Chancellor Gerhard Schroeder unveiled a long-awaited package of welfare, budget and tax reforms aimed at slashing state spending and kickstarting growth in Europe's largest economy.

Boasting that his nine-mont-hold coalition had produced the biggest economic programme in German history, Schroeder and Finance Minister Hans Eichel said it set the stage for wider recovery in Europe and a brighter outlook for its unsettled single currency, the euro.

Business groups have applauded the package, saying it underscored the serious need for economic reform, but independent analysts were less positive about its likely effects.

Schroeder's cabinet earlier backed a package of measures put forward by Eichel, a moderniser ally of Schroeder within the centre-left Social Democrats, that will cut 30 billion marks ($16 billion) off projected state budget costs for 2000.

Key reforms include a cut in corporate tax from 40 per cent to 25 from 2001 that is worth eight billion marks and designed to bring investment flooding back into German markets.

The tax breaks are offset by across-the-board savings within ministerial budgets, the cancellation of many state industrial subsidies and, most controversially, cuts to the "holy cow" of German state pension and other welfare provision.

The reforms are also intended to make sure Germany satisfies long-term the Maastricht deficit criteria for taking part in the euro. Bonn's net borrowing requirement is due to fall some four billion marks to 49.5 billion in 2000, with a balanced budget by the end of the next parliament in 2006.

Weakness in the German economy, where growth is seen at a mere 1.5 per cent this year and joblessness is entrenched above four million, has been cited as a major factor in the decline of the euro since its introduction on January 1.

Acknowledging the central role of the German economy in the euro-zone, Eichel said he was optimistic that an upturn across Europe would from next year start buoying the single European currency.

Tight-fisted consumers hinder Asian recovery

Asia's battered economies have begun to see light at the end of the tunnel, but consumer confidence will not recover fully for at least two years, economists said.

"This is a question of years and not months," said Ron Leven, head of Asian markets research for J.P. Morgan. "In terms of a solid, broad-based recovery you're a long way from seeing that happen."

Leven said Asia's high savings rate and low levels of domestic activity meant a pickup in consumer demand was needed to really turn around the economic environment.

"Asia doesn't suffer from an external demand problem, the trouble is excess savings," Leven added.

Domestic private consumption is the biggest engine of most Asian economies. Japan's Economic Planning Agency said in a recent report that personal consumption accounted for some 60 per cent of all economic activity in Japan.

A return to sustainable levels of growth in Asia is impossible without a pick-up in consumer spending.

A survey by credit card firm Mastercard in December 1998 showed that consumers in virtually every Asian economy expected economic prospects to brighten in the first half of this year, but they were not as optimistic as before the crisis.

"We will continue to see a rise in confidence in the next survey (to be conducted in June) ," said a Mastercard spokeswoman.

"We're still cautiously optimistic, and I'm not sure that within the next index we'll see pre-crisis levels just yet."

Widespread unemployment and downward wage pressure are perhaps most damaging for consumer sentiment, economists said.

Unemployment in economies like Singapore, Japan and South Korea is at almost twice pre-crisis levels.

"One of the most important reasons behind the sharp falls in consumption is uncertainty said Chan Chia Lin, head of economic research at investment bank ABN-Amro.

Mergers & Acquisitions

Lloyds—Scottish Widows: Lloyds TSB Group, Britain's biggest retail bank, said it was buying mutually owned life insurance and pensions group Scottish Widows for around £7 billion.

Volvo—Scania: Swedish truck makers Volvo and Scania were at the centre of renewed speculation in Europe's commercial vehicle sector, reported as possible takeover targets in industry consolidation.

Cablecom: The three main shareholders of Switzerland's biggest cable television group, Cablecom SA, said they wanted to sell their stakes, totalling 96 per cent, in a single block by the beginning of 2000.

Air France—Delta: Europe's third-largest carrier Air France unveiled a plan to form a strategic alliance with U.S. number three Delta marrying the potential of two major transatlantic traffic hubs.

Lufthansa—PAL: German national airline Deutsche Lufthansa AG said one of its subsidiaries had reached an agreement to buy the engineering and maintenance divisions of Philippines Airlines (PAL).

Royal Bank—UST: Royal Bank of Scotland strengthened its position in the United States by buying UST Corp for around $1.4 billion in cash, boosting its Citizens unit to a clear number two spot in the Boston market.

Codan—Trygg-Hansa: Danish insurer Codan grabbed a 14 per cent slice of the Swedish non-life insurance market by acquiring the non-life business of premium brand Trygg-Hansa from Swedish commercial bank.

BOC: BOC Group said it had rejected a joint takeover approach from two rivals in a move expected to kick off a bidding war for the British industrial gases firm.

Daewoo: South Korea's Daewoo Group signed a deal to sell its Seoul Hilton Hotel to a Luxembourg-based investment firm for $215 million, it said.

JT: Japan Tobacco Inc (JT), which recently hit the headlines with its buyout of RJR Nabisco Holdings Corp's foreign tobacco operations, says it is prepared to consider more takeovers and alliances in the future.

 

Goldman profit drops 28.6pc

U S. investment bank Goldman Sachs Group Inc. reporting earnings as a public company for the first time, said net profits dropped 28.6 per cent to $340 million in the second quarter because of a charge for its stock offering last month.

 

British Energy joins power supply club

Stage two of Britain's power industry consolidation began in earnest as the last of Britain's major power generators acquired a retail energy supply business. Nuclear generator British Energy Plc said it was paying £105 million for the electricity supply business Swalec, giving it the right to bill 980,000 energy customers in Wales.

 

P&O to invest $2b

Britain's Peninsular & Oriental Steam Navigation Co, the world's third largest cruise company, ordered five more ships at a cost of $2 billion to meet the surge in popularity for sea cruises.

The order, which brings the total number of new ships commissioned by the company to nine, will lead to a doubling in the size of P&O cruises and its Los Angeles-based subsidiary Princess Cruises.

 

Demand for HK unit trust seen deficient

The Hong Kong government will need to consider additional ways of disposing of its blue-chip stocks because demand for its proposed unit trust will be smaller than its huge portfolio, fund managers said.

A day after the unit trust plan cased investor fears that the government would simply dump its Hang Seng Index stocks on the market, some fund managers questioned the plan, saying it would likely appeal only to foreign institutions.

The Hong Kong government acquired the shares largely through its August 1998 stock market intervention at a cost of HK$118.13 billion. It has said repeatedly the action was aimed at thwarting market manipulators and it planned to dispose of the shares in an orderly manner.

 

 BoJ sells yen to help exports

Japan sold its own currency again and signalled it was willing to let the yen drop sharply in order to support the economy and help the nation's flagging exports.

The aggressive intervention in the currency market by the Bank of Japan (BoJ) and strong words for a weaker yen from top financial diplomat Eisuke Sakakibara came just as fresh data showed exports in May slumped across the board.

"Further weakening of the yen is possible if it is necessary for the economy," said Sakakibara, Japan's vice finance minister for international affairs. "We are flexible on foreign exchange."

Tokyo authorities are ready to "take decisive action" again to stem a premature yen rise, he said. "What is of paramount importance is to ensure Japan's economic recovery as soon as possible."

 

Asia's poor may not get G8 relief

Laos, Myanmar and Vietnam, three of Asia's poorest countries may not qualify for debt relief under an agreement forged by rich nations, an Asian Development Bank official said.

"I think these countries are relatively in better shape than African countries," Yoshihiro Iwasaki, chief of the ADB's strategy and policy office, said.

"So we are not expecting these countries to get debt relief from the major bilateral donors. We are not faced with the situation to consider it seriously."

Leaders of the Group of Eight nations at the weekend agreed to relaunch the Highly Indebted Poor Countries (HIPC) initiative as a vehicle for faster and deeper debt relief.

Some 36 countries stand to receive debt write-offs totalling $70 billion.

 

Japan's trade surplus falls

Japan's trade surplus slid 31.5 per cent in May, its heaviest fall in three years, as exports tumbled the finance ministry said.

The trade surplus, which measures the balance between imports and exports, fell to 834.3 billion yen ($7 billion), falling for the second straight month.

Exports in May dropped 11.8 per cent to 3,565 billion yen pushed down by a surge in the value of the yen and a sharp fall in office equipment and ship exports.

Exports to Europe were particularly badly hit, which analysts said signalled a slowdown across the European Union.

Japan's imports in the month were down a modest 3.3 per cent to 2,730.7 billion yen, in part due to a heavy fall in aircraft and liquor imports.

 

France seeks end to bank merger battle

French authorities stepped in to try to end a takeover battle between France's leading banks, calling on BNP, Societe Generale and Paribas to start talks to find a solution agreeable to all parties.

The committee of credit institutions, chaired by Bank of France head Jean-Claude Trichet, said in a statement it wanted the banks' chairmen to try to work out a "different" solution to the two merger proposals currently on the table.

 

Longbridge's statement soon, say BMW and UK

German car maker BMW and Britain said a statement was imminent on state aid securing the production of a new medium-sized car and thousands of jobs at the company's Longbridge plant in central England.

A deal would allow BMW to push ahead with plans to produce a new mass market car in a bid to turn around its loss making Rover subsidiary. In return the British government would help safeguard around 50,000 jobs in the English West Midlands.

The Munich-based car maker said an announcement on British state aid in return for new investment by the company in its Rover subsidiary's Longbridge plant was expected soon.

 

Europe marts forge closer electronic ties

European bourses took additional steps to forge closer electronic ties in a bid to boost liquidity and reinforce market positions amid increasing competition.

Sweden and Denmark became the world's first two national bourses to share an electronic trading system when their equity alliance Norex came on stream after a week's delay to get dealers up to speed.

Norway was again urged to join.

"We hope Norway will join and we are doing all we can to get them to choose cooperation with the joint Sweden-Denmark system rather than Frankfurt-London," President Carl Johan Hogbom of the Stockholm stock exchange said at the launch of the Nordic Exchanges, or Norex.

Oslo bourse spokesman Bernt Bangstad said the bourse's board is looking at two alternative linkups, Norex and the FrankfurtLondon led panEuropean alliance, but a decision is not expected before August.

 

Thailand launches bankruptcy court

Thailand cranked up its campaign against bad debtors by launching a central bankruptcy court to quickly get rid of a huge pile of bad debts that is paralysing the economy.

But market analysts, while welcoming the court's launch as a central plank of new financial reform legislation, said the court will have to do a lot to take care of a growing number of bad debtors.

Thailand's financial system was already saddled with nonperforming loans amounting to as much as 47 per cent of total lending, they said.

Sivaporn Dardarananda, adviser to the central bank governor said the court was a positive start but cautioned against hoping it would be the quick panacea for the ailing credit system.