Recession sparks fears of political instability in EC

UNEMPLOYMENT and further currency turmoil are threatening a fresh political crisis in the European Community. There is a growing fear in Brussels about the political impact of the economic downturn.

Poul Rasmussen, Prime Minister of Denmark, which holds the EC presidency, is beginning a tour of the EC this week and will sound out national leaders about what further steps can be taken. Denmark regards the economic crisis as one of the most important problems to be dealt with during its presidency, Danish officials in Brussels say. In the last few days steelworkers, farmers, car- workers and fishermen have all joined the grim list of those struck by recession, seeking protection and demonstrating their anger in the streets.

Jacques Delors, the European Commission President, warned at the weekend about the potential for social unrest that results from high unemployment. Mr Delors has already suggested an emergency summit of the Group of Seven leading industrialised countries, but this has been resisted by Japan, among others. Britain's view is that a meeting is only worth holding if substantive proposals can be agreed.

In the absence of any decisive movement from Brussels or national capitals, rising unemployment is exacerbating tensions caused by problems in the European Monetary System over the past year. Spain is the latest target of market traders, with intense pressure on the peseta forcing Spanish interest rates higher yesterday.

Yet Spain has the highest unemployment in Europe, at more than 20 per cent of the workforce. If the peseta is forced to follow the lira and the pound out of the EMS it is unlikely that the system could survive in its present form.

The Commission has come under fire from some countries for the lack of response to the crisis. A report on the functioning of the EMS following last year's turmoil is still some weeks away from completion, says Henning Christophersen, the EC's Economics Commissioner, and is unlikely to recommend more than technical changes.

At the last meeting of finance ministers, delays in completing work on this document brought harsh criticism from Ireland. The EC is separately pushing ahead with a plan to boost growth which was agreed in Edinburgh in December, but it is taking time.

The first projects financed under a facility agreed at the summit were decided yesterday by the European Investment Bank. But the sums involved will be relatively small, many of the projects are old, and in any case most governments can borrow at comparable rates on world markets. Details of a broader package are unlikely to be agreed before April, Mr Christophersen, has said.

The Edinburgh plan was bound to take time to implement, since it includes some legal changes that will require an intergovernmental conference - albeit a very brief one. But it has also run into problems with member states, not all of which have yet produced their ideas for national initiatives that will complement EC action.

In particular, EC sources say, no further progress can be made until Britain's budget is out of the way. Earlier EC ideas for a much larger economic package never came to anything. Britain, which held the EC presidency last year, believed that the emphasis should be on national action. Part of the problem was that none of the EC states were willing to see large sums of money going into the EC budget at a time when they are all fiscally squeezed.

There is growing pressure from producer lobby groups for the EC to shut out foreigners from domestic markets. Steelmakers are pressing for relief from East European production, the EC is engaged in a row with Japan over the level of car imports that will be permitted this year, and relations with the US are touchy over a wide array of trade issues.

Up to now the EC has managed to deflect the worst protectionist excesses. 'So far, the line has been held,' said a British diplomat. Britain and Denmark together battled against attempts to limit Eastern European steel imports, forcing changes to a plan for the steel industry.

But there are worrying signs that they may not be able to head off protectionism in other areas. As well as causing rising tension with the EC's trade partners, the downturn is sparking rows between the member states themselves.