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Tuesday, June 2, 1998 Published at 20:10 GMT 21:10 UK

Business: The Economy

Why the Russian domino can threaten Europe's markets

Rodney Smith's weekly look at Europe's economy and stock markets.

Russia ...
Russia is still on a knife edge, economically speaking ... one which could cut deeply into the rest of Europe if it slips. The key will be rouble devaluation.

Official protests aside, pressure for devaluation could soon be uncontainable. Fixing the rate at 6.10 to the dollar gave the markets a target which wasn't there before, and now they are having a go at it.

... and Europe

And, says Peter Oppenheimer at HSBC James Capel, if the rouble IS forced to devalue, many of the other Eastern European currencies which are closely linked with it would have to go too; a repeat of events in the Far East last year.

Furthermore, he says, the European Union now exports about 15% of its goods to Eastern Europe; the US exports less than 2%. Clearly, a domino devaluation in Eastern Europe could hurt Western European manufacturers.

Worst affected would be companies in the two biggest traders with Eastern Europe, Germany and Austria. Worse still, the event would not even need to happen. It need only be perceived as a sufficiently serious threat to damage confidence and sentiment in equity markets.


The next step could be that the Deutschmark, the lynchpin of the Euro, slips against the already powerful dollar. Western European interest rates would eventually have to take the strain.

This will doubtless be brought to the attention of Messers Duisenberg, Issing, Hamalainen, Solans, Padoa Schioppa and Noyer. Names to remember, they are the inaugural board of the European Central Bank, busy this week preparing for next Tuesday's policy meeting.

Not that anything will happen. They don't get to pull the levers of European monetary policy until January. In the meantime, they are testing the fit and feel of the desks and the chairs.


Otherwise, there's a sense of general awareness on European bourses of the continuing consolidation in the pharmaceuticals and banking industries. The $33bn purchase of Monsanto by AHP in the United States will create another drugs giant which will push Europeans like Zeneca farther into the background ... forcing their boards to contemplate, however reluctantly, the need for a partner if only as protection from predation.

And brokers know this.

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