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European Economists Divided Over Tentative Budget Agreement

November 20, 1987

LONDON (AP) _ Britain welcomed Friday’s news that the White House and congressional leaders had tentatively agreed to reduce the huge U.S. budget deficit by $76 billion over two years. But European economists were widely divided in their reaction.

The finance ministries of France, the Netherlands and West Germany had no immediate comment.

In welcoming the agreement, Britain’s finance minister, Chancellor of the Exchequer Nigel Lawson, said: ″This is an essential element both in the correction of the imbalances that have been plaguing the world economy, and in the restoration of confidence in the financial markets.″

″Other major nations ... will now need to prepare an appropriate response, with a view to a meeting as soon as practicable after the Congress has approved the package, so that a successful cooperative approach to current economic difficulties can be agreed.″

The analysts cautioned that the agreement was difficult to assess since it was tentative and its details were not yet known.

″Until I actually see it flashing across my screen, I won’t be convinced,″ said Robin Hubbard, a U.S. economist with Kleinwort Grieveson Ltd., a London investment firm.

Most of the European markets were closed or about to close Friday evening when the news was first reported, but the dollar did rise against major foreign currencies and stock prices in London staged a late rally.

Distinctly unimpressed was Bill Martin, chief econmist for the London investment firm Philips and Drew, who said: ″The impression we have is that the political system is a total shower (ineffective). They can’t deliver anything. The impression one has in Europe is of a system which can’t deliver anything coherent or sensible on the budget deficit.″

″But we live in hope,″ Martin added.

However, in Rome, Alberto Mucci, chief economist with Banca Nazionale del Lavoro, Italy’s largest commercial bank, said, ″My initial reaction is very positive.″

Mucci, referring to the earlier announced figure of 75 billion, said: ″Seventy-five billion dollars over two years is a lot more than the Gramm- Rudman called for.″

In addition, ″If there hadn’t been an agreement, the repercusssions would have been very serious,″ Mucci said.

″They are a first step on the vital path to regaining equilibrium in the U.S. federal deficit,″ he added.

In Amsterdam, Daniel van der Tuin, of the Van Haften investment banking firm, said: ″Any accord beyond the legally required cuts (of Gramm-Rudman) is positive, the reason being that there will also be cuts in the second year.″

And Martin Huefner, senior economist at Deutsche Bank AG in Frankfurt, said: ″The figures that are cited signal a willingness to cooperate.″

European leaders and economists have been clamoring for Washington to do something about the deficit since the world stock markets’ crash began in mid- October.

British Prime Minister Margaret Thatcher and Chancellor of the Exchequer Lawson were particularly outspoken in pressuring President Reagan to cut the deficit, by increasing taxes, if need be.

The foreign exchange and stock markets in Europe have been depressed in recent days on pessimism and uncertainty about the outcome of the negotiations in Washington.

Hubbard said: ″We still haven’t seen the outlined agreement and there are a lot of ifs and buts.″

Predicting several more weeks of uncertainty, Hubbard said: ″I don’t think a budget accord, whatever it is, is really going to reduce the budget deficit in the United States.

″The one positive thing that will be if that leads to a G-7 meeting,″ he said.

The G-7 is the so-called Group of Seven nations, the United States, West Germany, Japan, France, Britain, Italy and Canada.

Such a meeting would be spent pressuring West Germany and Japan to cut their interest rates and stimulate their economies, Hubbard said. But neither country is likely to bend to such pressure, he said.

″I don’t think a G-7 agreement at this time would be sustainable,″ Hubbard said.

But Van der Tuin thought the $76 billion figure was enough to lead to more stability in the foreign exchange market. He said: ″This opens an opportunity to nudge Japan and West Germany into action.″

Huefner, the West German analyst, said his country is likely to offer some concessions in return.

While the Bundesbank, the central bank, is unlikely to cut its discount rate soon, the government might still compromise in its fiscal policy and move forward part of the tax reform package that is scheduled for 1990, Heufner said.

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