Europe set for big step towards single currency: Finance ministers meet to to decide action plan for member states running excessive public deficits

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THE prospect of a single European currency by the target date of 1997, once thought impossible, has taken on new life in recent months as Europe moves out of recession, exchange rates steady and inflation comes under control. Today European Union economics ministers meet to take a significant step towards the goal of monetary union.

The 12, following an informal meeting in Germany a week ago, will today decide on an action plan for the 10 member states running excessive public deficits. Only Luxembourg and Ireland are exempt, Luxembourg because it has no deficit to speak of and Ireland because it is already deemed to be doing all it can to curb spending.

Tight control of public finances is vital if the 1997 deadline is to be met, because it is one of three pre-conditions for monetary union laid down by the Maastricht treaty. All member states have agreed that these so-called convergence criteria are sound policy and are pledged to bring their economies in line whether or not, like Britain, they subscribe to the concept of a single currency.

Every country has had to present to the European Commission a framework document outlining how it intends to meet the three criteria on inflation, budget deficits and public debt. In most cases these have already been heard: Greece and Ireland will present theirs today; the Irish plan presents no problems, but Greece is still struggling to control inflation and debt.

The Chancellor of the Exchequer, Kenneth Clarke, is confident that although the UK will today be written into the Commission's black book, it is accepted that the UK is working towards deficit reduction and so there will be no further public humiliation.

Italy, however, stands to have its knuckles severely rapped - Rome is deemed to have veered too far from the economic targets and to have offered few suggestions on how it intends to get back on track. The Commission will make public its recommendations and if Italy does not move smartly to take them up, the markets are likely to lose confidence in the lire, damaging the economy.

The fact that the 12 have agreed Ireland should not be included on the Commission black list has been interpreted as a sign that the Maastricht criteria will be applied as flexibly as possible in the run up to 1997 - though as the German Finance Minister stressed recently: 'They are in no way weakened.'

For the creation of a monetary union, a majority of member states must have controlled inflation, and be able to guarantee interest rate and currency stability. The budget deficit must be 3 per cent of gross domestic product or less and gross debt running at or below 60 per cent of GDP.

Currently, Luxembourg is the only country on target, but Germany is forecast to qualify next year; the Netherlands, Belgium, Denmark and France by 1997. This possibility has re-raised discussion of a two-speed Europe: if this hard core of countries wished to press ahead with a single currency there is nothing anyone else could do to stop them. Austria, which joins the Union next year, would also be ready by 1997. Norway, which will hold a referendum on membership this autumn, is already there, Finland and Sweden, the other would-be applicants, are way out of line.

For many countries, coming in on target will none the less require greater belt-tightening and the imposition of policies unlikely to be electorally popular. In France, government debt is rising, while in Belgium the question is whether the excessive levels of public debt - currently 137.9 per cent of GDP - can be curbed fast enough.