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Why the market is wrong about Emu

Core European growth is picking up. Late last year, I said growth disappointments would make the "Emu on time" outlook seem less probable by early 1997. Consumer spending would disappoint because of Maastricht masochism and the fiscal squeeze, and because of job losses and labour market deregulation.

Now the market believes that European monetary union (Emu) is in doubt because of dreadful growth, in both core and peripheral Europe. But the market is about to be proven wrong. I now expect fast growth in core Europe by end-1997. The reason is cheap money. And exchange rates have fallen, adding to easy monetary policy, particularly for core Europe.

What's the evidence that all this is working through to demand and not just pushing on a monetary string? First, exports are recovering strongly in Germany and France. So is business confidence. The consumer is still feeling bad, but no worse than last year. French consumption of manufactured consumer goods is on the rise, as are German orders and output. And we are starting to see a turnround in capital expenditure in both France and Germany. The inventory cycle will help because stocks are down to normal levels in both countries.

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