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Leadership vacuum in Europe
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March 16, 1999: 7:38 a.m. ET
Financial markets shrug off EU crisis, but political logjam casts long shadow
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LONDON (CNNfn) - The European Union's policy agenda has been transformed following the mass resignation overnight of all 20 European commissioners. However, currency analysts expect the euro to ride the storm and benefit in the medium-term from the expected reform of Europe's institutions.
Commissioners huddled together in Brussels Monday following the publication of a damning independent report into the institution's bureaucracy. The 144-page report pinpointed education commissioner Edith Cresson for criticism but also drew Commission president Jacques Santer deep into the fray.
The euro reacted to the news by shedding more than a cent in the Asian markets to reach $1.084. But it recovered somewhat in European trading to reach $1.087. "We will not see a sustained impact on the currency markets," said Rob Minikin, chief currency strategist at Citibank. "This issue was familiar to the market and six months down the line could be seen as a positive move."
Rebecca Paterson, currency strategist at JP Morgan, believes the political turmoil could speed enlargement of the single currency union. "One of the big complaints from the U.K. and Sweden is that the EU is not democratic enough. If the European Parliament strengthens because of this affair then there will be positive sentiment for the euro in the medium term."
The European Central Bank is expected to shrug off the EU's travails when it meets to discuss interest rates Thursday. "There is a reasonable chance of the bank cutting rates," said Holger Schmieding, senior European economist at Merrill Lynch. Futures markets have already factored in a 25 basis point cut, but Schmieding believes they may trim up to 50 basis points from the current repo rate of three percent.
While currency and bond markets have taken some heart from events in Brussels and equities focus on the Dow's battle with the 10,000 barrier, Europe's policy agenda does look uncertain. Most of the Commission's top officials are expected to be renominated and continue in a caretaker role, but the crisis of confidence is expected to halt the resolution of a slew of critical EU reform measures including the EU's own finances, agricultural reform and lingering trade disputes with the U.S.
Leon Brittan, the EU's vice-president and trade commissioner, described the damning report as a "disaster" and said progress on key EU issues hung in the balance. "In principle, we're caretakers. It's up to the members to tell us how much they want us to do," he said in an interview with the BBC.
The EU council of ministers is due to meet for a summit in Berlin on March 25, but the agenda of financial and agricultural reform is likely to be diluted away by calls for urgent reform of the Commission's structure. "We may still get a deal but it may not be thorough enough," said Schmieding, at Merrill Lynch.
Central European states pushing for EU entry may be early casualties of the fallout from Brussels. "A weakened Commission is bad news for these states as they had been the most constant force for enlargement," said Schmieding.
Jacques Santer, a Luxembourger appointed as a compromise candidate after the departure of predecessor Jacques Delors, has fulfilled concerns that his tenure would be ineffective without the clout of a major member state behind him. He is due to meet German chancellor Gerhard Schröder later Tuesday to discuss the Commission's next step - Germany holds the rotating EU presidency until June - but his reign is seen as effectively over.
Leon Brittan, the Commisson's vice-president, has emerged with his credibility intact and is expected to continue the push for a settlement of trade disputes with the U.S. "The report put its finger on things but said that one of the problems was that member states were asking the Commission to do things well beyond its capacity and resources," said Brittan. "So there were shortcuts and blind eyes turned but there is no justification for that. It is important therefore, for example, to look at all the programs and to stop the ones where more is being done than we have the resources for."
Joazias van Aartsen, the Dutch foreign minister, warned of a dramatic situation in the EU and called for the swift appointment of a new Commission. The Dutch favor retaining the existing commissioners ahead of new appointments though van Aartsen added that it was up to Germany to determine the next step.
Schröder faces the tough task of appeasing member states, particularly France, where resentment is building against the treatment of Cresson. Tuesday's report devoted several pages to the education chief including charges of nepotism in the appointment of her dentist as a scientific advisor to the EU. "Maybe I was a little careless," she admitted in an interview with France 2 television, before pointing to the Commission's collective responsibility.
Most of the 15 member states have already come out with supportive statements for their existing commissioners and plan to renominate them for the remainder of their terms, due to expire at the end of the year. The French government has yet to make a push for Cresson's reappointment, though her position is widely seen as untenable.
Yves-Thibault de Silguy, the other French nominee and commissioner for monetary affairs, was not implicated in the report and retains the support of market watchers. Schmieding said it would be "unsettling" for the markets to have a more interventionist official in the post. 
-- from staff and wire reports
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European Union
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