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Friday, 22 June, 2001, 12:10 GMT 13:10 UK
Euro warning signs
Gold bullion
Sophisticated investors have been running for gold
By the BBC's Rodney Smith

Here they come - the warning signs that will remind older, greyer Euro-politicians of the economic dark days of the 1970s that saw rising inflation cutting away at wage packets and making hard-headed unions demand money to compensate.

In the 1970's vicious cycle, price inflation begat wage inflation that begat price inflation and in the end, working people suffered, and European unemployment soared as people were priced out of jobs

Gloomy, isn't it? But we're entering the all-important wage bargaining autumn season in the Northern hemisphere.

In the EU, early signs in Germany are that trades union intend to appeal for inflation compensation - and they are angry and tough-minded after years of broken political promises about growth, the success of the euro, and unemployment.

Strikers in the 1970s
Strikers in the 1970s
This against a background of still-rising inflation in Germany - expected to be up another 0.2% in June, though some forecasters, like Paribas, are forecasting a rise of twice that scale.

Paribas economists may have been talking to Bundesbank council member Hans Reckers - or he to them - because although he is not the most prominent of Bundesbank articulators, he has been expressing his fear of what he calls the dangerous combination of rising inflation, high unemployment - also still rising, up 18,000 in May for the fifth consecutive monthly increase - and weak consumption.

He is an adviser to ECB member Ernst Welteke, and he joins those who believe the downward revised "wise men" forecasts of German growth this year could be over-optimistic.

Growth forecasts slipping

Everywhere, forecasts of German growth are slipping.

The HWWA economic institute has cut its forecast from 2.3% to 1.7%. Kiel's IfW is looking for just 1.3% in the second quarter, not far adrift of the bearish bankers at Paribas, who expect 1.2%, and no sign that this is likely to improve.

Hans Reckers Bundesbank
Hans Reckers Bundesbank
As the biggest euro-economy, Germany attracts most attention - but look at France.

The government is expected to settle on a public sector wage increase this round of about 4.5%.

That's the sort of signal the Germans, the Italians, and everyone else will be watching for.

Italy is particularly sensitive at present; industrial orders have slipped dramatically, 5.4% for the year to May.

Running for gold

So against this background of slowing growth, growing inflation, developing uncertainty and dwindling evidence that governments and central banks are in control, consider this.

Bullion is a commodity - no question - and yet people have been running for gold. These are sophisticated investors, people who know the power of the derivatives markets, who don't balk at making long or short term gains from weaker or stronger currencies, are now backing the gold miners.

It shows in the FT Gold Mines Index - shares in North American and South African gold miners have all been meeting heavy demand.

This need not be very significant - but it is a wise person who takes account of all the weather warnings going on around him or her.

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22 Jun 01 | Business
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