The MacNeil/Lehrer NewsHour

MR. MacNeil: Good evening. I'm Robert MacNeil in New York.

MS. WOODRUFF: And I'm Judy Woodruff in Washington. After the News Summary, we go to the campaign trail and today's speeches on the stump from President Bush in Oklahoma and Gov. Clinton in Colorado. Then we devote the rest of tonight's NewsHour to the turmoil in European currency markets, to an explanation of what it means for the European economic union, and the impact on the U.S. and the rest of the world's economy. NEWS SUMMARY

MS. WOODRUFF: The House of Representatives passed a bill today to regulate the cable television industry. The legislation would require the Federal Communications Commission to keep rates from rising above what is reasonable for basic programming and equipment. And it would encourage competition. Cable companies currently operate as monopolies in the communities they serve. Here's a sample of this morning's debate on the House floor.

SPOKESMAN: The American people are fed up with rapidly escalating and outrageous cable television bills, bills from an unregulated monopoly, which has one purpose, maximize their profits, and to do so at the expense of the American consumers.

SPOKESMAN: The bill before us today perpetuates a cruel hoax on the American people. It is, in fact, a cable rate raising measure masquerading as a cable subscriber cure-all. Mark my words, if this bill is enacted, it will raise cable rates, and subscribers will be screaming.

MS. WOODRUFF: Today's vote was two hundred and eighty to one hundred and twenty-eight, eight more than needed to override a promised presidential veto. The bill next goes to the Senate. Robin.

MR. MacNeil: The nation's trade deficit jumped to a 20-month high in July. The Commerce Department said it hit $7.8 billion, an increase of 16 percent from the previous month. A plunge in export sales to Europe was blamed for most of the gap. Many economists expect it to get worse in the second half of the year because of economic weakness among major U.S. trading partners. The currency crisis affecting many of those nations eased today. The British pound continued to sink but in more orderly trading after Britain withdrew from the mechanism that links all European currencies. Italy followed Britain's lead today, letting its currency float freely. Meanwhile, Germany rejected charges that it touched off the currency turmoil with domestic economic policies that drove its currency up relative to others in Europe. We'll have more on the currency crisis and what it means for the proposed European union later in the program.

MS. WOODRUFF: In the presidential campaign today, Gov. Clinton and President Bush kept their focus on the economy. Clinton told a crowd in Denver his program of investment and better government- business cooperation would undo President Bush's failures. In Enid, Oklahoma, Mr. Bush said that he believed in free enterprise, while Clinton would have the government pick economic winners and losers. White House Spokesman Marlin Fitzwater said today that fresh evidence about Clinton's draft record goes to the heart of why he should not be President. Fitzwater was referring to a statement published today from the former head of the ROTC program at the University of Arkansas. In it, retired Col. Eugene Holmes accused Clinton of purposely deceiving him about his draft status and anti- war activities. He said it was a conscious attempt to dodge the draft. Clinton did not answer reporters' questions about the matter, but a campaign said as recently as last year Holmes had no specific recollections of Clinton's ROTC application.

MR. MacNeil: Renewed fighting broke out in the Bosnian capital, Sarajevo, today. The battle's put a damper on Yugoslav peace talks set to begin tomorrow in Geneva. We have a report narrated by David Symonds of Worldwide Television News.

MR. SYMONDS: Serbian forces continued their bombardment of the Bosnian capital. The heavy artillery has been hidden from the United Nations inspectors. Howitzers, mortars, and multiple rocket launchers pounded Sarajevo's Western suburbs overnight and into the morning. The Bosnian health Ministry said nine people had died and more than sixty were injured in Sarajevo alone in the latest upsurge in fighting. The Serb attacks come amid reports that they're willing to trade a cease-fire for a division of the republic. But this was immediately rejected by Bosnia's Muslim president.

MR. MacNeil: Syria today threatened to quit the Mideast peace talks. Its representative to the Washington talks said his team could not continue unless Israel negotiates its withdrawal from the Golan Heights. He called for the U.S. to intervene to avert a deadlock. Israel's representative accused Syria of trying to stage a crisis in the talks to gauge how far it could push Israel. Israel has refused to discuss return of Golan Heights land until Syria first commits to normalizing relations and opening its borders.

MS. WOODRUFF: The special prosecutor in the Iran-contra case said today that he was ending the five and a half year investigation. Lawrence Walsh told the federal appeals court that barring new developments, he did not plan to bring any further matters to the grand jury. He said his office would proceed with the prosecution of former Defense Sec. Caspar Weinberger and former CIA officials Clair George and Dwayne Claridge. That's it for the News Summary. Now it's on to some tough talk from candidates Bush and Clinton, and the confidence crisis in Europe. FOCUS - MAKING HIS CASE

MS. WOODRUFF: First up tonight, sometough talk on the campaign trail. President Bush and Gov. Clinton agreed today on two points; that there are major disagreements between them, and it was time to take off the political gloves. The tough rhetoric underscoring their differences came at separate stops in the West. We have major excerpts from today's stump speeches. We start with President Bush, who spoke to a rally in the unairconditioned Enid, Oklahoma convention all.

PRESIDENT BUSH: I want to lay out the differences between my agenda and my opponent's plan. And these distinctions are fundamental. They shape our approach to every major issue in this election, from education, to health care, to the renewal of the American economy. And the first difference is the most profound, for it goes to the heart of the matter. What makes our economy grow, or more precisely, who makes an economy grow? And my answer is individual working men and women make it grow. [applause] And my opponent -- my opponent puts his faith in different people, the government planners. And he believes that Washington, the government, will produce economic growth through -- and here's his word -- "investing" your money more wisely than you can. To understand where these differences come from, you have to look at the differences in who we are and what we believe. I came out West, like a number of you, let's see -- in 1948, Barbara and I moved over across the way to Midland and Odessa to work in the oilfield supply business, and then become an independent producer and a drilling contractor. And I spent half my adult life in business. And I have the ulcers to prove it. So with a lot of -- applause - - with a lot of help, a lot of help from the tool pushers and the rough necks and the drilling superintendents and everybody else, and then some strong Oklahoma partners, I built a company from the ground up, created jobs, and paid my taxes. And by contrast, my opponent chose to run for office at an exceptionally early age. He wanted to determine how the people's taxes should be spent, how to shape people's lives through more government programs. And I never forgot, and nor will I, my days in the Texas oilfields, some successes, yes, some dry holes, some twist-offs, some flawless completions. But I never forgot the economic philosophy that I learned there in the field to unleash the aspirations of the ordinary person with the extraordinary dreams. And aspirations lead to enterprise and enterprise creates jobs and wealth, and the opportunity that knows no difference among color, creed, or social class. [applause] And you look at the differences. My opponent and his advisers propose something quite different. Their writings refer to European models and industrial policy. And that's an academic term for letting the government pick economic winners and losers. Their ideal is not the entrepreneur, but the government planner, the lawyer or the policy professor who flatters himself that he understands the American economy better than the workers and the entrepreneurs who have their sleeves up and really make it work. And my opponent and his advisers can trace their intellectual roots to the social engineering ideas popular at the turn of the century. And those old social -- some of you historians remember this -- those old social engineers advocated large scale government ownership to give the state the leading role in society and economy. And today European governments are still selling off the inefficient, industrial monstrosities that were born from those ideas. And Mexico and Argentina to ourself are soaringbecause they're also ridding themselves of government-owned enterprises. And -- [applause] -- over the years those early social engineers became interventionist liberals who wanted to create a welfare state. And they sought to level the differences, to tax success, to redistribute wealth. And they ended up paralyzing the private sector. Now, my opponent is drawn to these views. He and a number of his advisers studied them at Oxford in the 1960s, but they are shrewd enough to know that the welfare state doesn't sell in America. So my opponent labels his latest technique for government management investment. Those are his words. No matter what you call it, it's still big time government spending, directed by Washington planners who want to re-order social and economic priorities. And we cannot have that. [applause] This is the most fundamental disagreement between us, whether the driving engine of growth is government interventionism, or entrepreneurial capitalism. But from this one disagreement flow many, many others, with important practical consequences for our economy, our nation, and, yes, for your family. Take our second disagreement over the issue of taxes. He wants to raise taxes. I want to cut taxes. [applause] My opponent calls for raising marginal rates again. His approach will cut the demand for labor, unless you happen to be a lawyer or an accountant or lobbyist. And there's a motive to his madness. My opponent needs the money to pay for his social engineering. And he says it will come from the rich. He neglects to mention that 2/3 of the "rich" he's targeting are family farmers and small business owners. And his theory is that you may not live the lifestyle of the rich and famous, but you can be taxed like you do. Now -- [applause] -- and this leads me to our third major difference; government spending. Again, the contrast couldn't be more plain. He wants to raise government spending. I want to cut it. My proposal to reduce the growth -- the growth of spending has three parts; a cap on the growth of mandatory spending, excluding Social Security, a freeze on domestic spending, and the elimination of 246 programs and more than 4,000 projects that we don't need and that we cannot afford. [applause] And look at the health care. A case study of our different attitudes toward government regulation. I believe everybody should have health care. And my health care reform will bring health care to those without it by giving them the means to choose the kind of care they want. It will harness the forces of competition to control costs. And in keeping the government out, it keeps the quality of our health care up. And our -- [applause] -- and our health care, our health care is the finest in the world. And I want to keep it that way. And my opponent, by contrast, says that government will simply issue an edict; costs shall not rise. And he will order businesses to provide health care or pay for it, though he never quite says how. And it sounds simple. It sounds even seductive, but that's not the way the world works. And my opponent's new dictates and taxes won't cure the health care problem. It will just make the economy sicker. [applause] So this is the choice we face. This is the choice we face in November. And so I ask when you make that choice, please consider carefully which candidate's agenda best fits your beliefs, our national heritage, and our hope for a lasting peace. Thank you so much for listening. And may God bless the United States of America. Thank you.

MS. WOODRUFF: That was the President in Enid, Oklahoma. Meanwhile, Gov. Clinton was in Colorado today. He spoke at a noontime rally in Denver.

BILL CLINTON: Are you better off than you were four years ago? [people in audience shouting "No!"] This President promised us 15 million news jobs. He is over 14 million short. And get this, this administration which hates the government has actually presided over a period when there has been a decline in employment in the private sector, and now for the first time in American history, there are more people going to work in government offices every day than in factories throughout the United States. [people in audience shouting "Boo!"] For more than 10 years most Americans, literally 2/3 of our people, have worked harder for less money. We have gone from first to thirteenth in the world in wages. We have quadrupled the national deficit, and at the same time, unbelievably, somehow managed to reduce the amount of money we are investing in education and infrastructure and economic growth and high-technology and research and development. No one else could have figured out how to do that but "trickle down" brought it to us. [people in audience shouting] The President says that there are great differences between him and me. And boy is he right about that. I don't know why. [people cheering and applauding] He said, "Read my lips" four years ago and signed the second biggest tax increase in history. Then he said, "Read my lips again" a couple of weeks ago and just a couple of hours later his press secretary said that's not a commitment. After 800 days without an economic plan as President of the United States, he offered one, which was nothing more than a warmed-over version of trickle down economics. And in this week's Time Magazine -- listen to this -- in this week's Time Magazine an administration official is quoted anonymously as saying, "Well, it doesn't matter what's in our plan because he doesn't plan to follow through on it anyway." That's what they say about their own plan! My fellow Americans, we are better than that, and we can do better than that. And with your help, we will do better than that. [applause and cheers] I have done my best for nearly a year now to offer the American people a new approach, one that goes beyond trickle down economics without going back to tax and spend economics, one that says we have to invest in our people and their jobs, and their education and their health care. We have to cooperate with government, business, labor and education. We have to compete so that we can win in the world economy. Let's do what works for a change and abandon what has plainly failed. [applause and cheers] I want to have an investment program for this country which, yes, asks the wealthiest 2 percent of Americans to pay a little more in taxes, but uses that money to say if you want to get it back, you can get it back, but no more across-the-board tax cuts. You can get it back if you'll invest in American factories and in starting small businesses, and in putting the American people back to work, a real investment plan for the United States of America! [applause] I want a new partnership between government and business and labor in this country to develop the best ideas we have and turn them into jobs here in America. That is why, that is why two days ago in Northern California in San Jose, 21 -- 21 chief executives of high technology companies, 2/3 of them Republican, in an unprecedented break with party endorsed the Clinton/Gore ticket because we have a technology policy -- [applause] -- for the 21st century. [applause] Their idea of cutting the $400 billion deficit is to give a $100,000 tax cut to millionaires and $50 to the middle class and make it up by charging older people on Medicare $400 more a year and charging 3 million students $2,000 more for their student loans and kicking a million people off of their disability benefits! My idea for the deficit is to cut inessential spending, reduce by attrition federal employment by a hundred thousand and give it to the cities to put a hundred thousand police officers on the street in the next five years; [applause and cheers] bring health care costs in line with inflation by finally becoming the last advanced nation in the world to control health costs and provide basic health care to all Americans, we must do it! [applause] They say that they are for responsibility empowerment and family values. That's what they say. [audience booing] And the President vetoed the Family Leave Bill, after saying he'd give family leave. And he's about to veto it again. Now, let me tell you what my idea about that is. I believe in personal responsibility empowerment and family values. And here's my agenda. First of all, let's join the ranks of the 72 countries in the world that give working people a little time off when there's a baby born or a sick parent. Let's have the family leave -- [applause] -- if we value work empowerment and family values and personal responsibility, let's change the welfare system. Let's make it a second chance, not a way of life. Let's invest more. [applause] Let's invest more in education and child support and medical coverage for children, and then require people to take jobs and give 'em public service employment if the jobs aren't available. Let's make independence and support for families compatible, instead of just throwing rocks at people who are poor. Let's lift them up and make them independent. We can do that. [applause] Let us recognize that a lot of young people who get in trouble today get in trouble because they didn't have the kind of family support they needed, didn't have the community support they needed. And before we send them off to prison when they get in trouble, or just ignore them, let's let the first-time non-violent offenders do their time in community- based settings where they can get discipline and education and treatment and do community service work. That would reflect family values, and it would make our society safer and stronger. Let's recognize, in short, my fellow Americans, that we can be pro-growth and pro-environment. We can be pro-business and pro-labor. We can make government work again by making it more aggressive and leaner and more effective at the same time. And we can be pro-family and pro-choice. Let's bring this country together again. [applause] How long can we go on denying that most people are working harder for less? How long can we go on denying that our health care system is fundamentally broken? It's great for those who can access it, but we waste phenomenal amounts of money. How long can we go on with a President who doesn't even want to talk about problems like homelessness and dysfunctional families and the AIDS epidemic, which has now infected over 1 1/2 million Americans with the HIV virus? How long can we go on? How long can we go on pretending, pretending that we are competitive in areas where we are not? I ask you to commit yourselves to 47 days of effort to claim your country's legacy, to hold up a future that will open up brightly before all of you. I look out in this crowd, and I see at least half of you are quite a bit younger than I am. You've got more of your future facing you than I do. You have everything on the line in this election. You cannot permit yourselves to be part of the first generation of Americans to do worse than their parents because we did not have the courage to face the challenges of our lifetime. Stay with us. Work with us. Lift this country up, and we'll win a great victory on November 3rd! Thank you and God bless you all! FOCUS - CURRENCY CRISIS

MR. MacNeil: The economic upheaval in Europe is next tonight. The stresses and strains of building one integrated Europe proved too much for Britain yesterday. It temporarily pulled the pound sterling out of the European monetary system by withdrawing from an 11-nation exchange rate mechanism known as ERM. ERM was designed to keep the value of members' currencies within an agreed range. Around the world, markets were calmer today after yesterday's turmoil. But in Europe, the situation is still considered a currency crisis. What it means for Europe's integration plans and for the United States we'll pursue after a series of reports on today's reactions in various European capitals. We start with Independent Television News Correspondent Stephen Cape in London.

MR. CAPE: News of a 2 percent reduction in interest rates caught foreign exchange dealers by surprise. It was the fourth movement in rates in 24 hours as the government tried to restore its tattered economic policy. Shares rallied sharply, but the pound remained weak all day and analysts believe little will change.

STEVE BARROW, Chemical Bank: I think the experience of the last few days does condemn the pound to a period of weakness. Basically the chancellor has cracked under pressure from the markets, and the markets will view the chancellor in the future as being vulnerable. And I think that that will make the pound continue to slide against the German currency and other European currencies.

MR. CAPE: Sterling has effectively been devalued because the government suspended its membership of the Exchange Rate Mechanism. The value of the pound slipped against the German mark. British exporters believe the government should re-enter at a lower rate.

IAN CAMPBELL, Institute of Export: If we are to go back into the ERM in the future, then a rate of 260, 265, even 270 to the Deutsche mark is much easier to live with than the 295 previously.

MR. CAPE: But these are still uncertain times. Economists believe yesterday's sterling crisis wiped more than 10 billion pounds off the foreign reserves. The government may be keen to rejoin the Exchange Rate Mechanism, but mistakes like these cannot be made again.

NORMAN REES, ITN: [Frankfurt] One country's crisis, another one's opportunity. German stockbrokers hurrying to work this morning, not inclined to discuss sterling's problems.

STOCKBROKER: No time, profit.

MR. REES: But there was little opportunity for profit. The brokers not knowing just what to do. The DAX Index of Germany's 30 leading shares shot up 7.82 points in nervous early trading before shooting down to a gain of just one.

SPOKESMAN: Here in the market with nobody knowing what is going on in the next few minutes, and -- and most of the people are losing a lot of money during these three hours here.

MR. REES: Directors of the Bundes Bank met for their normal bi- monthly meeting, anxious to dispel any suggestion of crisis. In Frankfurt's Golden Square Mile, Germans generally are showing understanding but little sympathy for the plight of sterling.

MAN ON STREET: Now you must not forget that we have our own problems here, relatively high inflation, and so we can't lower our interest rates. We are -- our problems are big enough.

DAVID SYMONDS, WTN: The scenes in the Spanish Stock Exchange reflected the general panic in markets across Europe. The peseta, one of the weakest currencies within the European exchange rate mechanism, was devalued by 5 percent, forcing it below its limit against the Deutsche mark in early trading. Economics Minister Carlos Alchaga justified the government's decision, saying it was the only solution to stop Spanish money becoming the latest casualty in Europe's financial crisis. The peseta, the British pound and the Italian lira are among the weakest currencies within the ERM. But Spain hasn't yet been forced to pull out of the system. Unlike the Italians, already suffering from a weak government and a stagnant economy, they've withdrawn the lira from the ERM, turning its fate over to the international market. The currency was already devalued earlier in the week, but that didn't help. With the threat of heavy job losses now threatening the country, the people are losing faith fast. But in spite of the protests, the government were forced to even more stringent measures. Prime Minister Amato announced massive public spending cuts and huge hikes in taxes. It's a risk he said he has to take, despite the increasing public pressure. The new measures may prop up the economy long enough for it to benefit from the Mastrik Treaty.

MR. MacNeil: The agreement known as the Mastrik Treaty will lead to a stronger European union, including a single currency and a Central European Bank. The next test of that accord comes on Sunday, when the French vote for or against. We have a report narrated by David Symonds of Worldwide Television News.

DAVID SYMONDS, WTN: This was the Paris Stock Exchange on the morning after. Economists were relieved to see the frank holding up, but the currency crisis has sent jitters throughout every market in Europe, nerves that will jangle until jangle until the result of the imminent referendum on the Mastrik Treaty. If money's become a delicate business, so too have politics. Jean Marie LePenn, the extreme right wing leader, accused President Mitterrand of deliberately timing his cancer operation to win sympathy from voters toying with the idea of rejecting Mastrik. It's a wily electorate, however. It's weighing up Europe's future. In a country not known for its political apathy, the television is nevertheless full of reminders. It's thought the French are divided right down the middle on the issue of closer European union. Many believe this latest financial turmoil is a good reason to say no to the treaty. Out of a rally of fervent pro-European supporters South of Paris, former and present leaders said it won't just be France who pays if Mastrik is thrown out. Europe as a whole, they warned, will be in utter disarray.

MR. MacNeil: Now, some further analysis. We begin with Jeffrey Garten, author of the recent book "A Cold Peace, America, Japan, Germany and the Struggle for Supremacy." Mr. Garten is with the New York investment firm the Blackstone Group. He previously held posts in the Nixon White House and the Carter State Department. Jeffrey Garten, let's go through this very simply at first. Explain how the system works that Britain and Italy have just pulled out of.

MR. GARTEN: Well, since 1979, the European countries, the Western European countries, were attempting to keep their various currencies within a band, as you said in the introduction. And a band is nothing more than a lower level and a higher level. And the currencies could fluctuate within that narrow range. The effort was to keep them as close together as possible, and when that wasn't possible to take certain measures in order to force them back into the band.

MR. MacNeil: And what kind of measures would they take to do that?

MR. GARTEN: Well, the value of these currencies are determined by a lot of factors. Normally, the currencies reflect the underlying economic conditions in the countries. They reflect, for example, the investment climate. They reflect the growth rates. They reflect interest rates. So that if a currency sinks below the bottom or goes over the top, a country has to take certain domestic measures in order to change the value of its currency in the eyes of the financial market. And practically speaking, that has generally taken the form of jacking up interest rates in order to make the currency more attractive, or lowering rates in order to deflate the value of the currency.

MR. MacNeil: And in emergency situations by buying a lot of your own currency --

MR. GARTEN: That's right.

MR. MacNeil: -- or getting others to buy a lot of your currency.

MR. GARTEN: It's possible to move the value of the currency by going into the market and either buying it or selling it. And in practice, there's a combination of both that kind of intervention and the unilateral adjustment of interest rates.

MR. MacNeil: And what has been causing all the recent fluctuations?

MR. GARTEN: Well, the Europeans had decided to lock their currencies as closely together as possible in order to improve the overall climate for investment and trade. One way to think about it is that if New York State and Pennsylvania had different exchange rates, economic activity between the two would be much more complicated than it is right now. The prices of something you sell could be changing all the time. The calculation of an investment that you made could change. And so it's a great advantage to have currencies that are either the same, or very close together. However, if the underlying economic conditions of each of the countries is much different, keeping those currencies together requires tough domestic measures. And the real problem in Europe these past several months has been that the underlying condition was vastly different. A country like Italy, for example, has a budget deficit that makes ours look small, some 11 percent of the GNP. Britain has been in a recession, the worst recession since -- since the Second World War -- the longest recession. Germany, on the other hand, has had this very unique situation of having to pour a phenomenal amount of money, something on the order of $100 billion a year, into the Eastern part of Germany in order to make unification work. And that has -- that has resulted in very high interest rates, rates which are much higher than the other countries. So you have very different conditions in all of these countries and the laggards, Britain, Italy, with the low growth, in order to keep their currency linked or closely linked to the Deutsche mark, have had to maintain very high interest rates.

MR. MacNeil: In other words, if Germany keeps high interest rates to -- to control the inflation and pay for all it's doing in the former East Germany, that would tend to draw money towards the German mark, because you get more, get a higher interest rate if you put your money in marks.

MR. GARTEN: Right. Or to put it another way, you tend to sell the British pound, or the lira, and move your money into, into marks. And the only way that Britain can maintain the value of its currency would be to jack up its own interest rates. But Britain is in recession. In fact, it would be as if the U.S. right now decided to raise interest rates well above current levels. It would be an excruciatingly difficult decision. And Britain was doing that. But at some point, the markets believed that they could not continue raising their rates.

MR. MacNeil: Talk about the markets for a moment. You saw them all in those pictures, and you often see them with frenzied shouting of currency rates, or the dealing, quick amounts on computers and so on. Who -- who is the market, and who is making money out of these fluctuations? And are -- are there people who can make such a lot of money out of it that they actually are encouraging the sort of -- the fluctuations in difference and stand to gain by it?

MR. GARTEN: Well, the nebulous notion of markets really are hundreds of thousands of people watching computer screens, reacting to headlines, and making a guess on which way the currencies are going to move. And because of technology and deregulation and the way the global markets have just mushroomed, you know -- the size of the global foreign exchange market, just to take an example, is something like $700 billion a day, which means in one day the volume is more than two months on the New York Stock Exchange. So it's a nominal amount of money that is moving around --

MR. MacNeil: You mean in one day money like a commodity is -- is $700 billion --

MR. GARTEN: Churning.

MR. MacNeil: Churning.

MR. GARTEN: Churning, looking for --

MR. MacNeil: Which is the equivalent of two months of trading on the New York Stock Exchange.

MR. GARTEN: It's a phenomenal amount of money that is moving around, looking for profit opportunities. And those opportunities could be just a sliver of an interest rate, so that they're always looking for how to move money very quickly and because of technology, it's done literally with the push of a button. And it's true. A lot of people are making money out of this. But that is the nature of the market. That's what -- that's how money moves.

MR. MacNeil: If there were one currency in the European Community, as the Mastrik Treaty envisioned, this couldn't happen presumably?

MR. GARTEN: No. It would be the same as --

MR. MacNeil: As the United States.

MR. GARTEN: As the United States.

MR. MacNeil: If there were sort of, in effect, a United States of Europe, or a European Community with just one currency --

MR. GARTEN: That's right.

MR. MacNeil: -- you wouldn't have a crisis like this.

MR. GARTEN: But in order to have the one currency, you would have to have, as in the United States, a uniform interest rate. And you would have to have economic conditions which are much closer together than they are as, let's say, between Spain, on the one hand, and Germany on the other. And this is the real problem that the underlying conditions are so different that the financial markets are saying there's no way that these countries can keep their currencies linked tightly now. Somebody is going to split. And they saw Britain. They saw what trouble the economy was in. They heard Prime Minister Major pledge to defend the pound with, among other things, high interest rates. And they didn't believe it. And they figured at one point he was just going to have to break his promise. And they put pressure on the pound by selling it. The more the pound went down, the higher he had to put up interest rates. And for an economy that was flat on its back, with high unemployment and no growth, it proved too much of a strain and basically he had to give up and pull out of this system. And, of course, Italy did as well.

MR. MacNeil: Well, we'll come back. Now to add some European perspective, we're joined by Norbert Walter, managing director of Research and chief economist with the Deutsche Bank, Germany's large commercial bank, and Jurek Martin, Washington bureau chief of the Financial Times of London. Dr. Walter, everybody says the Bundes Bank, your national bank, is behind this currency crisis. What is the Bundes Bank trying to do by maintaining such high interest rates? What is its purpose?

DR. WALTER: There's a Bundes Bank law that indicates that there is one target, price stability. It was obvious that some mistakes were made when we unified the country. We pursued a fiscal policy that was too expansionary. We just went on with business as usual in Germany West. We should have cut subsidies. We should have cut some other expenditures of the government. We didn't do so. We just added to the government budget. And then of course - -

MR. MacNeil: You mean higher deficit spending?

DR. WALTER: Higher deficit spending.

MR. MacNeil: What's been happening in this country for --

DR. WALTER: For some time. And we had wage negotiations that were anything but appropriate for the addition of the labor force that came from the East, from Eastern Germany. We just behaved as if it would be a very rich country still. And this, of course, put pressure on -- upward pressure on costs, upward pressure on prices. And there was much more fear about the price inflation. In fact, there wasn't that much. But in order to contain that, the Bundes Bank acted as the law described, namely with a restrictive policy. And, therefore, we had the high interest rates that then were part of the problem.

MR. MacNeil: So you're saying the Bundes Bank is not the villain here; it's just -- it's just reacting to the policies of the Helmut Kohl government.

DR. WALTER: It's the government and the industrial partners who made the first mistake and the Bundes Bank, in a sense, had to act as a logical consequence with the interest rate hikes they had. I would, however, say that with the analysis the Bundes Bank made, itself, with the very fact that we had not a German monetary policy, but a monetary policy for Europe, with a fixed exchange rate regime as just described by Jeffrey, I think the Bundes Bank should have understood that the feedback mechanisms would be different in the new situation. And, therefore, I claimed and others -- but there were only a few in our country -- claimed that the Bundes Bank policy was too restrictive and, therefore, in a in a sense overdid its task.

MR. MacNeil: Does the Bundes Bank care about the effect its interest rates and policies are having on the rest of Europe and the world? Does it regard itself as just the National Bank of Germany, or in any way responsible for the repercussions elsewhere?

DR. WALTER: The Bundes Bank is not responsible for the political repercussions anywhere else, but if there are feedback mechanisms for the economy, then they have, of course, to take care of that. They may err. They may not judge correctly what the feedback mechanisms are. And I believe this was the case. It was just too new a system to fully understand it. And so they made mistakes. They could be accused for that, but in the end, of course, it was a disaster that it happened.

MR. MacNeil: Do you think the pressures caused by the costs of reunifying Germany are going to continue the deficit spending and all which will require the Bundes Bank just to continue maintaining the high interest rates it will?

DR. WALTER: First of all, the deficits in Germany always turned out to be lower than expected. And it seems to be a little bit different in the United States occasionally. So this year again the deficits fall short of expectations and not by a small margin. Instead of 150 billion Deutsche mark, it is not dollar, 150 billion Deutsche mark deficit, it will be closer to 100 million, but there is not a discussion about that. It's almost not realized that we have difficulties to spend the extra money set aside for Eastern Germany, so there's more a perception of the high deficit than an actual high deficit.

MR. MacNeil: In other words, the Bundes Bank could safely lower interest rates and not threaten the inflationary situation?

DR. WALTER: I'm pretty sure that the Bundes Bank can achieve its target of inflation of 2 percent with a policy that is less restrictive with interest rates that are less high than they are today because of the feedback system that is in place.

MR. MacNeil: I'm going to come back to the effect on European unity in a moment, but let me go to Mr. Martin in Washington. Mr. Martin, will Britain come back into the system, into this regulation system?

MR. MARTIN: John Major said today, Norman Lamont said today, when the time is right, which rather reminds me of what Mrs. Thatcher used to say about entering the ERM in the first place. Most people think that it will not be next week. It certainly won't be next month. It could take several months. But there is the expectation on Major's part that Britain should return, because Major is convinced that the ERM does offer a longer-term solution to get you out of the perpetual British cycle, devaluation, inflation, devaluation, inflation. So I think his commitment's there.

MR. MacNeil: Why -- what is your explanation -- you've heard the one here -- why was the British pound so weak?

MR. MARTIN: Oh, I think the British economy, as Jeffrey Garten has been saying, is in the most awful state. And I also think that there was a determination to test the major commitment, John Major's commitment, and only last week in Scotland in a big speech to the Scottish Confederation of British Industry that basically said devaluation is the easy way out, the soft option -- never, never, never. It was a little bit like George Bush talking about taxes not being increased ever, ever. And that's a test.

MR. MacNeil: Why did Mr. Major make such a big deal out of defending the pound? Some British industrialists, I read, would have been quite happy with a lower -- a pound valued lower because it would improve British exports.

MR. MARTIN: I actually think with John Major it's an article of faith. It's an intellectual conviction born of experience. A lot of his experience, obviously, had been in the financial side, economic side of British government management, as well as a banker before. And he said time and time again that this perpetual cycle, devalue, inflate, devalue, inflate meant ultimately that Britain would never catch up, would never converge sufficiently with the economy of West -- of Germany to be a viable, central player in a widening European economy.

MR. MacNeil: What is this going to do to the Major government, to his government?

MR. MARTIN: Oh, it is in dire straits at the moment. I think the credibility of the chancellor, Norman LaMont, is completely shot. Mr. Major's a stubborn man. And he may stick with Mr. LaMont for a while, but his credibility is shot. There has even been talk, not maybe from the most responsible of circles, that John Major has stuck out so far for non-devaluation that to accept a devaluation, which is effectively what he's doing, is a resigning matter. I think that's putting a bit -- a bit too extreme a face on it, but it's not impossible.

MR. MacNeil: What is this situation going to do for -- to British support for further European integration, do you think?

MR. MARTIN: Not a lot. Obviously perhaps the most important next decision is what happens in the French referendum on Sunday. If France votes no, as your report said, then Mastrik is a dead letter. If France votes marginally yes, even overwhelmingly yes, an awful lot of countries, including Britain, where perhaps the political pressures are now very clear, are going to say, weren't we too ambitious, weren't we actually overreaching in ways towards a federal Europe, not necessarily, but we tried to run before we could walk, in effect. And I think that that will be a very, very prevalent British view allied, I have to say, with a revival of some anti-German feeling inside Britain, particularly on the right, but not exclusively on the right.

MR. MacNeil: Jeffrey Garten, will this kill, this situation, this currency crisis, is this going to kill the idea of monetary union headed towards one currency, or might it conversely increase support for it, do you think? Because, as you said earlier, if you'd had monetary union, you wouldn't have -- you couldn't have a crisis like this. You might have other effects, but you couldn't have a crisis like this.

MR. GARTEN: Well, my guess is that the ideal of monetary union will remain but that the best situation would be that it will take much longer now. I think there'll be a major regrouping no matter what happens with the French vote, a major analysis of whether or not, as Jurek said, they were moving too fast. The real -- the interesting question is what changed here, because a year or two ago, there was great optimism about this. And I think it was the end of the Cold War, the collapse of the Berlin Wall, and this massive problem that Germany inherited in unifying the country. The amounts of money that it now had to come up with in order to bring the East in, that changed the equation all over Europe. And my guess is that German interest rates, even if they come down, are going to remain high. The problem of unification is going to be there for several years. And as long as that is present, the ability of these other countries to harmonize economic policies with Germany is going to be quite limited.

MR. MacNeil: Do you think, Dr. Walter, that this is going to slow down or stop movement towards a single currency, or will some -- I've heard some arguments from Europe today that if you had it, you wouldn't have a crisis like this, increased support for it.

DR. WALTER: Okay. Bygones are bygones. The question is where to head to. I think Mastrik has a difficult task. I think it's very difficult to assume that it will go ahead; ratification will be in the doldrums I do believe. If there's a strong French yes, then I could imagine that the chaos in London and in Rome causes the French to be very careful not to create the same situation for themselves. So if there's a clear yes in France, I could imagine that the Mastrik philosophy survives, that the single currency as an idea survives, but probably in a smaller club in Europe, so that the multi-speed of Europe towards monetary union again is a more important issue than it was today -- until today, and that we have a less tight schedule. But for the American audience I want to say that we have been talking about 1997 and 1999, and people talk about a short period. And I think that's something that is way out and it's a lot of time. And if we do not aim at something that is before the end of the decade, before the turn of the century, I think it's something that is not politically relevant. And, therefore, I strongly advocate that one tries to get at the monetary union by the year 2000 and, if necessary, with a small clop, and if others want to join later on they may do so.

MR. MacNeil: Mr. Martin, do you think that the -- seeing Germany -- the reason Germany is causing these -- these dislocations is because it's investing huge amounts of money in the former East Germany and in some years from now is going to emerge with a skilled work force and all new technology and equipment there as an even stronger power than it was before reunification -- is that going to make the French, for instance, on Sunday, is it going to make the British think it even more important to tie Germany into a more unified system?

MR. MARTIN: That's a very good question. That's the logical conclusion actually, Robin. Whether the French are of a mind to see it that way, I'm really hardly qualified --

MR. MacNeil: It was the original inspiration for the common market in the first place.

MR. MARTIN: It certainly was. And I would have thought that the need so freely expressed so often over the years inside Germany and outside Germany to root Germany into the community is seen as great now as it ever was. I think that the thought, the prospect that Germany will remain the strongest economy in Europe for the foreseeable future, the belief that it really will after all the teething problems are overcome, the sort of mettle which no European country can be too far away from, or cannot aspire to being like, economically it will be very, very strong. And so maybe the real debate is, in fact, is going to be inside Germany as to whether Germany is ready for the sort of European economic and monetary union that was conceived before Mastrik, agreed at Mastrik, whether it's ready for that. And I think that there are doubts about that inside Germany. Often it's the Germans saying, well, we do not wish to lose our Deutsche mark. Sometimes there are much more complicated factors there. And maybe it's Germany who's going to actually come up with the political answers.

MR. MacNeil: What is your answer to that, Dr. Walter?

DR. WALTER: It's quite obvious. If we would have a referendum, the answer of the German population would be no, but thank God, we do have a constitution that does not necessitate the referendum. We won't have a referendum. And all parties understand that the rooting of Germany in Europe is so important for our well-being, for our freedom, for peace in Europe, that these parties will stick to their view and will ratify if there is a meaning to ratifying.

MR. MacNeil: Finally, gentlemen, what does all this mean to the United States on a day in which the trade deficit reported for July has gone up again substantially? What do all these shifts in currencies and everything mean -- apart from the American tourists traveling to Europe, what does it mean, Jeffrey Garten?

MR. GARTEN: Well, I think we can look at it in a couple of ways. In the short-term, maybe in the next few months, if the European monetary system is realigned, if there are changes in the currencies and changes of interest rates and let's say it's a week or two from now and there's anew system with different relationships, the interest rate structure there may be a little bit lower. And that may give us a little bit more flexibility with our interest rates. So in the short-term it may give the U.S. a little bit of a boost. But I think any reading of this situation is not in the U.S. interest over, over more than the next couple of months, because we are heavily -- our economy is heavily dependent on exports now, exports to Europe have been slowing dramatically. We can't use our budget to stimulate the economy. Our interest rates are pretty low as it is, so -- we're heavily reliant on exports. But beyond that -- and I think this is really the central point of all this -- beyond that, we have -- there are major countries there in Europe who are now so preoccupied with the daily crisis of their currencies, this is likely to go on for quite a while. And in a world community where there is a crying need for more collaboration on currencies, on trade, on agriculture, on the environment, this is really a nail in the coffin in terms of the American ability to get the attention of other countries to stimulate global growth or anything like that.

MR. MacNeil: Jurek Martin, what do you see as the impact on the United States of this?

MR. MARTIN: I think Jeffrey Garten made some excellent points there. The United States is committed at the moment to growth. Growth matters to the United States more than anything else, and it's been certainly arguing with Germany often enough over the last year that it's time to relax. But having said that, I would have thought that the impact on the United States is not that great at the moment. This is a currency crisis curiously which is a Euro- currency crisis at the moment. The dollar's not involved. The yen's not involved. The Deutsche mark is. It remains powerful. So the net result is that the United States is slightly on the sidelines of this crisis, not in a position to influence events much, and perhaps not about to be enormously affected by in the short-term, unless of course Europe goes to hell in a hand basket, in which case it is affected.

MR. MacNeil: Very briefly, what do you see, Dr. Walter, as the impact on the U.S.?

DR. WALTER: If there is ongoing chaos and not a solution, a fast solution, this might cause an in-flow of capital into the United States and this then translates into a stronger dollar, which is not exactly what you need for price competitiveness in international markets. In the long run, however, it's much more important. The United States needs a strong international ally and it cannot be anything but a strong Europe, and, therefore, it should have an interest in a solution of the crisis in Europe.

MR. MacNeil: Well, gentlemen, all three, thank you very much. RECAP

MS. WOODRUFF: Again, the main stories of this Thursday, the House of Representatives passed a bill to regulate cable TV rates and services. The measure, which now goes to the Senate, is expected to face a presidential veto. The nation's trade deficit hit a 20- month high in July, reflecting a surge in imports and a sharp drop in American export sales to Europe. Good night, Robin.

MR. MacNeil: Good night, Judy. That's the NewsHour for tonight. We'll be back tomorrow night with a NewsMaker interview with Ross Perot, plus the political week as seen by Gergen & Shields. I'm Robert MacNeil. Good night.