Briefing for '98: EMU: Europe awaits the first eleven

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The Independent Online
Bring on the euro. Four months before Europe decides who's in and who's out of the single currency, and a year before the euro's birth, the political establishment, businesses and consumers are strangely complacent about the most momentous economic event since post-war reconstruction.

"They've got to get it off the ground," said Alison Cottrell, an analyst at PaineWebber International. "They haven't got another scenario. There is enormous political pressure on all sides not to rock the boat now."

Last year dispelled all doubts about a project that in purely economic terms will save investors, businesses, consumers and tourists $30bn (pounds 18bn) in money-changing fees, but politically will do far more.

The summit on the first May weekend in Brussels will rank in global monetary history alongside the 1944 conference in Bretton Woods, New Hampshire. That convention designed the dollar standard that underpinned the world economy for 25 years after World War II.

Between 1 and 3 May, the European Union will decide which countries can join the monetary union in January 1999, how much their currencies will be worth on the final day, and who will become the first president of the European Central Bank.

France and the Netherlands are at loggerheads over that job, with the French putting forward their own candidate - Bank of France governor Jean Claude Trichet - to challenge Wim Duisenberg, a former Dutch central bank head. Mr Duisenberg is now running the predecessor of the European Central Bank, and had long been considered a shoo-in for the job.

The betting in financial markets is that 11 countries will make the euro grade - including Italy, long derided north of the Alps for its revolving- door governments and financial mismanagement. Suddenly, the Italians are doing better than their main detractors, the Germans.

The UK, Denmark and Sweden will stay out because they don't want in, at least not yet. Greece will be stuck with its drachma as it fails the Maastricht Treaty test for economic performance, public finance, inflation and exchange-rate stability.

EMU could have come unstuck in 1997. It didn't because Europe finally achieved the "Goldilocks" combination (not too hot, not too cold) of accelerating economic growth and low inflation that the US has enjoyed for several years.

Buoyed by the depreciation of European currencies against the dollar, EU growth is likely to have reached 2.6 per cent in 1997, quickening to 3.0 per cent in 1998, the fastest pace since the Berlin Wall came down in 1989, according to the European Commission.

Low inflation, thanks partly to the EU's 10.7 per cent unemployment rate, has kept interest rates down, helping finance ministers slice their borrowing needs without making politically painful incisions in the welfare state. Low rates have meant the most to Belgium and Italy, the EU's most indebted countries.

Italy's budget deficit - the key yardstick for euro eligibility - will drop to as low as 2.7 per cent of GDP in 1997, the Commission said. That puts it safely within the 3 per cent target of GDP required to join EMU, for the first time in three decades. It's also better than Germany's expected 3.0 per cent.

At the end of February, the 15 countries publish 1997 statistics for economic output and budget deficits. On 21 March, the EU's finance ministers come to the UK for a weekend meeting.

A week later, the European Commission and European Monetary Institute will publish recommendations on the countries eligible for the euro. The Commission, the EU's executive agency, will probably call for a broad EMU. The central bankers at the Monetary Institute may be more sceptical.

The granddaddy of all summits starts with a meeting of EU finance ministers on Friday 1 May. They will come up with a recommended list of euro countries and it forward to the European Parliament. On the Saturday, EU government leaders will hold the final vote to designate the central banker.

The summit concludes on the Sunday with the announcement of the bilateral exchange rates at which the national currencies will be locked together on 1 January 1999. The euro will then exist as an accounting unit but paper money won't be distributed until 2002.