EU expects Britain to miss 1999 currency target

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The Independent Online
The European Commission declared yesterday that the 1999 target date for the single currency is still realistic, but courted controversy by predicting that France and Germany would meet the key economic target in time to qualify while the UK would not.

According to the Commission's spring forecasts, France and Germany will have brought their budget deficits below 3 per cent of gross domestic product by the end of 1997. It puts Germany's deficit at 2.9 per cent and France's at 3 per cent.

However, the Commission predicts Britain will have a budget deficit of 3.7 per cent. The suggestion that the UK can-not hope to qualify for the single currency is likely to irk Chancellor Kenneth Clarke.

Some officials yesterday suggested the EU forecasts for France and Germany were not credible. Independent economists also expressed scepticism about the Commission's predictions.

Ian Harwood, an economist at investment bank Kleinwort Benson, said: "There seem to be some heroic assumptions about fiscal retrenchment in France and Germany." Stephen King at James Capel said: "There is very little chance that those two countries will meet the target."

The Commission assumes that the radical austerity plan proposed by Helmut Kohl, the German chancellor, will be implemented. Its predictions also take into account budget-cutting measures in France. But they do not appear to incorporate published British budget plans.

The Treasury's last forecast put the UK budget deficit at 2 per cent of GDP in the 1997/98 financial year. Its July prediction is likely to show that it will remain below 3 per cent even taking recent borrowing over-runs into account.

The Commission acknowledges that the economic forecasts remain subject to "considerable uncertainties", warning that if efforts towards sounder public finances were to prove insufficient the results could be very different.

Germany and France have a long way to go. At the end of 1996 Germany's budget deficit is expected to be standing at 3.9 per cent, while the French deficit will still be 4.2 per cent.

Seven countries will have met the budget deficit test by 1997, according to the Commission. Yves-Thibault de Silguy, the economics commissioner, said yesterday there would be a "significant number" of member states ready to go ahead in 1999. Under the Maastricht criterion for public debt, only three countries would qualify by 1997, but the debt rule leaves greater scope for flexibility.

The Commission's predictions defy the sceptics who believe the 1 January 1999 target date for the launch of monetary union cannot be met. Last month, the Organisation for Economic Co-Operation and Development said both Germany and France would have budget deficits above the 3 per cent mark in 1997.

However, the Commission's optimism was tempered by gloomy predictions for economic growth. This year EU growth is expected to fall to only 1.5 per cent, against a forecast of 2.6 per cent six months ago. Growth will accelerate to 2.5 per cent in 1997. It reckons Britain will have the fastest- growing economy this year and next.

Comment, page 23

General government borrowing as GDP %

Estimates Forecasts Forecasts 1995 1996 1997

France -5.0 -4.2 -3.0

Germany -3.5 -3.9 -2.9

UK -6.0 -4.4 -3.7

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