanies that file suits underHelms-Burton, requiring US busi-ness travelers to obtain visas fortravel through the EU, imposingtrade sanctions on items not cov-ered by the World Trade Organiza-tions (WTO) such as telecommuni-cations and aviation. The EU is alsopreparing a case against the USlaw that it will bring before theWTO.

The United Kingdom, Italy,Spain and France have all indi-cated that in addition to any EUsanctions they will impose sanc-tions of their own. These sanctionswould include legislation orderingtheir home companies to ignoreany US legal moves and allowinghome companies to sue US sub-sidiaries in order to ‘claw-back’ anymoney awarded by US judges.Canada and Mexico have both an-nounced retaliatory measures simi-lar to the European Union’s. Thetwo countries also will launch anappeal to the law through Nafta.

Canada has been one of themost outspoken on the issue. Be-sides having a large stake in tradeand investment with Cuba, the Ca-nadians have domestic politics ontheir minds, too. Canadian officialsdon’t want their electorate to per-ceive them as backing down to theUS over Helms-Burton. Canadianspecial interest groups and mem-bers of the opposition have ac-cused the ruling Liberals of not be-ing ‘aggressive enough’ in counter-ing the US law.

Canada is looking at this contro-versy as an opportunity to assertitself in front of the world. In anarticle from the Financial Times,


15

Bernard Simon writes “[Helms-Bur-ton] has given Canadians a chanceto satisfy two basic cravings: tostand up to the big bully across theborder, and to be noticed by therest of the world for somethingother than Mounties, maple syrupand ice hockey.”

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Just the threat of US actions un-der Helms-Burton has already de-terred trade with Cuba. As soon asthe bill became law, some busi-nesses either pulled out or scaledback their Cuban operations. Ce-mex, A Mexican cement maker isconsidering a complete withdrawaland ING Group NV, a Dutch bank,is pulling financing for Cuba’s sugarcrop. Officials at Canadian banksannounced that they were scalingback their credit to businesses op-erating Cuba. American Expressannounced that it was pulling thecredit of two Dutch firms operatingin Cuba amid concerns overHelms-Burton. Colombian airlineAeoroRepublica announced that itwas pulling its twice weekly flightsto Cuba over fears of US sanctions.

Title III can be either suspendedor invoked every six months. Thatfact alone makes the decision toinvest in Cuba very difficult. It wouldnot be wise for a company to investin Cuba with the possibility of facinga lawsuit every six months. Compa-nies that are going ahead with in-vestment plans are doing so cau-tiously. Canadian-based WiltonHotels is planning a large invest-ment in resorts in Cuba and ownerWalter Berukoff said, “We’ve beenvery careful not to deal in expropri-ated US properties. We have nodesire to upset the Americans.”

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US companies and nationalshave a legitimate claim on landconfiscated by Castro. However,the main issue for the US’s tradingpartners is not protection of prop-erty rights or contract sanctity.

Their concern is manly over the USmethod of using extraterritorial leg-islation to unilaterally enforce itsown foreign policy objectives. Withsimilar US legislation designed tocurb international trade with Iranand Libya already being voted on inCongress, it is important not to letthe US set a precedent with Helms-Burton. The European Commis-sion has stated that “extraterritorialapplication of unilateral sanctionscreates an unacceptable burdenfor the international business com-munity.” This sentiment has beenechoed by foreign trade ministersall over the world.

US business,which seeminglystands to benefitfrom the law, hasalso spoken outagainst the legisla-tion. A letter to Clin-ton from the USChamber of Com-merce and fourother trade groupssaid that the legis-lation will only hurtUS businesses.Their letter said“We believe that if[He lms -Bu r ton ]were to become ef-fective, it woulddrive a wedge be-tween the UnitedS ta te s and ourdemocratic all iesthat would signifi-cantly hinder multi-lateral efforts to en-courage democ-racy in Cuba.”

In prac ti ce,Helms-Burton willnever work. If TitleIII is ever allowedto take effect, it willimme dia tel y b erendered ineffec-ti ve by counter-measures from UStrading partners.Any settlementsawarded by UScourts, if they areever even paid, willbe lost through

counter-suits in other countries. Asfor Title IV, harassing internationalbusiness travelers by telling themwhere they can and cannot go doesabsolutely nothing to exert pres-sure on Castro’s regime. If the USreally wants to force change inCuba it needs to be done on amultilateral level with the full coop-eration of the world’s largest trad-ing blocs. Anything else will onlyhinder further improvements inworld trade and do absolutely noth-ing to change the situation in Cuba.


16

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So far our computer model fore-cast is running perfectly on sched-ule. The precise high came on May23rd, 1996 with the Dow reachingthe 5800 level. The key weekly sup-port basis the S&P 500 NearestFutures rested at 64760 and oncethat area was penetrated, the cor-rection process was confirmed.

Overall, we expect to see the USshare market decline a bit further.Primary support lies at the 59800level followed by 57300-56100.This is about the extent that we seefor the correction as a whole. Whilefrom a point perspective this ap-pears to be major, the 1990 correc-tion was far more significant on apercentage basis. If the 1996 cor-rection were to match that of 1990in percentage movement terms,then we would need to see the S&P500 futures decline down to the54600 zone.

Timing continues to be a bigquestion for this correction. About90% of the total decline should becompleted by the end of August.We do see that the final low for thiscorrection is due in August, Octo-ber/November, March 1997 orMay/June 1997. If we see the57300-56100 level during mid tolate August, then either the correc-tion is over, or we will see a moresignificant correction if the Augustlow is penetrated at any time be-yond August. This would open thedoor for a decline down to the50300 level. An August low only inthe 59800 area would tend to implythat the balance of the move downto 57300-56100 might not comeuntil early next year in a slower,more choppy style move. Ouryearly models do show that if atyear-end the S&P 500 futurescloses below 59260, then clearly a1997 low should be expected.

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Gold and silver remain captive towhat appears to be the inevitablestart of IMF gold sales. While we donot see this fundamental as long-term bearish, we do expect to seeit help keep a negative undertonefor perhaps as much as the next 6months. Silver remains the bigproblem. While many call this thepoor man’s gold, it its more like thepoor man’s opium that creates vi-sions of unrealistic grandeur. Thesilver/gold ratio still appears poisedto make new highs or at least in thenear-term retest the 100:1 level.The primary resistance remains atthe 82.84-84.80:1 zone. A monthlyclosing above 84.80:1 will signalthat silver could completely fallapart. Vital support basis NY spotremains at the $4.50 and $4.29 lev-els. If silver declines and holds$4.50 during mid August, thenthere will be some hope that thedecline is over. However, if silverpenetrates the $4.29 level, thencaution should be employed. Silvermight yet decline under $3.50 dur-ing early 1997 before any hope ofa bull market emerges. Gold, on theother hand, has reasonable sup-port at the $368 area followed by$341. We do not expect to see newlows in gold under any circum-stances.

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While our long-term models con-tinue to suggest that the dollar isgoing to rally dramatically into2003, we do see that the potentialfor one more dollar low does existduring the first half of 1997 againstmost major European continentalcurrencies, with the noted excep-tion of the pound and the Japaneseyen. Only a monthly closing for thedollar above 15840 on the Dmarkwould suggest that this forecast iswrong and that the dollar low is inplace. Otherwise, a monthly clos-ing below 13985 for the dollar vsDmark would suggest that this fore-

cast is correct and that an appropri-ate hedge position is warranted.

The dollar/yen is a differentstory. Here the dollar low is in placeon a long-term basis and the overalldecline should continue taking thedollar up to 12500 or 14500 levelover the next two years. Nonethe-less, resistance stands at the11300 level and a failure to moveabove that level by Septemberwould also raise the possibility thata retest of support at the 10489-10315 level is likely. A monthlyclosing below 10315 would thenraise the potential for a very sharpdecline back to the 10065 area or9755 at worst.

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Here the primary monthly clos-ing support remains at the 10801level. A monthly closing beneaththis area will signal that a sharpdecline to the 10100-10200 area ispossible. If July closes below10801, then we should expect apossible rate hike by the Fed duringAugust.

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The Japanese share market hasmost likely reached a temporarytop in June. Here we see that amonthly closing below 21170 willsignal that a correction is underwayonce again. The bulk of support liesat the 19628 and 18896 levels. Amonthly c losing below 18896would warn that a retest of long-term support is possible taking thismarket back to the 15292 zone.

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The Canadian share market ba-sis the TSE reached a high duringMay at 52490. Here we see that acorrection back to the 48182 to44867 level is likely. A monthlyclosing below 44867 would warn


17

that a much more serious decline ispossible where a sharp drop to the39307 level is likely. We do see thata year-end closing below 43300would warn that the overall correc-tion could extend into early 1997before reversing to the upside fornew highs going into mid 1998.

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Th e Br i ti sh share marketreached a high in during the weekof April 15th. Vital support lies at the36552-36474 level basis the cash.A weekly closing below 36474 willsignal that a sharp correction isnow possible. Additional supportlies at the 34334 area. A monthlyclosing below 34334 would thenwarn of a drop back to retest long-term support at the 29388-29250zone. A year-end closing below34808 would warn that the overallcorrection could extend into early1997. We do have a panic cycledue in November so we should ex-pect to see some sharply highervolatility at that time. Key targets fora low appear to be August and Oc-tober. New lows below beyond Oc-tober would then raise the possibil-ity that a low in February orApril/May of next year .

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The German share market basisthe DAX futures reached a high theweek of June 24th. Vital supporthere begins at the 24875 and2275 0 levels. A weekly andmonthly closing below 22750would warn that a correction is pos-sible where we see long- term sup-port forming at the 21450 and20185 levels. A September closingbelow 24515 would also warn thata retest of long-term support in the20925 area would be possible overthe next 6 or 10-12 months. Yearlymodels show that only a year-endclosing below 23270 would raisethe possibility of extending the cor-rection into early 1997.

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The French share market basisthe CAC 40 futures has underper-formed most other world sharemarkets. Here the major high tookplace back in February 1994. Majorresistance continues to stand at the22380 level followed by 22620-22765. Here we see that 1996 mustclose at least above 20252 in orderto hold on to any hope that a retestof resistance is possible in themonths ahead. A closing below20252 will leave the possibility thata penetration of the 1995 low coulddevelop in early 1997. Major year-end closing support lies at the17968 area. Should 1996 close be-low this level at year-end, then adrop back to the 15750 area will bepossible next year.

6:,66�0$5.(7,1'(;

The Swiss share market basisthe nearest futures has been by farthe strongest European market.There is a potential for a July highto form if we see a weekly closingbelow the 35435 area. This will im-mediately warn that a correctioninto October is possible testing atleast the 31650 zone. A weeklyclosing below 31360 will signal thatan overall correction back to the27690 or at worst 25450-24400area will become possible.

3(,*RYHUQPHQW%RQG�:DWFK

Government debt continues toescalate despite the fact that defi-cits may bee declining in some na-tions like the US. The US situationis reaching the critical point. Wesee 1996 as the absolute bottom inthe outright deficit numbers as re-ported by government. Keep inmind that the deficit would be about$50 billion higher if it were not forthe Social Security funds beingused to offset the general expendi-ture deficit.

As reported previously, the Clin-ton debt crisis is the key factor that

is causing a rise in volatility for allbond markets globally. Clinton’sshifting of the national debt from40% financed short-term to 70% isnot merely alarming, it is outrightdangerous! In fact, 33% of the en-tire national debt is now funded 1year or less. Consequently, as thedeficit appears to be declining,there is a major shift in where themoney is going. Revenues nowamount to about $100 billion morethan is actually spent on defenseand social programs combined.This excess revenue is being ab-sorbed by interest expenditures. Asa result of the Clinton Deficit Re-duction Plan, interest expendituresare rising faster than ever before inhistory! While total expenditure for1994 was up 4.5%, interest expen-ditures rose 11.5% for the sameperiod. We are now moving into anexponential growth rate in interestexpenditures in all governmentsaround the globe.

We strongly advise that fixed in-come investment should be re-stricted to 90 days or less. Do notinvest in long-term bonds of anynation at this time. This holds truein Europe as well.

LATEST ADDITION TOPEI BLACK LIST

The fiscal corruption in the NDPgovernment of British Columbia inCanada is beyond all belief. Thishighly socialistic political party isabout as Marxist as you can get.The budget surplus they claimedexisted going into the elections hasamazingly turned into a deficit fol-lowing their victory. The politicalcorruption on an idealogical levelwithin the NDP is moving countertrend to the rest of the world. Withthe vast majority of Provincial debtin Canada moving to reform, thereis absolutely no reason to buy BCbonds. We strongly recommendthat BC bonds should be sold andinvestment in fixed income shiftedto short-term debt issues of nomore than 6 months in Canada atthis time. Both BC and federal debtissues of Canada are at serious riskof declining due to the rising ques-tion of direction.


18

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CONSUMER PRICES: US con-sumer prices rose 0.3 percent lastmonth and 2.9 percent in the yearto May, indicating faster economicgrowth is putting only modest up-ward pressure on inflation.

In the first five months of thisyear, prices rose at an annual rateof 4.1 percent against 2.8 percentfor 1995 as a whole. But the accel-eration may not be sustained, as itlargely reflected a jump in energycosts. Oil prices have since fallenfrom peaks reached earlier thisyear.

Excluding the volatile food andenergy components, "core" con-sumer prices rose 0.2 percent lastmonth and 2.7 percent in the yearto May.

CONSUMER CONFIDENCE:US consumer confidence fell unex-pectedly in June but remainedhigher than in June last year, fig-ures indicated.

The Conference Board, a USbusiness group based in New York,said its confidence index had fallento 97.6 against 103.5 in May. Thissurprised Wall Street economistswho had predicted little change,given recent reports of rapid em-ployment growth and buoyant retailspending.

Some analysts said the declinewas consistent with projections ofslower economic growth in the sec-ond half of this year after a robustsecond quarter. But it may havejust reflected the volatility of theindex, which has fluctuated be-tween 88 and 105 in the past six

months. Historically a reading of90 to 100 has indicated steady eco-nomic growth.

EXISTING HOME SALES: USfigures showed a 1.4 percent rise insales of existing homes in May overApril, higher than most analystshad expected.

GOVERNMENT DEVELOP-MENT AID: The US slipped lastyear into fourth place behind Ja-pan, France and Germany as aprovider of government develop-ment aid, and the total declined to$59bn, the Organization for Eco-nomic Cooperation and Develop-ment (OECD) reported.

Japan remained by far the larg-est official aid donor last year with$14.5bn, according to the OECD’sdevelopment assistance commit-tee. Helped partly by the strengthof their currencies in relation to thedollar, France and Germany over-took the US to arrive in second andthird place with $8.4bn and $7.5bnrespectively.

US official aid fell by $2.6bn -- 28percent in real terms -- to $7.3bn,partly because of delays in approv-ing its 1995-96 budget but also be-cause of cuts in food assistanceand in those peacekeeping expen-ditures which qualify as aid. Lastyear the US devoted 0.1 percent ofgross national product to govern-ment aid programs, its lowest levelsince the second world war.

UNEMPLOYMENT: The LaborDepartment said non-farm payrollemployment rose 348,000 lastmonth, nearly twice the increaseexpected by economists. Figuresfor April were revised to show again of 163,000 rather 2l,000 asreported previously.

The employment gains lastmonth were broadly based, withlarge increases in many service in-dustries. But the jobless rate,which is based on a survey of

households rather than compa-nies, rose modestly to 5.6 percentagainst 5.4 percent in April, reflect-ing an increase in the number ofpeople seeking work.

LEADING INDICATORS: TheUS index of leading indicators rosefor the third consecutive month inApril, suggesting the economy willgrow robustly in coming months.

The leading index is designed topredict changes in economic activ-ity six to nine months in advance.The recent string of increases wasthe longest since autumn 1993,when the index gave advancewarning of a surge in economicgrowth in 1994 -- a surge thatprompted the Fed to tighten mone-tary policy aggressively. The indexrose 0.3 percent in April, followinga revised 0.3 percent gain in Marchand a 1.3 percent leap in February.

PURCHASING MANAGERS’INDEX: Purchasing managers re-ported a surge in an index measur-ing price pressures in manufactur-ing industry, and the CommerceDepartment announced a largerthan expected gain in new con-struction spending.

The overall purchasing manag-ers’ index fell slightly last month to49.3 percent, against 50.1 percentin April. most economists had ex-pected the index to rise modestly,reflecting a mild expansion ofmanufacturing output.

The "prices paid" componentrose to 50.8 percent from 40.1 per-cent in April, mainly because of in-creases in prices of agriculturalproducts. This followed ninemonths in which price pressures,as measured by purchasing man-agers, had appeared to ease.

CONSTRUCTION SPENDING:The Commerce Department saidconstruction spending rose 1 per-cent in April to a seasonally ad-justed annual rate of $551.7 bn. In


19

the first four months, constructionspending averaged 5 percenthigher than in the same period lastyear.

81,7('�.,1*'20

RETAIL SALES: Retail salesfell last month for the first time sinceJanuary, raising doubts about thestrong recovery in consumerspending promised by the chancel-lor this year. The surprisingly weakfigures disappointed the City ofLondon, which had expected astrong rise in sales in line with morebuoyant survey evidence. But thedata appeared to provide furthervindication of the chancellor of theexchequer’s quarter-point interestrate cut on June 6.

Retail sales fell a seasonally ad-justed 0.1 percent between Apriland May and were 2.0 percenthigher in May than the same monthlast year, the Office for NationalStatistics said.

MANUFACTURING OUTPUT:Manufacturing activity experiencedits biggest decline for more than 31/2 years last month as factoriesreined in output and cut jobs in theface of declining order books and abuild-up of unsold goods. Compa-nies making plant and machineryraised output only fractionally whileproducers of components cut out-put sharply, according to themonthly survey by the CharteredInstitute of Purchasing and Supply.

But weakness in these two ar-eas was intensified for the first timethis year by a sharp slowdown inoutput and demand for consumergoods. Although the consumergoods sector remained the strong-est area of the economy, its poorperformance last month contrastswith the buoyant conditions earlierthis year. It suggests that con-sumer demand, which the govern-ment expects to rebound stronglyin 1996, may still be fragile.

CONSUMER CREDIT: Con-sumer credit recorded its biggestrise for 7 1/2 years last month, pro-viding a strong signal that the re-

covery in consumer spending isgathering pace. After taking ac-count of seasonal movements,co nsumers b or ro wed a netL1.01bn ($1.53 bn) from banks andother lenders in April, comparedwith L722m in March, the Bank ofEngland said. The increase, whichfar exceeded City of London expec-tations, was the highest rise sincecurrent official records began inApril 1993. The Bank said otherunofficial estimates indicated it wasthe largest increase since autumn1988.

IMPORTS: The level of importssucked into the UK economy hasrisen sharply in recent months,suggesting that overall demand inthe economy remains reasonablyhealthy. However, the rise in im-ports may also trigger concernsthat the UK’s trade deficit could de-teriorate in the months ahead, re-versing the healthy picture seen inprevious years.

Although exports performed rea-sonably well during the spring,some economists are starting tofear that the imbalance betweenimports and exports could widenfurther in the months ahead. A hintof emerging problems in the exportsector came after the EngineeringEmployers Federation said that ex-port order books were now weak-ening. This has occurred eventhough the engineering sector hashitherto weathered the downturnbetter than many other manufactur-ing industries.

Measured overall, the Office forNational Statistics said that theUK’s overall deficit in goods withthe rest of the world was a season-ally adjusted BP1.3bn ($1.98bn) inApril -- the most recent month forwhich data is available. This wasalmost dou ble the previou smonth’s deficit of BP765m.

OECD OUTLOOK: The Organi-zation for Economic Cooperationand Development said in its latestEconomic Outlook that the UK willbe one of the fastest growing Euro-pean countries over the next twoyears. Growth is at present belowtrend but activity will accelerate this

year and unemployment will fall fur-ther without triggering rising infla-tion, the Paris-based think-tankpredicted. The OECD has becomemore optimistic about UK growth,revising up its forecast for GDPgrowth to 2.2 percent this year and3 percent in 1997. This wouldmake the UK the second-fastestgrowing economy in the Group ofSeven leading industrialized na-tions next year. But it insisted thegovernment would still meet its in-flation target as inflation falls below2.5 percent over the next two years.

MANUFACTURING: The Con-federation of British Industry -- theUK’s largest employers’ lobby --says that weak overseas demandis keeping UK manufacturing in thedoldrums in spite of signs of a re-vival in domestic demand. TheCBI’s latest monthly industrialtrends survey finds orders formanufactured goods were belownormal for the 10th successivemonth, while export demand was atits lowest level for a monthly surveysince February 1994.

FACTORY OUTPUT: Factoryoutput fell sharply in April as manu-facturers met demand from thestoreroom shelf rather than step-ping up production. But the Officefor National Statistics concededthat it had been underestimatingoutput in the past. Manufacturingoutput dropped by 0.3 percent inApril, the biggest decline for fivemonths. Output now stands belowthe average for the first threemonths of the year, suggesting in-dustry may be on course for a thirdsuccessive quarterly decline. Stat-isticians said the underlying trendin manufacturing was flat, as it waslast month. Output in the threemonths to April was the same as inthe preceding three months. Thelatest monthly figures were accom-panied by widespread revisions topast data, extending back to theend of 1992. Manufacturing outputhas been revised upwards through-out 1993 and 1995 and, to a lesserextent, 1994. As a result, manufac-turing growth for last year as awhole has been revised up from 1.9to 2.2 percent.


20

Manufacturing activity experi-enced its biggest decline for morethan 3 1/2 years last month as fac-tories reined in output and cut jobsin the face of declining order booksand a build-up of unsold goods.Companies making plant and ma-chinery raised output only fraction-ally while producers of componentscut output sharply, according to themonthly survey by the CharteredInstitute of Purchasing and Supply.

But weakness in these two ar-eas was intensified for the first timethis year by a sharp slowdown inoutput and demand for consumergoods. Although the consumergoods sector remained the strong-est area of the economy, its poorperformance last month contrastswith the buoyant conditions earlierthis year. It suggests that con-sumer demand, which the govern-ment expects to rebound stronglyin 1996, may still be fragile.

TOURISM: The UK tourism in-dustry is heading for a record yearafter an 8 percent rise in overseasvisitors in the first three months. Atotal of 4.63m visitors spendBP2.11bn ($3.2bn) in the Januaryto March quarter, compared with4.27m and BP2.04bn respectivelyin the same period last year. Thefigures mean the number of visitorsto the UK for the full year shouldexceed last year’s record 23.6m.

The number of UK residents go-ing abroad rose 11 percent to8.09m in the first quarter, andspending climbed 16 percent toBP3.15bn.

CONSTRUCTION ORDERS:Construction orders rose by onepercent in April compared withMarch, the second consecutivemonthly increase to be announcedby the Environment Department.The medium term trend in orders,however, was still downwards withthe total value of orders in constant1990 prices falling by 9 percent inthe three months to the end of Aprilcompared with the previous threemonths. The department said thatthe three-monthly figures provide abetter guide to performance asmonthly figures could vary greatly.

INSTITUTIONAL INVEST-MENT: A record surge of invest-ment in unit trusts, thanks in part tothe popularity of new corporatebond personal equity plans, orPeps, meant institutional invest-ment remained buoyant in the firstquarter of this year.

Official figures showed institu-tional investment in UK and over-seas assets fell slightly in the firstquarter of this year but was stilldouble the level in the same periodin 1995. Total net investment byinst i tu ti ons wa s BP13.5 bn($20.65bn) in the first quarter, com-pared with BP14.9bn in the finalquarter of last year and BP6.8 bn inthe first quarter of 1995, the Officefor National Statistics said.

Investment in overseas securi-ties grew strongly. Emerging mar-ket investment was BP3.8bn in thefirst quarter of the year. This wassimilar to the BP3.7bn invested inthe fourth quarter of 1995, but itrepresents a sharp turnaround fromthe BP0.6bn dis investment inemerging market assets in the firstquarter of last year. Overall, therewas a net di s in vestment ofBP0.5bn in UK company securitiesin the first quarter thanks mainly toa BP1.5bn disinvestment of ordi-nary company shares.

CAR OUTPUT: Car output forexport rose 10.6 percent, year-on-year, in May to leave the industryon course for another 20-year pro-duction peak in 1996. The exportperformance more than compen-sated for weakness in the UK mar-ket, leaving total output for themonth 0.5 percent higher at141,393. That lifted total car outputfor the first five months of the yearto 698,344, a 2 percent rise overthe corresponding period of 1995.Within that total, output for exportwas 3.4 percent up at 363,038.

Production of commercial vehi-cles is also running ahead of year-ago levels, according to figuresfrom the Office for national Statis-tics. May’s commercial vehicleoutput, at 22,186 units, was 3.2percent ahead of May last year,

with production for export 8.6 per-cent higher at 9,719.

However, weakness in some UKmarket sectors such as heavytrucks left total commercial vehicleoutput for the first five months only0.1 percent higher, at 106,637.Production for export over the five-month period was 14.9 percenthigher, at 52,509.

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INDUSTRIAL ORDERS: Ger-man industrial orders rose 2.2% involume termes in April, their strong-est performance in nearly a year,according to preliminary, season-ally adjusted figures from the eco-nomics ministry. The rise wasstronger than expected, promptingsome economists to say the econ-omy was recovering after the first-quarter fall in GDP. However, min-istry officials said they would needanother two months of favorableeconomic data before declaring aturnaround.

On a seasonally adjusted basis,orders were 6.4% higher than inApril 1995. This was the first posi-tive year-on-year figure for ninemonths. The most significant indi-cator of a recovery, according toeconomists, was a 3.5% season-ally adjusted jump in the volume ofdomestic orders between Marchand April, following a 2% rise fromFebruary to March.

COMPANY FAILURES: Thenumber of corporate insolvenciesin Germany increased 114.1% inthe first quarter this year, comparedwith the same period in 1995. Thestrong rise in insolvencies reflectsthe continued force of the restruc-turing process in eastern Germanyand the severe economic downturnin the whole of the country.

The Federal Statistics Officesaid the insolvencies had risen forthe fourth year running, with 6,090German companies either declar-ing bankruptcies or entering intoinsolvency procedures. In westernGermany the number of corporateinsolvencies went up by 6.6% to


21

4,344, while in the east they in-creased by 38.2% to 1,746. Theeast accounts for almost 30% of allGerman insolvencies. The totalamount of money owed to creditorshas been put at about DM11 billion($7.2 billion) for the whole of Ger-many, about DM3.4 billion morethan was owed at the beginning ofthe year.

ECONOMY: While acknow-ledging continued weakness in theeconomy, the German economicsministry reported "isolated signs"that pointed to "a gradual stabiliza-tion". These follow a 0.5 percentcontraction in real gross domesticproduct in the first quarter of thisyear and a stagnant economy in thetwo preceding quarters.

in its latest monthly report, theministry said there had been a"marked growth" in foreign ordersfor German manufactured goodssince late autumn. Domestic or-ders had grown somewhat in re-cent months and the business cli-mate in the west German retailtrade had "clearly improved" sincethe start of the year.

The ministry admitted that indus-trial production was sluggish, "al-though the decline visible up to lastautumn had since ceased".

Activity in the recession-plaguedconstruction sector had improvedin recent months, although this, theministry said, was only becausebusinesses were trying to catch upproduction losses caused by theharsh winter.

The ministry said the 3.82m reg-istered unemployed at the end ofMay were a continuing cause ofconcern. With the end of the harshwinter, it had become clear that theincrease in unemployment sincelast autumn was largely structuralrather than seasonal. Comparedwith the end of October last year,seasonally adjusted unemploy-ment had risen by 230,000 -- west-ern Germany account ing for160,000 of the total.

ECONOMIC SLOWDOWN:The German economy contracted

as expected in the first quarter buta slight upward revision to earlierfigures indicated that the country isexperiencing a slowdown ratherthan a recession.

Real gross domestic product fell0.5 percent in the first three monthsof this year compared with the pre-vious quarter, the federal statisticsoffice said. But revised figurespointed to economic stagnation inthe fourth quarter of 1995 and nota 0.5 percent fall in GDP as wasreported three months ago.

Mr. Gunter Rexrodt, the eco-nomics minister, said the pause ineconomic growth that began inmid-1995 had still not been over-come.

GDP figures showed activity ineastern Germany down a real 2.5percent in the first quarter, but out-put unchanged in western Ger-many. Construction activity de-clined for the third successive quar-ter in the country as a whole. Harshwinter weather contributed to a real7.5 percent slump in seasonally ad-justed first quarter output after de-clines of 2.5 percent and 0.5 per-cent respectively in the fourth andthird quarters of 1995.

The economics ministry said astrong 18 percent jump in construc-tion activity in April triggered a 1.4percent rise in the real, seasonallyadjusted output of the productionindustries between March andApril.

This recovery followed sharp,weather-induced declines in con-struction sector output in Februaryand March which prompted adownward revision of overall indus-trial production growth in March to0.9 percent from 2 percent pre-viously reported. The ministry saidit expected most of the GDP losscaused by bad weather in the firstquarter would be recovered in thecurrent three-month period.

Official figures showed that do-mestic demand stagnated in realand seasonally adjusted terms inthe first quarter. A 0.5 percent risein private consumption and a 1 per-

cent increase in governmentspending offset the building sectordecline. Business investmentstagnated while imports were alsounchanged. Exports fell 1.5 per-cent compared with the final 1995quarter, possibly indicating someweakening in the competitivenessof German industry.

First quarter GDP was 0.3 per-cent higher than a year earlier.Construction activity was down11.8 percent and investment inplant equipment 0.5 percent lower.But exports of goods and serviceswere 3 percent higher and statespending 3.4 percent up on the firstquarter of last year.

PLANS TO CURB PUBLICDEFICITS: Mr. Theo Waigel, Ger-many’s finance minister, said thefederal government and the statesshould take a firmer grip on theirfinances to ensure public deficitsstay below the Maastricht treatylimit of 3 percent of gross domesticproduct.

Outlining controversial plans fora "national stability pact", Mr.Waigel said the federal govern-ment and states, or Lander,needed a clear set of rules to con-trol the deficit and should be sub-ject to penalties.

He proposed a law giving thefederal government additional re-sponsibility for any deficits run upby the state social insurance funds,which pay pensions, healthcarecosts and unemployment pay.

The states should in future beresponsible for the deficits of themunicipalities as well as their ownbudget balances, he said.

He said he wanted the structurein place to control Germany’s defi-cit by 1998, in time for the plannedstart of European economic andmonetary union in 1999. He saidthe aim should be to reduce Ger-many’s government deficit in nor-mal economic conditions to onepercent of gross domestic product.

Finance ministry forecasts pre-pared showed that the government


22

expects Germany’s public deficit tofall below the Maastricht limit of 3percent next year, dropping to 1.5percent by 2000. The ministry alsoexpects Germany’s governmentdebt will exceed the Maastricht limitof 60 percent of gross domesticproduct this year and stay abovethat level for the subsequent fouryears.

However, Mr. Waigel refused toconsider accepting any weakeningof the Maastricht treaty’s conver-gence criteria and expressed thehope that a pick-up in economicgrowth would allow Germany tomeet the debt criterion and qualifyfor Emu.

Mr. Waigel said the federal andstate governments should takeequal responsibility for the coun-try’s deficit, but he acknowledgedthis rule could be adapted to helpthose Lander such as Saarland orBremen with heavy debts and inter-est payments.

EXPORT RISE: German ex-ports are forecast to rise by 5.5percent in value this year, but thisabove average expansion will notgive an automatic boost to eco-nomic growth, according to thecountry’s chambers of commerce.

Mr. Franz Schoser, chief execu-tive of German chambers of indus-try and commerce (DIHT), saidtrade and economic growth had be-come uncoupled as a result of glo-balization. Though the exportgrowth expected by the DIHT is farhigher than the 2.1 percent growthin nominal gross domestic productforecast recently by the Organiza-tion for Economic Cooperation andDevelopment, Mr. Schoser saidthere was no reason to worry anyless about Germany’s internationalcompetitiveness.

The DIHT’s latest survey of ex-port and import prospects, com-piled with German chambers ofcommerce abroad says it expectsthe Asia and Pacific regions to bethe most dynamic foreign marketsthis year. They have overtakenNorth America in this respect in thepast three years.

Mr. Schoser forecast doubledigit growth in exports to India,South Korea, Malaysia, Vietnam,the Philippines, Taiwan and Japan.China, currently embroiled in a dis-pute with Germany over Tibet, isexpected to increase its demandfor German goods by 3 percent thisyear and remain an important mar-ket over the long term.

The DIHT forecast German im-ports will rise by about 2.8 percentin value terms this year fromDM634.3bn ($404bn) in 1995,pushing up the trade surplus tomore than DM100 bn fromDM93.4bn last year.

Mr. Schoser said this relativelylow import growth would mainly re-flect increased buying of raw mate-rials and components as Germanmanufacturers tried to cut costs,diversify their sourcing, rationalizetheir production and boost exports.Germany’s weak economic growthwould offer little scope for exportersof finished goods elsewhere inEurope and North America. Bycontrast, the DIHT forecast a 6 per-cent increase in imports from theAsia-Pacific region and double digitgrowth in imports from central andeastern Europe.

BONN URGED TO CUT TAXBURDEN: The German govern-ment will fail to achieve its goal of a50 percent cut in unemployment bythe end of the decade, unless it cutsthe burden of taxation on businessand enacts budget cuts of betweenDM50bn ($32.8bn) and DM60bneach year, according to IFO, theMunich-based economic institute.

In a wide-ranging report aboutthe future of the German welfarestate, IFO concludes that funda-mental structural welfare state re-form is inevitable because the nexteconomic upturn will fail to bringdown the rate of unemploymentsufficiently.

Earlier this year, ChancellorHelmut Kohl promised to cut unem-ployment from 4m then, or roughly10 percent of the working popula-

tion, to 2m by the end of the dec-ade.

The institute has calculated thatthe level of income taxes and socialsecurity contribution consistentwith 2m unemployed would be 42.5percent of gross wages as opposedto 48 percent today.

A reduction of taxes and socialsecurity contributions to an aver-age of 42.5 percent would implyfundamental reform of the varioussocial insurance systems. IFO ar-gues that the social security systemneeds to be freed from externalfinancial obligations, such as thepayments of pensions to formereastern German pensioners whohad never contributed to the fund.

The IFO report said "the actionprogram for investments and jobsof the federal government points inthe right direction, but econometricsimulations suggest however thatto achieve the aim of a 50 percentreduction in unemployment by theyear 2000, it is necessary to gobeyond measures announced sofar in terms of reduction in sociallevies, income taxes and corpora-tion taxes".

VEHICLE OUTPUT: Ger-many’s output of cars and commer-cial vehicles slipped to 419,700 inMay, down 6 percent comparedwith May last year, reflecting con-tinued weakness in the Germaneconomy. The Federation of theGerman Automobile Industry saidye sterday car pro duction at397,300 was down 5 percent com-pared with April, while output ofcommercial vehicles fell 22 percentto 22,400.

The strong decline, especially inthe commercial vehicle sector,amounts to another sign that theGerman car industry is facing astrong squeeze in its home market.

Total vehicle exports were down8 percent compared with May 1995at 235,000, with car exports down8 percent and commercial vehicleexports down 1 percent.

CUT IN JOBLESS COSTS:The German cabinet agreed


23

sweeping changes to unemploy-ment benefits, aimed at makingsavings of DM17bn ($11bn) by2000.

Mr. Norbert Blum, the labor min-ister said the measures would intro-duce more flexibility at the work-place, encourage people to takemore part-time work and createmore jobs, although he would notsay how many. They would alsoreduce the burden paid by employ-ers in a bid to increase competitive-ness, the main thrust of the meas-ures.

The changes to the 26-year oldlaw, scheduled to take effect nextyear if passed by parliament, in-clude increasing the minimum agefor those entitled to receive Ger-many’s generous unemploymentpay for an extended period. Underthe current system, those made un-employed at 42 are entitled to 18months’ full unemployment pay. Ifthey have dependents, that pay is67 percent of previous income,while for single people it is 60 per-cent.

The government wants to raisethe minimum age to 45 with a slid-ing scale that would provide fullunemployment pay for longer peri-ods, the older a person becomesunemployed. A 57-year-old wouldreceive 32 months’ full unemploy-ment pay while anyone aged below45 would receive just one year’s fullbenefit and the much less gener-ous unemployment assistance af-terwards.

RETAIL SALES: German retailsales in April were a nominal 3 per-cent and a real 2 percent higherthan in April last year, fueling hopesthat the domestic economy mightbe recovering from its first quarterweakness.

However, official figures slowingthat turnover, adjusted for seasonalfactors and the different number ofdays in the month, was unchangedin nominal terms and a real 1 per-cent higher than in March also indi-cated that keen pricing contributedto the sales growth.

VISIBLE TRADE SURPLUS:The federal statistics office re-ported a slight increase in Ger-many’s visible trade surplus toDM6.2bn ($4.02bn) in March fromDM5.8bn in March last year. Ac-cording to preliminary estimates,the current account, which meas-ures trade in goods, services andcertain transfers, recorded a deficitof DM1.4bn in the month against asurplus of DM100m in March 1995.

INFLATION: The office re-ported that pan-German inflationwas 1.7 percent year-on-year inMay against 1.5 percent the monthbefore. In the west, inflation rose to1.5 percent from 1.2 percent whilein the east it rose to 2.8 percent inMay from 2.7 percent in April.

M3 MONEY SUPPLY: Ger-many’s money supply continued togrow at well above the Bundes-bank’s 1996 target range in May,slowing down only marginally fromthe high rates of the previous threemonths. Economists said it nowlooked unlikely the Bundesbankwould cut the securities repurchase(repo) rate, which it left at 3.30 per-cent when it lowered the discountand Lombard rates in April. TheGerman central bank said M3 roseat an annualized rate of 10.5 per-cent in May over the level of the lastquarter of 1995, after 11.2 percentin April and 12.3 percent in march.However, Mr. Helmut Schieber, aBundesbank council member, saidM3 should move towards the targetrange of 4-7 percent growth.

He said monetary capital forma-tion, in which funds are moved intolonger-term investments outsideM3, had been relatively weak andshould soon return to normal.Compared with the fourth quarter of1994, M3’s annualized increasewas 4.9 percent after 4.7 percent inApril.

Bank lending in Germany wasup by 7.9 percent (on a six-monthlyannualized basis), a slight slow-down from the April figure.

-$3$1

ECONOMIC GROWTH: Ja-pan’s economy grew at an annual-ized rate of 12.7 percent in the firstquarter of this year, the fastestgrowth in 23 years, the govern-ment’s economic planning agencysaid.

The expansion marked a deci-sive end to three years of economicstagnation.

Gross domestic product grew 3percent from the final quarter of1995 to the three months to March,or by 5.7 percent from the first quar-ter last year, the agency said. Thisbrings growth for the fiscal year toMarch to 2.3 percent, the highestsince 1991 and nearly twice thegovernment’s target of 1.2 percent.

Private consumption, which ac-counts for about 60 percent ofGNP, rose 5.1 percent in compari-son with the same quarter last year,nearly twice as fast as in the finalthree months of 1995.

The other important engine ofeconomic growth was public sectorinvestment, which rose by 27.2 per-cent in the first quarter from thesame period last year, after 12.6percent growth in the previousquarter.

Much of this is thought to be paidfor by last September’s recordY14,220bn ($130bn) fiscal stimula-tion package, widely expected torun out later in the year. Publicconstruction starts fell in April, ac-cording to separate figures.

The GDP deflator, a broadmeasure of prices, fell by 0.1 per-cent from the same quarter of lastyear, the seventh consecutivequarter of decline.

INDUSTRIAL OUTPUT: Ja-pan’s industrial output increased by2 percent from April to May, accord-ing to preliminary data form theMinistry of International Trade andIndustry (Miti). The rise confirmsthat the economic recovery is ontrack but not strong enough to


24

tempt the Bank of Japan to raiseinterest rates. Output rose by 3.2percent in April.

While less than 3.4 percent in-crease forecast by Miti last month,the output rise in May was seen asencouraging because with it camea small decline in the ratio of unsoldstocks and materials to sales.

SALES TAX INCREASE: TheJapanese cabinet approved a longexpected yet unpopular increase insales tax, the first step in an attemptto rebalance the tax system andrestrain a sharp rise in governmentdebt. The increase, from the pre-sent 3 percent to 5 percent, will beincluded in next year’s budget, totake effect from April 1, 1997.

This will raise an estimatedY4,000bn-Y5,000bn ($36.7bn-$45.9bn) a year for the finance min-istry’s coffers, and make a measur-able dent in the central governmentbudget deficit, set at Y21,000bnthis year, or 4.5 percent of grossdomestic product.

The tax increase is less than thefinance ministry had wanted, but astep in its campaign to correct Ja-pan’s uniquely unbalanced taxstructure. At present, the state de-rives around two-thirds of tax reve-nue from direct taxation and therest from sales tax. The balance inother leading mature economies isthe opposite.

DIFFUSION INDEX: The gov-ernment Economic PlanningAgency’s leading diffusion index, abasket of 11 indicators pointing toconditions in the next six months,rose to 55.6 in April, from 36.4 inMarch.

It was the first time in two monthsthat the index stood above 50,which represents equilibrium be-tween growth and recession. Be-fore then, the index had stood atabove 50 for six months in a row, aharbinger of the recovery whichemerged at the end of last year.

The figure suggests slowergrowth than indicated by the 12.7percent annualized increase in

gross domestic product reported inthe three months to March, the fast-est in 23 years.

DEPARTMENT STORESALES: In another sign of gentlerecovery, the Japan departmentstores association announcedsales by its 109 member compa-nies increased 1.7 percent in may,the fifth month of increase, and un-changed from the growth rate inApril.

The general measure of retailsales showed a 1.1 percent declinein April.

CHIP MARKET: The share offoreign companies in Japan’s semi-conductor market rose to 30.6 per-cent in the first quarter of this yearagainst 22.8 percent in the firstquarter of 1995, the US Trade Rep-resentative’s office said.

In the last quarter of 1995 theforeign share of Japan’s semicon-ductor market was 29.6 percent.Coinciding with the publication ofthe figures, the US yesterday re-newed its demand for continuedgovernment involvement in helpingforeign manufacturers maintaintheir access to the Japanese micro-chip market.

The US-Japan semiconductoraccord, which ensures a minimumforeign share of 20 percent of theJapanese market, expires on July31. Japan does not wish to renewthe agreement because it feels themarket share targets have beensuccessfully met.

TRADE SURPLUS: Rising do-mestic demand for personal com-puters and semiconductors was afactor in a 60.5 percent decline inJapan’s trade surplus in the year toMay, the 18th consecutive month ofdecline. The trade gap reachedY231.69bn ($2.13bn), slightlyhigher than the market was expect-ing, according to preliminary datafrom the finance ministry

Exports rose a vigorous 14.2percent to Y3,405.9bn in May, butthat was less than half the reported

pace of import growth, 32.6 percentto Y3,174bn.

The underlying pace of importgrowth is slightly slower than that,because the headline figure is dis-torted by the 30 percent rise in oilprices over the period. Up to 40percent of Japanese imports --crude and refined products-- arelinked to movements in oil prices.

Even so, Japan’s recoveringeconomy showed robust demandfor finished goods, nearly 60 per-cent of the total, last month.

Imports of office equipment --mainly computers -- rose by almostthree quarters, while imports ofelectronic devices increased by 48percent.

Unusually, the surplus declinedwith all three of Japan’s main trad-ing regions. The trade gaps withthe US and with the European Un-ion both fell by nearly 40 percent inMay. The gap with other Asian na-tions fell by 24.4 percent, the sec-ond month in a row to Y336.05bn.It was more than double Japan’sY167.7bn surplus with the US.

BUSINESS CONFIDENCE:The Bank of Japan announced thatJapan’s top companies are at theirmost confident for four and a halfyears and the business outlookcontinues to improve at a moderatepace. The percentage balance be-tween large manufacturers whothink conditions are getting betteror worse was minus 3% in May, halfwhat had been forecast in Februarywhen the figure was minus 12%,according to the bank’s Tankanbusiness survey.

Optimists and pessimists areforecast to even out by the next pollin September. A positive figure wasreached in 1991. The survey of9,666 businesses is the most de-tailed indicator of Japan’s short-term economic outlook and influ-ences the bank’s monetary policy.Conditions have now improved forthree quarters in a row.

The most encouraging featuresof the survey were that the recovery


25

is spreading from manufacturing toservice industries and that privatesector investment is staring to takeup the slack from a decline in state-funded public works spending.

The balance of non-manufactur-ing expecting an improvement roseby 9 points to 12%. All companiesnearly doubled their fixed invest-ment plans for the current year,from a 2.7% increase to a 6% rise.Corporate investment rose 1.2%last year, the first rise for four years.

But output prices, those at whichmanufacturers sell goods to whole-salers, continue to fall with a bal-ance of 17% of companies report-ing a decline, down from 20% inFebruary. Meanwhile, input prices,which are paid by companies forsupplies and materials, are risingaster, due to the yen’s decline. Abalance of 4%, up one point fromthe last survey, said input priceswere going up.

Rising costs and falling pricesare set to sap corporate profitsgrowth in the coming year. Manu-facturers said they expect pre-taxprofit growth of 13.2% in the year tonext March, after a 35.8% increaselast year. This is despite an ex-pected modest rise in sales growthto 3.4%, from 2%.

UNEMPLOYMENT: Japaneseunemployment rose to 3.5 percentin May, the highest since recordsbegan in 1953 and proof that theeconomic recovery has not re-lieved the pressure on jobs.

The government’s managementand coordination agency attributedthe rise, from 3.4 percent in April, toa sharp increase in the number ofpeople seeking work after beingencouraged by signs of an eco-nomic upturn.

The economy grew at an annual-ized rate of 12.7 percent in thethree months to March, the fastestfor 23 years.

The number of jobless rose by320,000 people, or 15.4 percent, to2.4m in the year to May, much morethan the 0.1 percent increase in

numbers employed over the sameperiod. "More and more people arecoming on to the job market, but theeconomic recovery cannot absorbthem all," an agency official said.

Within the rise in the number outof work were a record 50,000yo ung graduates. Another160,000 people said they had leftjobs in search of higher pay orstarted to look for work after a pe-riod at home, while 90,000 lost theirjobs because their companiesceased trading or shed staff.

Worst hit were young people,kept out of work by a continuedrecruitment freeze among manycompanies, and the late middle-aged, victims of early retirement.

The jobless rate among 15 to 24year-old men rose by 1.6 percent-age points to 7 percent, while theunemployment rate among 55 to 64year-old males rose by 0.8 points to5.5 percent.

JOBS FOR LIFE IN DOUBT:Japan is seeing a sharp increase inthe number of companies wantingto scrap jobs-for-life, according to asurvey. Over half a sample of6,000 companies surveyed by theJapanese labor ministry say theyno longer stick to the traditionalsystem, a staple of Japan’s relativesocial stability. This is a sharp in-crease on the 41.5 percent makingthe same claim in a survey threeyears ago.

Larger companies are slightlyless tough about "surplus labor"than smaller ones. Of businesseswith 5,000 or more employees, 32percent wanted to scrap the lifetimerule. Over half of companies withfewer than 300 workers said theywanted to be free to sack people.

OUT PUT SHIFT ING OFF-SHORE: Nearly 20 percent ofproducts imported by Japanesecompanies are "reverse imports" ofgoods made overseas by Japa-nese-affiliated companies, accord-ing to a survey.

The survey, by the Japan Exter-nal Trade Organization (jetro), un-

derlined the extent to which Japa-nese companies have shifted pro-duction overseas in the so-called"hollowing out" effect, blurring theexport-import picture.

Jetro said the proportion of off-shore production to total productionby the companies surveyed wasexpected to rise to 26.8 percent bythe year 2000 from 18.4 percent inthe year to March 31, 1995. It saidthat 47.1 percent of the companiessurveyed either had cut or ex-pected to cut domestic production,while 35.5 percent expected no de-cline and the remainder were un-clear, saying that the outcome de-pended on foreign exchange ratemovements.

)5$1&(

CUTS IN TAX IN SPENDINGPLEDGED: Mr. Alain Juppe, theFrench prime minister, pledged tocut income tax progressively overfive years--with commensuratepubl ic spending cuts--and tospread the burden of France’scostly welfare system more widely.

Mr. Juppe said his governmentwould present in mid-September,in conjunction with its 1997 budget,a five-year program setting out par-allel reductions in spending andtaxes.

He gave no details except thatthe plan would involve lowering allincome tax brackets, creating anew universal health insurancecharge and reforming the "profes-sional tax", levied on companies’wage bills and investments.

Mr. Juppe stressed that the re-port did not commit the govern-ment, which is to hold further con-sultations with parliament, employ-ers and union leaders.

Mr. Juppe said he would beguided by two principles -- that noreal tax reform was possible with-out reducing rates, and that no taxcuts were possible without reduc-ing public spending at the sametime.


26

Initial tax cuts in 1997 are there-fore likely to be minimal, becausethe government needs to reducethe budget deficit by at least an-other FFr40bn ($7.78bn) in 1997 ifFrance is to qualify in that year forEuropean monetary union. This isexpected to entail spending cuts ofat least FFR60bn to counter un-avoidable rise in state debt servic-ing and other fixed charges.

Mr. Juppe confirmed that hisplan to cut income tax rates, whosecurrent top level is 56.8 percent,would require abolishing many ofFrance’s numerous tax breaks --only half of French families pay in-come tax.

Mr. Juppe said he intended tocreate a single health insurancecharge for all, which would be lev-ied on savings as well as salaries.

RADICAL TAX REFORMURGED: The French governmentshould cut the top rate of incometax from 56.8 percent to 40 percentand substantially reduce the num-ber of exemptions, according to ahigh level report submitted to Mr.Alain Juppe, the prime minister.

The report, by a group of fivesenior civil servants, contains astrong indictment of the French taxsystem and calls for a series ofradical changes which are likely tobe controversial.

it calls for the lowest-paid to beexempt from tax, for the existingsliding scale to be reduced to sixbands, for higher income earners tobe taxed on family allowances andfor the lower income tax ceiling tobe balanced by eliminating thepractice of deducting 20 percentfrom an employees earnings be-fore calculating tax.

Ministers are urged to considergreater harmonization of profes-sional tax -- levied on companies bya range of different levels of localgovernment largely on the basis ofthe number of staff employed andinvestment undertaken.

The report says that meaningfultax reform cannot take place with-

out a reduction in public expendi-ture; that spending should be bal-anced by tax revenues; and thatexcessive simplification of the sys-tem could risk triggering injustices.

It criticizes proposals being dis-cussed at the European Commis-sion for a switch in the "destination-based" system of value added taxto one levied at the point of origin ofthe goods or services being sold. Itsays such a system would createsubstantial conflicts.

His proposal for a new universalhealth insurance charge triggeredan angry response from French un-ions, with Fource Ouvriere calling ita precursor to the privatization ofthe medical system and the Com-munist-backed ConfederationGenerale du Travail.

The report says taxes and othercharges now represent a record 45percent of gross domestic product,the highest proportion in any largedeveloped country. It warns of thesharply growing burden of socialexpenditure, notably in health care,and of the danger of the more rapidgrowth in real wages of public sec-tor rather than private sector work-ers.

It says the tax system has lost itselasticity, with each rise in chargesaccompanied by a sharp growth inthe number and value of tax deduc-tions claimed as people adopt "sur-vival tactics". It also calls for modi-fication to the incentives payableon life assurance products, with re-newed emphasis on encouragingthe country’s nascent pension sys-tem.

GROSS DOMESTIC PROD-UCT: The French economy re-bounded strongly in the first quar-ter, with gross domestic product ris-ing by 1.2 percent after a 0.4 per-cent decline in the strike-affectedfinal quarter of 1995.

According to Insee, the nationalstatistics agency, the positive first-quarter result was due in part to thenegative effect of December’sstrikes on fourth-quarter 1995 fig-ures. In addition, the winter cold

snap had brought an unexpectedlyhigh 7.8 percent increase in energyproduction. And the unusually highnumber of working days was re-sponsible for "about half a point ofgrowth."

Economists drew encourage-ment from the strong 3.1 percentquarter-on-quarter increase in in-dustrial investment, although someexpressed doubt that this wouldcontinue.

But they interpreted the steepreduction in stocks, without whichfirst-quarter growth could havereached a highly impressive 2 per-cent, as a negative sign.

Car sales were particularlystrong, with a quarter-on-quarter in-crease of 19.7 percent, after a 0.3percent decline in the fourth quarterof 1995. First-quarter exports (up3.3 percent) rose faster than im-ports (up 1.8 percent).

LUXURY SALES: A strong ad-vance in exports helped Frenchluxury goods makers to record a4.1 percent increase in sales in1995, confirming the sector’s re-bound from the impact of the Gulfwar and the backlash to last year’sFrench nuclear tests.

The 78 member companies ofthe Colbert Committee -- in fashion,perfume, champagne, cognac,jewelry and leather -- yesterday re-ported a combined turnover ofFFr34.7bn ($6.7bn), comparedw i th an adjusted fi gure ofFFr33.3bn in 1994.

Exports rose 6 percent toFFr26bn -- accounting for morethan three-quarters of overallsales. Nearly half of these exports-- FFr12bn -- went to the Asia Pa-cific region, with Japan accountingfor FFr6bn.

UNEMPLOYMENT: New fig-ures released by Insee, the na-tional statistics institute, put thenumber of people out of work inApril at 3.14m -- just 11,000 lessthan the record of 3.156m set inMarch 1994. This put the unem-ployment rate at 12.3 percent,


27

among the highest in the G7 groupof industrialized nations.

Mr. Juppe recently resorted tothe promise of future income taxcuts in an effort to encourage con-sumers to spend more. But thenew unemployment figures will re-inforce analysts’ expectations thatsuch spending is likely to remainsubdued for the foreseeable future,especially at a time when scarcelya week passes without the an-nouncement of large-scale joblosses in one sector or another.

The 12.3 percent unemploymentrate compared with a previous es-timate of 11.9 percent and followedan annual household survey con-ducted in March. The survey usedinternational labor standard meth-ods of calculation and, as such,differs slightly from French laborministry data showing the numberof job seekers.

HOUSEHOLD CONSUMP-TION: Household consumption fellin May for the fourth consecutivemonth. The rate of decline, how-ever, slowed significantly to just 0.1percent from a downwards revised1.5 percent in April. Insee said themarginal nature of the latest fallindicated that consumption wasstabilizing.

MINIMUM WAGE: The govern-ment also confirmed that France’sminimum wage -- the "smic" --would be increased by 0.5 percentfrom July 1. This will carry the netmonthly minimum salary over theFFr5,000 ($965) threshold fromFFr4,992.99 at present.

DECLINE IN TRADE SUR-PLUS: Official figures show that, inthe first four months of the year, thesurplus reached FFr33.23bn($6.4bn) -- still a creditable per-formance, but down from theFFr36.42bn recorded in the corre-sponding period of 1995.

Figures for April were affectedby a comparatively weak perform-ance from exports, which fell toFFr116.7bn from FFr125.7bn inMarch. Imports also fell -- fromF Fr113.7bn in march toFFr112.9bn in April -- but the neteffect produced an April surplus ofa relatively modest FFr3.82bn, ver-sus the exceptionally high figure ofFFr11.94bn recorded in March.This was inflated by a number ofexceptional items. Mad cow dis-ease impinged on the export fig-ures for the first time, albeit in amodest way, in the form of a 10percent -- or FFr200m -- decline inmeat exports.

External growth has acted as apowerful economic motor forFrance in recent years; the first half1995 trade surplus of FFr60 bn rep-resented a 62 percent improve-ment over 1994 levels.


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Documents

1996 Issue # 7