European Business News (EBN), 97-02-07

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From: The European Business News Server at <http://www.ebn.co.uk/>

Page last updated February 7 1730 CET

CONTENTS

[01] US economy shows robust job growth and restrained wage rises

[02] Kohl says no problems between Italy and Germany

[03] Veba, C&W end partnership, opening door fore telecoms reshuffling

[04] Dollar's rally appears ready for last push it its current rally after G-7 meeting

[05] German officials disagree on effect of unemployment on making EMU

[06] Mandela pledges continued efforts toward privatisation and the removal of exchange controls

[07] French industrial leaders expect strong first-quarter demand

[08] Corporate and Economic Briefs

[01] US economy shows robust job growth and restrained wage rises

The data validate the Federal Reserve Board's decision this week to leave short-term interest rates unchanged. The breakdown of the report - which showed an increase of 271,000 non-farm payroll jobs and 5.4% unemployment rate - indicated that the economy continues to growth at a moderate pace with low inflation. ''We're getting more good news on the employment and inflation fronts,'' said Kathleen Stephansen, senior economist at Donaldson, Lufkin & Jenrette Securities.

Most significant about the report is that strong employment growth in January came without an accompanying rise in Labor market tightness. For example, average hourly earnings rose just $0.01 to $12.06, compared with a 15 cent rise in the component over the last two months. Also, the January factory workweek fell 0.7 hour to 34.1.

Those developments are unambiguously good news for Federal Reserve policy makers and the financial markets. Robust growth in the economy and tightening Labor markets fed concerns that price bottlenecks and imbalances might arise and fuel inflation. But according to available data, that hasn't happened yet.

Economists agreed that with a number of seasonal quirks and new reporting techniques in the Bureau of Labor Statistics' latest report on employment distorting the data, the significance of the information has been diminished. Still, the arrows continue to point toward solid employment growth.

''The Labor market is still very strong,'' said John Williams, chief economist at Bankers Trust Co. In a statement accompanying the report, BLS Commissioner Katharine Abraham noted that seasonal factors affected the latest month's report. Heavy snows - and resulting employment declines - in January 1996 led to an exaggeration of the month-over-month employment gain in certain industries.

Average weekly earnings fell 1.9% to $411.21. Over the past year, average hourly earnings rose 3.8% and average weekly earnings increased 4.7%.

[02] Kohl says no problems between Italy and Germany

At a joint news conference, Kohl said 'there are essentially no areas in which bilateral difficulties come into question and we are both on the way to build Europe.'

Both leaders sought to downplay reports of a rift after the Financial Times reported this week that European Union and central bank officials were discussing a plan to defer Italian entry into the currency, in part to assuage German fears of a soft currency.

Kohl reiterated that any decision on which countries will join the currency union will be made in early 1998, and until then every EU member must concentrate on meeting the criteria required to join.

'We want to stick to the timetable and the criteria,' he said. 'We must still do a lot' in order to meet the criteria outlined in the Maastricht Treaty for Europe's economic an monetary union.

'Therefore, I can only advise not to now think about who is in a position' to fulfil the criteria, Kohl said. 'We will sit down together to decide in a rational way.'

Kohl emphasised that, 'German interests are represented in the Treaty,' adding that, 'if we were to damage the criteria, that would damage German interests.'

Prodi, at his individual news conference, added that speculation that Italy's entry would be delayed is of no importance. When asked about turbulence on financial markets earlier this week, Prodi said that financial markets believed the statements of the government and didn't give credence to the Financial Times article.

Asked if he agreed with suggestions that Italy could benefit from a six- month delay in entering the single currency, he said that this was neither an idea he agreed with nor something which corresponds to German desires.

Prodi said he didn't think that there were any particular countries which were behind the rumours suggesting that Italy could or should delay its participation in the single currency.

He said that he and Chancellor Kohl agreed that the single currency criteria must be examined only next year, adding that decisions as to who participates in the euro must be made according to the Maastricht Treaty parameters.

Prodi expressed assurance that Kohl wouldn't do anything to undermine Italy's position next year. He also emphasised that Italy has placed great importance on participating in the single currency. 'It's the path we have chosen,' he said.

The premier pointed out that Italy now meets three out of the five Maastricht Treaty criteria. While Italy is far from meeting the 60% debt-to- gross domestic product criteria, with a debt-to-GDP ratio of more than 120%, Prodi noted that this particular requirement is to show that a country is moving towards the ratio required.

Meanwhile, according to Italy's 1997 budget targets, Italy will achieve the 3.0% deficit-to-GDP ratio requirement this year.

[03] Veba, C&W end partnership, opening door fore telecoms reshuffling

Veba said different business strategies were to blame for the deal's collapse, with Veba planning to invest more heavily in Germany while Cable & Wireless planned to concentrate on its home market in Britain.

But Veba said it planned to keep a 10.4 percent stake in Cable & Wireless. A bank trustee will hold Cable & Wireless' stake in the venture during a search for new partners.

Share analysts who had anticipated this move over recent weeks have speculated that the termination will leave C&W in need of a new cornerstone for its continental European presence, where it will now be a thinly-spread, minor player. C&W stressed that 'Europe remains a key strategic market . . .and the company will concentrate its efforts in continental Europe on developing business which will strengthen and support' the company's communications operations. Under terms of the dissolution, Veba will buy back C&W's 45% stake in the Vebacom venture for 2.21 billion Deutsche marks ($1.34 billion). At the same time, C&W will buy back Veba's 50% stake in C&W Europe for 90 million marks.

C&W predicted a one-off pretax profit boost of 60 million pounds ($98.41 million) in fiscal 1997. Veba will retain its 10.4% stake in C&W.

Veba said the collapse of the Vebacom alliance will not impact its 'o.tel.o' telecommunications venture with German energy group RWE. The venture, which will offer a range of telecommunications services, received German cartel office approval today.

Veba will own 40% of o.tel.o, with RWE holding 37.5%. The remaining 22.5% will be held in trust by a bank while a new international partner is sought.

Veba chief executive Ulrich Hartmann said: 'For our aggressive market strategy in Germany we need partners who can maintain our tempo.

RWE Chief Executive Dietmar Kuhnt said he was sure that the alliance would win a strong position on the German telecommunications market. 'With Veba we will seize the chance presented by telecommunications -- the market of the future.'

The 2,100 workers at o.tel.o have already begun their work. Veba will bring the activities of Vebacom and RWE those of its unit Telliance -- with the exception of Talkline -- into the new joint venture's operating structure.

[04] Dollar's rally appears ready for last push it its current rally after G-7 meeting

But, analysts said, it could well prove the last leg of the currency's recent strong rally. In early Friday trading, the dollar was surging against its Japanese and German counterparts on negative yen sentiment. Analysts suggested that although they might not express disapproval on Saturday, the G-7 ministers won't allow the dollar to rise indefinitely.

Also, as it heads towards DM1.7000 and Y130.00, the U.S. currency will start to face stiff technical resistance. 'We are nearing the likely top of the dollar,' predicted Klaus Baader, currency economist at Deutsche Morgan Grenfell in London. He noted that apart from everything else, the dollar's rally could also be dampened by falling expectations of an interest-rate cut in Germany now that the worst of that country's downturn appears to be over. 'There will be a floor under expectations of a German rate cut,' he said.

For the moment, though, German officials appear intent on keeping the dollar strong. Both the Economics Minister Gunter Rexrodt and Finance Minister Theo Waigel were reported early Friday to have made comments suggesting they weren't concerned about the mark's recent weakness.

'It indicates that Japan's urgency to do something isn't shared by the U.S. or Germany,' Baader noted. Despite Japan's desire for action, analysts said that expectations of anything concrete emerging from the G-7 are fading fast.

Badder said he expects G-7 to express satisfaction with the dollar's recent rise but suggests that the G-7 aren't entirely happy with the speed at which it is advancing at the moment.

He reckoned this probably won't be strong enough to have any impact on current dollar sentiment. 'They would have to go quite far to instil fear of intervention,' he said, noting that even if they did the market would then question whether the G-7 was in a position to back that up with appropriate policy changes. 'The best the G-7 can hope to achieve is to slow the dollar,' he said.

Nigel Richardson, an international economist with Yamaichi International, noted that expectations from G-7 had declined despite speculation in Tokyo that Japan would start liquidating its U.S. Treasury holdings if it has to intervene on its own. But, he said, the country's failure to take independent action so far suggests it isn't likely to do so in the future. All the same, Richardson added, Japan probably won't have to wait too long before there is a consensus among central banks that the dollar's rally has gone far enough.

An average of purchasing-power parities indicates that the 'tolerance limit' will reached between Y130.00 and Y135.00, he said. 'Therefore, if it goes much beyond Y130.00 there will be a consensus things have gone too far, ' he predicted. (Nicholas Hastings, AP-Dow Jones)

[05] German officials disagree on effect of unemployment on making EMU

While a senior Bundesbank official says the current unemployment levels will make it more difficult to meet the Maastricht criteria for economic and monetary union, Economics Minister Guenther Rexrodt says Germany is on track for EMU membership....on time.

The apparent disagreement came as Italian Prime Minister Romano Prodi arrived for a summit with German Chancellor Helmut Kohl. That meeting is being held against backdrop of doubt about whether Italy will be a start-up member of European economic and monetary union. Bundesbank council member Klaus-Dieter Kuehbacher said Germany's jobless rate will make it harder for Bonn to join EMU on the 1999 starting date. He told a banking congress that the high unemploynment rate is likely to drive up social costs which will make it more difficult for the government to further consolidate its budget.

'This will endanger the government's plans of reaching a budget deficit of 2.9% of gross domestic product,' Kuehbacher said. Maastricht criteria require the deficit to be below 3% of GDP.

Kuehbacher said that government officials must take action, rather than only talking.

But Rexrodt insists that Germany will meet the targets. 'We are in a difficult situation. We have to save money on the budget for needed tax reform, we have to fulfil the criteria for Maastricht and we have to struggle with the unemployment issue,' Rexrodt said. 'I'm sure Germany will fulfil the criteria of Maastricht and thereby deliver the conditions for European Monetary Union by 1999.' The Bundesbank has on several occasions said that it cannot assist in reducing the nation's unemployment rate since the labour market suffers from structural problems that cannot be corrected by the central bank.

And on Friday, another senior Bundesbank official said an interest rate cut could not help cool off the unemployment rate.

Bundesbank council member Hans-Juergen Koebnick said a cut in the bank's main money market rate 'would not take any unemployed person off the street.'

Koebnick declined to speculate about whether Italy would be among the first to join a European currency union in 1999. 'It remains to be seen what comes out today,' he said.

Koebnick last year suggested that southern European nations would likely not be ready to join the currency union at its launch as their efforts to consolidate finances were still at the beginning stages.

Meanwhile, Italy's Prodi is expected to use today's summit to rebuff a series of reports questioning Italy's fitness for EMU.

'I intend to remind him, since he himself well knows, that these comments don't help anyone and least of all the common cause of building monetary union,' Prodi was quoted as saying by Italian newspaper La Repubblica ahead of a meeting of the two leaders in Bonn.

'We all need each other - we need France and Germany, but they also need us. I'll tell it straight, also because I know that Kohl thinks that way, too,' Prodi said.

The German government declined to comment on Prodi's remarks. But Italian observers said his sharp tone was meant less to reproach Kohl than to calm concern in Italy and rebuke foreign critics who keep doubting the country's chances of qualifying for EMU entry in 1999.

[06] Mandela pledges continued efforts toward privatisation and the removal of exchange controls

Enterprises targeted include telecommunications provider Telkom, South African Airways, Airports Co., diamond miner Alexkor, forestry products concern Safcol, regional airline SunAir and tourist resort operator Aventura.

'In a matter of months, besides the mammoth task of general restructuring, Telkom will acquire a strategic equity partner and SunAir and Aventura will be wholly privatised,' Mandela said.

'The Airports Co. and Safcol, in forestry, should complete their bidding processes this year. Alexkor, in diamond mining, is also being attended to. South African Airways and Autonet should have completed their restructuring processes by the first half of 1998, and intense discussions are underway in (transport body) Transnet to address these, and other, subsidiaries,' Mandela said.

The president also said that he is confident the country has 'moved into high gear' in implementing it's macroeconomic strategy and said he was reaffirming South Africa's commitment 'to the phased removal of remaining exchange controls,' he said.

Mandela, however, gave no details on how and when restrictions on taking currency out of the country would be lifted.

Further, South Africa is seeking to further enhance its future economic prospects by improving trade ties with its neighbours and trade partners around the world.

He cited a commitment by South Africa and nations in the Southern Africa Development Community toward establishing a free trade zone within eight years and also renewed efforts to reach a new trade pact with the European Union.

[07] French industrial leaders expect strong first-quarter demand

National statistics bureau INSEE said the intermediate goods sector in particular looks to be well-supported. Foreign demand for French industrial goods is expected to 'remain very well oriented' in all sectors of manufacturing, except in consumer goods where demand is expected to be moderate.

The INSEE survey found that business leaders considered demand to have slightly fallen in the fourth quarter of 1996, with contrasting conditions seen in many areas of industry.

They found that professional goods demand was dynamic while demand for consumer goods less so. Demand for intermediate goods was in decline during the fourth quarter and was very negative in the automotive sector. Excluding automobiles, INSEE said the trend in demand has been up since the middle of 1996.

At the same time, INSEE said foreign demand was up and appears to remain on a positive trend in all sectors. INSEE said capacity utilisation was up to 82.6% in January, compared with 82.1% in October, rising particularly strongly in the professional goods sector and to a lesser extent in automobiles.

Business leaders said job reductions continued in January and they expect this situation to continue, albeit at a slightly less pronounced pace in the first quarter of 1997.

Producer prices were up 0.1% in the fourth quarter of 1996, after having declined 0.6% in the third quarter, rising in the intermediate goods sector and falling in other sectors. For the current quarter, INSEE said, prices are expected to continue falling, especially in the automotive sector.

Wage increases were 0.6% on the quarter in the course of the fourth quarter 1996, after a similar rise in the previous quarter, INSEE said. For the current quarter, the rise is expected to be moderate.

[08] Corporate and Economic Briefs

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