EMI warns of danger of euro turmoil

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The Independent Online
The single European currency could face "unbearable strain" in its crucial "running in" period, the president of the European Monetary Institute warned yesterday.

In a speech sure to be read by the financial markets as a fresh signal of a possible delay to European Monetary Union, Alexandre Lamfalussy said members must have properly met the required budget deficit targets in order to avoid such turmoil.

Mr Lamfalussy, charged with preparing the ground for the future European Central Bank (ECB), said: "We will have to live with the possibility of teething troubles during the crucial 'running in' period, putting considerable strain on the strategy and the technical capabilities of the ECB. Such strain could become unbearable ... if it were compounded by the consequences of initially weak budgetary positions in the member countries."

With rumours of delays to the EMU start date haunting the markets, analysts expected the president's remarks to trigger further jitters when trading opened today, even though he also stressed the importance of the singe currency for the European single market.

Alison Cottrell of Paine Webber said: "Anything which sounds vaguely pessimistic or cautious about EMU at the moment is interpreted by the markets as implying a delay, even if that isn't the intention at all."

Between 1 January 1999, when member states entering EMU will lock their currencies, and 2002 when the new euro notes and coins are in full circulation, different currencies will continue to circulate in the EMU zone. Many people fear that during the transitional period if the markets do not have full confidence in the shape of the single currency, or in member states' whole-hearted commitment to EMU, they could wreak considerable damage by speculating between parallel currencies. This would put considerable pressure on the European Central Bank.

Mr Lamfalussy, speaking at a forum in London organised by investment bank Robert Fleming and the London School of Economics, made it clear he thought that the ECB's task would be even more difficult if countries entering the single currency did not have a strong and sustainable fiscal position.

In his speech, Mr Lamfalussy said: "If fiscal positions are not initially under control, there may be repercussions on the single currency from large deficits and adverse spillovers across borders affecting Monetary Union as a whole from lax fiscal policies in individual member states."

The speech echoed recent concerns expressed by Hans Tietmeyer, president of the Bundesbank, that profligate fiscal policy by governments within the euro-zone could scupper any attempt by an ECB, no matter how independent, to maintain a prudent economic policy.

As London Business School Professor David Currie explained in a recent research report on EMU: "If all countries were deeply in debt ... European real interest rates could rise sharply. This would make it harder to finance investment and would worsen the prospects for growth."

However, one city analyst pointed out that such remarks were to be expected from European central bankers, who always press the case for strict fiscal discipline and a strong currency, fearing anything that could weaken the euro.

Mr Lamfalussy spelt out what he thought the EMI's advice should be on the interpretation of the Maastricht convergence criteria. "The Treaty ... establishes two reference values that should not be exceeded: the 3 per cent deficit ceiling and the 60 per cent debt ceiling.... Deviations from the reference values should be granted sparingly."